NUMERICAL TECHNOLOGIES INC
S-1/A, 2000-03-20
PREPACKAGED SOFTWARE
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<PAGE>


  As filed with the Securities and Exchange Commission on March 20, 2000
                                                     Registration No. 333-95695
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                               ----------------

                             AMENDMENT No. 3
                                      TO
                                   Form S-1
                            REGISTRATION STATEMENT
                                     Under
                          THE SECURITIES ACT OF 1933
                               ----------------
                         NUMERICAL TECHNOLOGIES, INC.
            (Exact name of Registrant as specified in its charter)
<TABLE>
   <S>                   <C>                              <C>
      California                     7371                      94-3232104
      (prior to
   reincorporation)      (Primary Standard Industrial       (I.R.S. Employer
                          Classification Code Number)     Identification Number)
       Delaware
        (after
   reincorporation)
   (State or other
    jurisdiction of
   incorporation or
     organization)
</TABLE>

          70 West Plumeria Drive, San Jose, CA 95134, (408) 919-1910
  (Address, including zip code, and telephone number, including area code, of
                   Registrant's principal executive offices)

                               ----------------
                               Yagyensh C. Pati
                     President and Chief Executive Officer
          70 West Plumeria Drive, San Jose, CA 95134, (408) 919-1910
(Name, address, including zip code, and telephone number, including area code,
                             of agent for service)

                               ----------------
                                  Copies to:
<TABLE>
 <S>                        <C>
     Kathleen B. Bloch                       Stephen J. Schrader
       Julie A. Bell                          Justin L. Bastian
      Anthony Kikuta                         Stephanie J. Millet
      Lynn Hashimoto                             Amie Peters
 Wilson Sonsini Goodrich &
          Rosati                          Morrison & Foerster, LLP
 Professional Corporation       755 Page Mill Road, Palo Alto, CA 94304-1018
 650 Page Mill Road, Palo
      Alto, CA 94304                           (650) 813-5600
      (650) 493-9300
</TABLE>
                               ----------------
  Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
                               ----------------
   If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
   If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
   If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
   If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
   If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
                               ----------------
   The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the     +
+Securities and Exchange Commission is effective. This prospectus is not an    +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted.             +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

                SUBJECT TO COMPLETION, DATED MARCH 20, 2000

                                5,534,000 Shares


[LOGO OF NUMERICAL APPEARS HERE]

                       Numerical Technologies, Inc.

                                  Common Stock

                                   --------

  Prior to this offering, there has been no public market for our common stock.
The initial public offering price of our common stock is expected to be between
$11.00 and $13.00 per share. We have applied to list our common stock on The
Nasdaq Stock Market's National Market under the symbol "NMTC."

  The underwriters have an option to purchase a maximum of 830,100 additional
shares to cover over-allotments of shares.

  Investing in our common stock involves risks. See "Risk Factors" on page 7.

<TABLE>
<CAPTION>
                                                            Underwriting
                                                            Discounts and  Proceeds to
                                            Price to Public  Commissions    Numerical
                                            --------------- ------------- -------------
<S>                                         <C>             <C>           <C>
Per Share..................................      $              $             $
Total......................................      $              $             $
</TABLE>

  Delivery of the shares of common stock will be made on or about     , 2000.

  Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

Credit Suisse First Boston

                       Chase H&Q
                                            SG Cowen

                   The date of this prospectus is     , 2000.
<PAGE>

                               ----------------

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                      Page
                                      ----
<S>                                   <C>
Prospectus Summary...................   4
Risk Factors.........................   7
Special Note Regarding Forward-
 Looking Statements..................  16
Use of Proceeds......................  17
Dividend Policy......................  17
Capitalization.......................  18
Dilution.............................  19
Selected Financial Data..............  20
Management's Discussion and Analysis
 of Financial Condition and Results
 of Operations.......................  21
Business.............................  26
</TABLE>
<TABLE>
<CAPTION>
                                   Page
                                   ----
<S>                                <C>
Management..........................41
Related Party Transactions..........50
Principal Stockholders..............57
Description of Capital Stock........59
Shares Eligible for Future Sale.....62
Underwriting........................64
Notice to Canadian Residents........66
Legal Matters.......................67
Experts.............................67
Where You Can Find More
 Information........................67
Index to Financial Statements......F-1.
</TABLE>

                               ----------------

   You should only rely on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may be used only where it is legal
to sell these securities. The information in this document may only be accurate
on the date on this document.


                     Dealer Prospectus Delivery Obligation

   Until       , 2000, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealer's obligation to deliver
a prospectus when acting as an underwriter and with respect to unsold
allotments or subscriptions.

                                       3
<PAGE>


                               PROSPECTUS SUMMARY

   You should read the following summary together with the more detailed
information and financial statements and notes thereto appearing elsewhere in
this prospectus.

                       Numerical Technologies, Inc.

   We are a leading commercial provider of proprietary technologies and
software products used to produce semiconductors with subwavelength feature
sizes of 0.18 micron and below that enable the design and manufacture of
faster, smaller and more power efficient electronic products. A semiconductor's
"feature size" relates to the size of the integrated circuit, or IC, components
on the semiconductor and is measured in microns, or millionths of a meter. In
semiconductors with "subwavelength" feature sizes, the wavelength of light used
to create the IC features on the semiconductor is larger than the feature sizes
themselves. Our subwavelength solution exceeds the predictions of industry
roadmaps by producing semiconductors with feature sizes of 0.09 micron and
below using existing semiconductor equipment. We believe our patented
technologies and software products are critical to key markets of the
semiconductor industry as they strive to design and manufacture subwavelength
semiconductors.

   Our industry partners and customers demonstrate the success of our
proprietary technologies and software products. Motorola used our proprietary
technologies in its 0.18 micron fabrication facilities to produce 0.10 micron
microprocessor features. One of our industry partners announced that it
developed the world's fastest one volt digital signal processor, or DSP, by
reducing feature sizes from 0.25 micron to 0.12 micron using our proprietary
technologies. DSPs manipulate large volumes of video or sound in products such
as cell phones or video cameras. MIT Lincoln Laboratory, a research laboratory,
used our proprietary technologies to achieve the first successful creation of
0.05 micron features. We have industry partner and customer relationships with
leading companies in all key markets of the semiconductor industry, including
vendors of tools used to design semiconductors, such as Cadence Design Systems;
manufacturers of photomasks, or templates used in creating ICs, such as Dupont
Photomask and Photronics; manufacturers of sophisticated equipment used to
manufacture semiconductors, such as Applied Materials and KLA-Tencor; and
semiconductor manufacturers, or foundries, such as TSMC and UMC. Through our
industry partner relationships, our industry partners resell, market, either
jointly with us or unilaterally, and promote our technologies and products to
their own customers. Our customers are the actual users of our technologies and
products.

Our Market and the Subwavelength Challenge

   The proliferation of semiconductors in a broad range of electronic products,
including personal computers, mobile phones, Internet appliances, video game
consoles, and high-speed networking and communications products that serve as
the backbone of the Internet, is driving the growth in the worldwide market for
semiconductors. To capitalize on this growing market, electronics manufacturers
must continuously introduce higher-performance products that are cheaper and
more portable. These advanced products must incorporate semiconductors that are
faster and smaller, consume less power and can be manufactured at a lower cost.
As a result, the growth in manufacturing of semiconductors with feature sizes
of less than 0.25 micron is expected to be significantly greater than the
growth for semiconductors with larger feature sizes.

   The ability to produce advanced ICs depends on developing technologies that
enable the design and manufacture of devices with increasingly smaller feature
sizes. As a result of advances in semiconductor design and manufacturing
processes, feature sizes decreased from 3.0 micron in 1980 to 0.18 micron in
today's

                                       4
<PAGE>


advanced fabrication facilities. This progression requires large research and
development investments in sophisticated semiconductor design tools, photomask
manufacturing and semiconductor equipment. In addition, each incremental
reduction in feature size requires significant capital expenditures. The
purchase and installation of new equipment and the construction of new
fabrication facilities can require billions of dollars and several years before
becoming operational.

   At 0.18 micron and smaller, traditional technology approaches are no longer
adequate. The wavelength of light used in production semiconductor equipment to
manufacture these features is significantly larger than the features
themselves. This is like trying to paint a one-inch wide line with a four-inch
wide paint brush. This growing disparity between feature sizes and the
wavelength of light is referred to as the "subwavelength gap." We do not expect
alternative manufacturing processes that can bridge the subwavelength gap will
be commercially viable for many years. We believe advances in manufacturing
equipment technology alone can no longer enable the progression to smaller
feature sizes.

Our Solution

   We provide patented phase shifting and proprietary optical proximity
correction and process modeling technologies that are integral to our
subwavelength solution. Phase-shifting technologies manipulate light wave
patterns to create high-resolution images of IC features. Optical proximity
correction technologies, or OPC, help to reduce distortions in IC features.
Process modeling technologies allow semiconductor designers and manufacturers
to accurately translate IC designs to photomasks and then to the actual
semiconductor. These technologies enable the progression to subwavelength
feature sizes.

   Our comprehensive subwavelength solution allows our industry partners and
customers to produce smaller, faster and more power efficient semiconductors
with existing semiconductor equipment. This saves them the time and cost
necessary to establish a more advanced fabrication facility. As a result, our
industry partners and customers can earn revenues more quickly and increase
their return on invested capital.

   We license our proprietary technology and software products to semiconductor
designers, design tool vendors, photomask manufacturers, semiconductor
equipment manufacturers and foundries. By providing a subwavelength solution
employable in every key stage of the semiconductor design and manufacturing
process, our technologies and products integrate the entire subwavelength
"design-to-silicon flow." We believe that we can capitalize on the pressing
need for proven subwavelength solutions by leveraging our technology leadership
and our relationships with leading companies within the semiconductor industry
to drive the adoption of our solution as the industry standard.

   Our company incorporated in California in October 1995 and will
reincorporate in Delaware prior to the closing of this offering. Our principal
executive office is located at 70 West Plumeria Drive, San Jose, CA 95134. Our
telephone number is (408) 919-1910.

   Unless otherwise indicated, information in this prospectus assumes the
following:

  . a three-for-two forward stock split of preferred stock and common stock,
    which is subject to stockholder approval, prior to the closing of this
    offering;

  . the automatic conversion of all outstanding shares of preferred stock
    into shares of common stock immediately prior to the completion of this
    offering;

  . our reincorporation in Delaware prior to the closing of this offering;
    and

  . no exercise of the underwriters' over-allotment option.


                                       5
<PAGE>


                                  The Offering

<TABLE>
<S>                                          <C>
Common stock offered by us.................. 5,534,000 shares
Common stock to be outstanding after the
 offering................................... 29,082,005 shares
Use of proceeds............................. For the repayment of outstanding promissory
                                             notes issued pursuant to our acquisition of
                                             Transcription Enterprise Limited and for
                                             general corporate purposes.
Nasdaq National Market Symbol............... NMTC
</TABLE>

   The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of February 15, 2000 and
excludes:

  .  1,238,155 shares outstanding under our stock option plans with a
     weighted average exercise price of $1.40 per share and 2,412,911
     additional shares that we could issue under our stock option plans; and

  .  300,000 shares issuable under our employee stock option plan.

                         Summary Financial Information
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                           Years Ended
                                                          December 31,
                                                      -----------------------
                                                       1997    1998    1999
                                                      ------  ------  -------
<S>                                                   <C>     <C>     <C>
Statement of Operations Data:
Revenue.............................................. $  620  $  736  $ 5,492
Total costs and expenses.............................  1,239   7,469   14,693
Loss from operations.................................   (619) (6,733)  (9,201)
Net loss.............................................   (584) (6,551)  (8,828)
Pro forma net loss per common share, basic and
 diluted (unaudited).................................                 $ (0.64)
Pro forma weighted average common shares, basic and
 diluted (unaudited).................................                  13,885
</TABLE>

<TABLE>
<CAPTION>
                                                        December 31, 1999
                                                  -----------------------------
                                                                     Pro Forma
                                                  Actual  Pro Forma As Adjusted
                                                  ------- --------- -----------
<S>                                               <C>     <C>       <C>
Balance Sheet Data:
Cash and cash equivalents........................ $13,486  $ 8,236   $ 33,063
Working capital..................................  10,499   (3,469)    21,358
Total assets.....................................  17,605   99,119    123,947
Notes payable, including short-term portion......     --    35,000        --
Total stockholders' equity.......................  12,405   57,825    117,653
</TABLE>
- --------
   See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing per share data.

   The pro forma balance sheet data reflects our acquisition of Transcription
Enterprises Limited effected in January 2000 and the conversion of
approximately 11,913,000 shares of preferred stock into shares of common stock.
The pro forma as adjusted amounts give effect to the sale of 5,534,000 shares
of common stock in this offering at an assumed initial public offering price of
$12.00 per share after deducting estimated underwriting discounts and
commissions and estimated offering expenses and the application of the net
proceeds from this offering. See Note 9 of Notes to Financial Statements.

                                       6
<PAGE>

                                  RISK FACTORS

   You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.

If the key markets within the semiconductor industry, especially semiconductor
manufacturers, do not adopt our proprietary technologies and software products,
we may be unable to generate sales of our products.

   The four key markets within the semiconductor industry are semiconductor
designers and design tool vendors, photomask manufacturers, semiconductor
equipment manufacturers and semiconductor manufacturers. If these key markets
do not adopt our proprietary technologies and software products, our product
sales could decline. We design our technologies and products so that each key
market within the semiconductor industry can work efficiently with the other
markets. For example, if designers do not adopt our technologies and products,
it will be more difficult for them to design semiconductors which are
understood and processed efficiently by mask manufacturers that do adopt our
technologies and products. In addition, we believe semiconductor manufacturers
need to adopt our proprietary technologies and software products first in order
to drive adoption by the other three markets. Semiconductor manufacturers
define and develop the manufacturing process. While designers, mask
manufacturers and equipment manufacturers are not required to adopt our
technologies and products in order to work with semiconductor manufacturers
that do adopt them, the efficiency of the entire manufacturing process is
greatly diminished if they do not. If each key market of the semiconductor
industry does not perceive our proprietary technologies and software products
as the industry standard, our technologies and products could become less
valuable and more difficult to license. Factors that may limit adoption of our
subwavelength solution within the markets include:

  . our current and potential industry partners and customers may fail to
    adopt our technologies and products;

  . semiconductor designers may not need subwavelength processes if there is
    a slowdown in semiconductor manufacturing or a decrease in the demand for
    smaller semiconductor feature sizes; and

  . the industry may develop alternative methods to produce subwavelength
    features with existing capital equipment due to a rapidly evolving market
    and the likely emergence of new technologies.

In order for potential industry partners and customers to adopt, and expend
their own resources to implement, our technologies and products, we must expend
significant marketing resources, with no guarantee of success.

   Our proprietary technologies and software products involve a new approach to
the subwavelength gap problem. As a result, we must employ intensive and
sophisticated marketing and sales efforts to educate prospective industry
partners and customers about the benefits of our technologies and products,
with no guarantee of success. Our sales and marketing expenses increased from
$1.4 million in 1998 to $4.3 million in 1999. In addition, even if our industry
partners and customers adopt our proprietary technologies and software
products, they must devote the resources necessary to fully integrate our
technologies and products into their operations. This is especially true for
our industry partners so that they can begin to resell and market our solution
to their customers. If they do not make these expenditures, establishing our
technologies and products as the industry standard to the subwavelength gap
problem will be difficult.

Our limited operating history and dependence on new technologies make it
difficult to evaluate our future prospects.

   We only have a limited operating history on which you can base your
evaluation of our business. We face a number of risks as an emerging company in
a new market. For example, the key markets within the

                                       7
<PAGE>


semiconductor industry may fail to adopt our proprietary technologies and
software products, or we may not be able to establish distribution channels.
Our company incorporated in October 1995. In February 1997, we shipped our
initial software product, IC Workbench. We have only recently begun to expand
our operations significantly. For example, we grew from 47 employees as of
January 1, 1999 to 105 employees as of January 1, 2000.

We have a history of losses, we expect to incur losses in the future and we may
be unable to achieve profitability.

   We may not achieve profitability if our revenue increases more slowly than
we expect or not at all. In addition, our operating expenses are largely fixed,
and any shortfall in anticipated revenue in any given period could cause our
operating results to decrease. We have not been profitable in any quarter, and
our accumulated deficit was approximately $16.2 million as of December 31,
1999. We expect to continue to incur significant operating expenses in
connection with increased funding for research and development and expansion of
our sales and marketing efforts. In addition, we expect to incur additional
noncash charges relating to amortization of intangibles and deferred stock
compensation. As a result, we will need to generate significant revenue to
achieve and maintain profitability. If we do achieve profitability, we may be
unable to sustain or increase profitability on a quarterly or annual basis. Any
of the factors discussed above could cause our stock price to decline.

We recently acquired Transcription Enterprises Limited and if we are not
successful in integrating Transcription's products and operations with ours,
our revenue and operating results could decline.

   Our recent acquisition of Transcription Enterprises Limited will only be
successful if we are able to integrate its operations with ours, which could
substantially divert management's attention from the day-to-day operations of
the combined company. If we encounter any difficulties in the transition
process, the revenue and operating results of the combined company could
decline. We must successfully integrate Transcription's products with ours. We
must also coordinate our research and development and sales and marketing
efforts to realize the technological benefits of this combination.

   We may find it difficult to integrate personnel with disparate business
backgrounds and combine two different corporate cultures. In addition, the
process of combining our company with Transcription could interrupt the
activities of either or both of the companies' businesses. It is possible that
we will not be able to retain key Transcription management, technical and sales
personnel.

   In addition, the acquisition of Transcription could cause our industry
partners and customers to be uncertain about our ability to support the
combined companies' products and the direction of the combined companies'
product development efforts. As a result, they may delay or cancel product
orders, which could significantly decrease our revenue and limit our ability to
implement our combined business strategy.

Our acquisition of Transcription may increase the focus of the semiconductor
industry on the manufacturing data preparation market, which could lead to a
rapid and substantial increase in competition.

   Our recent acquisition of Transcription may increase the semiconductor
industry's awareness of the market for manufacturing data preparation software,
which could lead to a substantial increase in the number of start-up companies
that focus on software solutions for data preparation. Manufacturing data
preparation software translates semiconductor designs into instructions that
control manufacturing equipment. Potential competitors could pursue and execute
partnership agreements with key industry partners we intend to pursue, which
could make it difficult or impossible for us to develop relationships with
these potential industry partners. In addition, some of our current competitors
may increase their own research and development budgets relating to data
preparation, or may more aggressively market competing solutions.

                                       8
<PAGE>

If we do not continue to introduce new technologies and software products or
product enhancements ahead of rapid technological change in the market for
subwavelength solutions, our operating results could decline and we could lose
our competitive position.

   We must continually devote significant engineering resources to enable us to
introduce new technologies and software products or product enhancements to
address the evolving needs of key markets within the semiconductor industry in
solving the subwavelength gap problem. We must introduce these innovations and
the key markets within the semiconductor industry must adopt them before
changes in the semiconductor industry, such as the introduction by our current
and potential competitors of more advanced products or the emergence of
alternative technologies, render the innovations obsolete, which could cause us
to lose our competitive position. These innovations are inherently complex,
require long development cycles and a substantial investment before we can
determine their commercial viability. Moreover, designers, mask manufacturers
and equipment manufacturers must each respond to the demand of the market to
design and manufacture masks and equipment for increasingly smaller and complex
semiconductors. Our innovations must be viable and meet the needs of these key
markets within the semicondutor industry before the consumer market demands
even smaller semiconductors, rendering the innovations obsolete. We may not
have the financial resources necessary to fund any future innovations. In
addition, any revenue that we receive from enhancements or new generations of
our proprietary technologies and software products may be less than the costs
of development.

Fluctuations in our quarterly operating results may cause our stock price to
decline.

   It is likely that our future quarterly operating results may fluctuate from
time to time and may not meet the expectations of securities analysts and
investors in some future period. As a result, the price of our common stock
could decline. Historically, our quarterly operating results have fluctuated.
We may experience significant fluctuations in future quarterly operating
results. The following factors may cause these fluctuations:

  .  the timing and structure of our product license agreements;

  .  changes in our pricing policies or those of our competitors; and

  .  changes in the level of our operating expenses to support our projected
     growth.

We intend to pursue new, and maintain our current, industry partner
relationships, which could substantially divert management attention and
resources, with no guarantee of success.

   We expect to derive significant benefits, including increased revenue and
customer awareness, from our current and potential industry partner
relationships. In our pursuit to maintain and establish partner relationships
within each of the key markets in the semiconductor industry, we could expend
significant management attention, resources and sales personnel efforts, with
no guarantee of success. To establish and maintain our partner relationships,
we expend our limited financial resources on increasing our sales and business
development personnel, trade shows and marketing within trade publications. If
we did not have to pursue potential industry partners, we could focus these
resources exclusively on direct sales to our customers. In addition, through
our partner relationships, our partners resell, market, either jointly with us
or unilaterally, and promote our technologies and products. If these
relationships terminate, such as due to our material breach of the contracts or
the partners' election to cancel the contract, which generally is permissible
with prior notice to us, we would have to increase our own limited marketing
and sales resources for these activities. Further, we may be unable to enter
into new industry partner relationships if any of the following occur:

  .  current or potential industry partners develop their own solutions to
     the subwavelength gap problem; or

  .  our current or potential competitors establish relationships with
     industry partners with which we seek to establish a relationship.

                                       9
<PAGE>

   We have only recently entered into many of our current partner
relationships. These relationships may not continue or they may not be
successful. We also may be unable to find suitable additional industry
partners. To date, we have entered into agreements with industry partners,
including:

  .  Cadence in the design market;

  .  DuPont Photomask and Photronics in the mask manufacturing market; and

  .  Applied Materials, KLA-Tencor and Zygo Corporation in the semiconductor
     equipment market.

A limited number of industry partners represent a high percentage of our total
revenue. As a result, if these partners terminate or decrease the extent of
their relationships with us, our revenue could significantly decrease.

   We derive a large percentage of our total revenue from a relatively small
number of our industry partners. The loss of, or reduction in, expected revenue
from a significant partner could significantly decrease our revenue and results
of operations, or limit our ability to execute our strategy. In addition, we
generate revenue under our contracts with several of our significant industry
partners, such as KLA-Tencor and Zygo, only when the partner resells our
proprietary technologies and software products to their customers. If these
partners reduce their efforts to promote or sell our products, our revenue
could decrease. Our revenue could also be significantly decreased if:

  . a major partner significantly delays or cancels its development projects
    with us;

  . we materially breach our agreement with an industry partner, which could
    lead to termination of the agreement; or

  . we delay or cancel new product announcements and releases.

   Downturns in general economic conditions or in the semiconductor industry in
particular could cause an even greater decrease in our revenue. In 1999,
revenue from KLA-Tencor accounted for 23.1% of our total revenue, revenue from
Zygo accounted for 17.0% of our total revenue and revenue from Cadence
accounted for 16.5% of our total revenue. No other industry partner accounted
for more than 10.0% of our total revenue in 1999. We anticipate that we will
derive a significant portion of our revenue from a limited number of industry
partners for the forseeable future.

Many of our current competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
we do and as a result, they may acquire a significant market share before we
do.

   Our current competitors, or alliances among these competitors, may rapidly
acquire significant market share. These competitors may have greater name
recognition and more customers which they could use to gain market share to our
detriment. We encounter direct competition from other direct providers of phase
shifting, OPC and manufacturing data technologies. These competitors include
such companies as Avant! and Mentor Graphics. We also compete with companies
that have developed or have the ability to develop their own proprietary phase
shifting and OPC solutions, such as IBM. These companies may wish to promote
their internally developed products and may be reluctant to purchase products
from us or other independent vendors. Our competitors may offer a wider range
of products than we do and thus may be able to respond more quickly to new or
changing opportunities, technologies and customer requirements. These
competitors may also be able to undertake more extensive promotional
activities, offer more attractive terms to customers than we do and adopt more
aggressive pricing policies. Moreover, our competitors may establish
relationships among themselves or with industry partners to enhance their
services, including industry partners with which we may desire to establish a
relationship.

                                       10
<PAGE>

The market for software solutions that address the subwavelength gap problem is
new and rapidly evolving. We expect competition to intensify in the future,
which could slow our ability to grow or execute our strategy.

   We believe that the demand for solutions to the subwavelength gap problem
may encourage many competitors to enter into our market. As the market for
software solutions to the subwavelength gap problem proliferates, if our
competitors are able to attract industry partners or customers on a more
accelerated pace than we can and retain them more effectively, we would not be
able to grow and execute our strategy as quickly. In addition, if customer
preferences shift away from our technologies and software products as a result
of the increase in competition, we must develop new proprietary technologies
and software products to address these new customer demands. This could result
in the diversion of management attention or our development of new technologies
and products may be blocked by other companies' patents. We must offer better
products, customer support, prices and response time, or a combination of these
factors, than those of our potential competitors.

We are growing rapidly and must effectively manage and support our growth in
order for our business strategy to succeed.

   We have grown rapidly and will need to continue to grow in all areas of
operation. If we are unable to successfully integrate and support our existing
and new employees into our operations, we may be unable to implement our
business strategy in the time frame we anticipate, or at all. Due to our rapid
growth in headcount, we outgrew our principal office facilities earlier than we
expected. As a result, we recently relocated to San Jose, California and may
need to relocate to a larger facility in the future, which could be difficult
in the very competitive Silicon Valley office leasing market. In addition,
building and managing the support necessary for our growth places significant
demands on our management as well as our limited revenue. These demands have,
and may continue to, divert these resources away from the continued growth of
our business and implementation of our business strategy. Further, we must
adequately train our new personnel, especially our technical support personnel,
to adequately, and accurately, respond to and support our industry partners and
customers. If we fail to do this, it could lead to dissatisfaction among our
partners or customers, which could slow our growth.

We must continually attract and retain engineering personnel or we will be
unable to execute our business strategy.

   We have experienced, and we expect to continue to experience, difficulty in
hiring and retaining highly skilled engineers with appropriate qualifications
to support our rapid growth and expansion. We must continually enhance and
introduce new generations of our phase shifting and OPC technologies. As a
result, our future success depends in part on our ability to identify, attract,
retain and motivate qualified engineering personnel with the requisite
educational background and industry experience. If we lose the services of a
significant number of our engineers, it could disrupt our ability to implement
our business strategy. Competition for qualified engineers is intense,
especially in the Silicon Valley where we are located.

Our chief executive officer and chief technology officer, as well as the co-
founders of Transcription, are critical to our business and they may not remain
with us in the future.

   Our future success will depend to a significant extent on the continued
services of Y. C. (Buno) Pati, our President and Chief Executive Officer, Yao-
Ting Wang, our Chief Technology Officer, Roger Sturgeon, one of our directors
and a senior executive of Transcription and Kevin MacLean, Vice President and
General Manager of Transcription. If we lose the services of any of these key
executives, it could slow our product development processes and searching for
their replacements could divert our other senior management's time and increase
our operating expenses. In addition, our industry partners and customers could
become concerned about our future operations, which could injure our
reputation. We do not have long-term employment agreements with these
executives and we do not maintain any key person life insurance policies on
their lives.

                                       11
<PAGE>

If we fail to protect our intellectual property rights, competitors may be able
to use our technologies which could weaken our competitive position, reduce our
revenue or increase our costs.

   Our success depends heavily upon proprietary technologies, specifically our
patent portfolio. The rights granted under our patents and patent applications
may not provide competitive advantages to us. In addition, litigation may be
necessary to enforce our intellectual property rights or to determine the
validity and scope of the proprietary rights of others. As a result of any such
litigation, we could lose our proprietary rights and incur substantial
unexpected operating costs. Litigation could also divert our resources,
including our managerial and engineering resources. We rely primarily on a
combination of patents, copyrights, trademarks and trade secrets to protect our
proprietary rights and prevent competitors from using our proprietary
technologies in their products. These laws and procedures provide only limited
protection. We have been issued two U.S. patents, have five U.S. patent
applications currently pending in the U.S. and nine foreign patent applications
currently pending in selected foreign countries. Our pending patent
applications may not result in issued patents, and our existing and future
patents may not be sufficiently broad to protect our proprietary technologies.
Also, patent protection in foreign countries may be limited or unavailable
where we have filed for and need such protection. Furthermore, if we fail to
adequately protect our trademark rights, this could impair our brand identity
and ability to compete effectively. If we do not successfully protect our
trademark rights, this could force us to incur costs to re-establish our name
or our product names, including significant marketing activities.

If third parties assert that our proprietary technologies and software products
infringe their intellectual property rights, this could injure our reputation
and limit our ability to license or sell our proprietary technologies or
software products.

   Third parties, for competitive or other reasons, could assert that our
proprietary technologies and software products infringe their intellectual
property rights. These claims could injure our reputation and decrease or block
our ability to license or sell our software products. For example, on March 14,
2000, ASML MaskTools, Inc. filed a complaint alleging we infringe two U.S.
patents and have committed unfair or fraudulent business practice under the
California Business and Professions Code. We are currently investigating the
patents and allegations. The defense of these claims could divert management's
attention from the day to day operations of our company, as well as divert
resources from current planned uses, such as hiring and supporting additional
engineering personnel. Litigation is inherently uncertain, and an adverse
decision could limit our ability to offer some features in our OPC product. In
addition, a company could invite us to take a patent license. If we do not take
the license, the requesting company could contact our industry partners or
customers and suggest that they not use our software products because we are
not licensed under their patents. This action by the requesting company could
affect our relationships with these industry partners and customers and may
prevent future industry partners and customers from licensing our software
products. The intensely competitive nature of our industry and the important
nature of our technologies to our competitors' businesses may contribute to the
likelihood of being subject to third party claims of this nature. Please see
"Business--Intellectual Property."

Any potential dispute involving our patents or other intellectual property
could include our industry partners and customers, which could trigger our
indemnification obligations with them and result in substantial expense to us.

   In any potential dispute involving our patents or other intellectual
property, our licensees could also become the target of litigation. This could
trigger our technical support and indemnification obligations in some of our
license agreements which could result in substantial expense to us. In addition
to the time and expense required for us to supply such support or
indemnification to our licensees, any such litigation could severely disrupt or
shut down the business of our licensees, which in turn could hurt our relations
with our customers and cause the sale of our proprietary technologies and
software products to decrease.

Defects in our proprietary technologies and software products could decrease
our revenue and our competitive market share.

   If our industry partners and customers discover any defects after they
implement our proprietary technologies and software products, these defects
could significantly decrease the market acceptance and sales

                                       12
<PAGE>


of our software products, which could decrease our competitive market share.
Any actual or perceived defects with our proprietary technologies and software
products may also hinder our ability to attract or retain industry partners or
customers, leading to a decrease in our revenue. These defects are frequently
found during the period following introduction of new products or enhancements
to existing products. Despite testing prior to introduction, our software
products may contain software errors not discovered until after customer
implementation. If our software products contain errors or defects, it could
require us to expend significant resources to alleviate these problems, which
could result in the diversion of technical and other resources from our other
development efforts.

We face operational and financial risks associated with international
operations.

   We derive a significant portion of our revenue from international sales. We
have only limited experience in developing, marketing, selling and supporting
our proprietary technologies and software products internationally and may not
succeed in maintaining or expanding our international operations, which could
slow our revenue growth. We are subject to risks inherent in doing business in
international markets. These risks include:

  .  fluctuations in exchange rates which may negatively affect our operating
     results;

  .  greater difficulty in collecting accounts receivable resulting in longer
     collection periods;

  .  compliance with and unexpected changes in a wide variety of foreign laws
     and regulatory environments with which we are not familiar;

  .  export controls which could prevent us from shipping our software
     products into and from some markets;

  .  changes in import/export duties and quotas could affect the competitive
     pricing of our software products and reduce our market share in some
     countries; and

  .  economic or political instability.

   We may be unable to continue to market our proprietary technologies and
software products successfully in international markets.

We may need to raise additional funds to support our growth or execute our
strategy and if we are unable to do so, we may be unable to develop or enhance
our proprietary technologies and software products, respond to competitive
pressures or acquire desired businesses or technologies.

   We currently anticipate that our available cash resources, combined with the
net proceeds from this offering, will be sufficient to meet our presently
anticipated working capital and capital expenditure requirements for at least
the next 12 months. However, we may need to raise additional funds in order to:

  .  support more rapid expansion;

  .  develop new or enhanced products;

  .  respond to competitive pressures; or

  .  acquire complementary businesses or technologies.

   These factors will impact our future capital requirements and the adequacy
of our available funds. We may need to raise additional funds through public or
private financings, strategic relationships or other arrangements.

We may be unable to consummate other potential acquisitions or investments or
successfully integrate them with our business, which may slow our ability to
expand the range of our proprietary technologies and software products.

   To expand the range of our proprietary technologies and software products,
we may acquire or make investments in additional complementary businesses,
technologies or products if appropriate opportunities arise.

                                       13
<PAGE>


We may be unable to identify suitable acquisition or investment candidates at
reasonable prices or on reasonable terms, or consummate future acquisitions or
investments, each of which could slow our growth strategy. If we do acquire
additional companies or make other types of acquisitions, we may have
difficulty integrating the acquired products, personnel or technologies. These
difficulties could disrupt our ongoing business, distract our management and
employees and increase our expenses.

Management will have broad discretion as to the use of proceeds from this
offering and, as a result, we may not use the proceeds to the satisfaction of
our stockholders.

   Our board of directors and management will have broad discretion in
allocating the net proceeds of this offering. They may choose to allocate such
proceeds in ways that do not yield a favorable return or are not supported by
our stockholders. We have designated only limited specific uses for the net
proceeds from this offering. Please see "Use of Proceeds."

The concentration of our capital stock ownership with insiders upon the
completion of this offering will likely limit your ability to influence
corporate matters.

   The concentration of ownership of our outstanding capital stock with our
directors and executive officers after this offering may limit your ability to
influence corporate matters. Prior to the completion of this offering, our
directors and executive officers, and their affiliates, beneficially own 67.0%
of our outstanding capital stock, and we expect them to remain significant
stockholders upon the completion of this offering. As a result, these
stockholders, if acting together, will have the ability to control all matters
submitted to our stockholders for approval, including the election and removal
of directors and the approval of any corporate transactions.

We have anti-takeover defenses that could delay or prevent an acquisition of
our company.

   Provisions of our certificate of incorporation and bylaws in effect after
completion of this offering and Delaware law could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our
stockholders. Please see "Description of Capital Stock."

Negotiations between the underwriters and us determined the initial public
offering price, but the market price may be less or may be volatile, and you
may not be able to resell your shares at or above the initial public offering
price.

   This initial public offering price may vary from the market price of our
common stock after the offering. The market price of our common stock may
fluctuate significantly in response to factors, some of which are beyond our
control, including:

  .  actual or anticipated fluctuations in our operating results;

  .  changes in market valuations of other technology companies;

  .  conditions or trends in the semiconductor industry;

  .  announcements by us or our competitors of significant technical
     innovations, contracts, acquisitions or partnerships;

  .  additions or departures of key personnel;

  .  any deviations in net revenue or in losses from levels expected by
     securities analysts;

  .  volume fluctuations, which are particularly common among highly volatile
     securities of technology related companies; and

  .  sales of substantial amounts of our common stock or other securities in
     the open market.

                                       14
<PAGE>

   General political or economic conditions, such as recession or interest rate
or currency rate fluctuations in the United States or abroad, also could cause
the market price of our common stock to decline. Please see "Underwriting."

Our stock price is likely to be extremely volatile as the market for technology
companies' stock has recently experienced extreme price and volume
fluctuations.

   Volatility in the market price of our common stock could result in
securities class action litigation. Any litigation would likely result in
substantial costs and a diversion of management's attention and resources.
Despite the strong pattern of operating losses of technology companies, the
market demand, valuation and trading prices of these companies have been high.
At the same time, the share prices of these companies' stocks have been highly
volatile and have recorded lows well below their historical highs. As a result,
investors in these companies often buy the stock at very high prices only to
see the price drop substantially a short time later, resulting in an extreme
drop in value in the stock holdings of these investors. Our stock may not trade
at the same levels as other technology stocks. In addition, technology stocks
in general may not sustain current market prices.

An active public market for our common stock may not develop.

   An active public market for our common stock may not develop or be sustained
after this offering. The initial public offering price for the shares has been
determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in the
trading market.

A large number of shares becoming eligible for sale after this offering could
cause our stock price to decline.

   Sales of a substantial number of shares of our common stock after this
offering could cause our stock price to fall. Our current stockholders hold a
substantial number of shares, which they will be able to sell in the public
market in the near future. Please see "Shares Eligible for Future Sale."

You will incur immediate and substantial dilution in the book value of the
stock you purchase.

   The initial public offering price is substantially higher than the book
value per share of our outstanding common stock immediately after the offering.
This is referred to as dilution. Accordingly, if you purchase common stock in
the offering, you will incur immediate dilution of approximately $10.81, at an
initial public offering price of $12.00 per share, in the book value per share
of our common stock from the price you pay for our common stock. Please see
"Dilution."

If we raise additional capital through the issuance of new securities at a
price lower than the initial public offering price, you will incur additional
dilution.

   If we raise additional capital through the issuance of new securities at a
lower price than the initial public offering price of $   per share, you will
be subject to additional dilution. If we are unable to access the public
markets in the future, or if our performance or prospects decreases, we may
need to consummate a private placement or public offering of our capital stock
at a lower price than the initial public offering price. In addition, any new
securities may have rights, preferences or privileges senior to those
securities held by you.

Exercise of registration rights after this offering could adversely affect our
stock price.

   If holders of registration rights exercise those rights after this offering,
a large number of securities could be registered and sold in the public market,
which could result in a decline in the price of our common stock. If we were to
include in a company-initiated registration shares held by these holders
pursuant to the exercise of their registration rights, our ability to raise
needed capital could suffer. After this offering, the holders of 17,476,825
shares of our common stock, which will represent a total of approximately 60.1%
of our outstanding stock after completion of this offering, are entitled to
rights with respect to registration under the Securities Act of 1933.

                                       15
<PAGE>

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

   This prospectus contains forward-looking statements in "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and elsewhere. These statements relate
to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks
outlined under "Risk Factors," that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels or activity, performance or
achievements expressed or implied by these forward-looking statements.

   Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results.

                                       16
<PAGE>

                                USE OF PROCEEDS

   Our net proceeds from the sale of 5,534,000 shares of common stock in this
offering at an estimated initial public offering price of $12.00 per share,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses, will be approximately $59.8 million. If the underwriters'
over-allotment option is exercised in full, we estimate that our net proceeds
will be approximately $69.0 million.

   In connection of our acquisition of Transcription Enterprises Limited, we
issued promissory notes in the aggregate principal amount of $40 million, $35
million of which is outstanding. Interest on the notes accrues at 8.0% per
annum. These notes are payable in 16 equal quarterly payments of $2.2 million,
plus interest, commencing on April 1, 2000. We expect to pay the balance of
principal and accrued interest under the notes with a portion of the net
proceeds from this offering. The remaining proceeds will be used for working
capital and general corporate purposes. We may use a portion of the net
proceeds to acquire businesses, products and technologies that are
complementary to our business. However, we have no present plans or
committments and are not engaged in any negotiations with respect to any
transactions of this type. Pending these uses, we will invest the net proceeds
from this offering in short-term, interest-bearing, investment grade
securities.

                                DIVIDEND POLICY

   We have never declared or paid any cash dividends on our common stock or
other securities. We currently anticipate that we will retain all of our future
earnings for use in the expansion and operation of our business and do not
anticipate paying any cash dividends for the foreseeable future.

                                       17
<PAGE>

                                 CAPITALIZATION

   The following table sets forth our total capitalization as of December 31,
1999:

  . on an actual basis after giving effect to the three-for-two forward stock
    split of our preferred stock and common stock;

  . on a pro forma basis to reflect our acquisition of Transcription
    Enterprises Limited effected in January 2000 and the automatic conversion
    of all outstanding shares of preferred stock into common stock upon the
    closing of this offering; and

  . on a pro forma as adjusted basis to reflect the sale of the 5,534,000
    shares of common stock at an assumed initial public offering price of
    $12.00 per share in this offering, after deducting estimated underwriting
    discounts and commissions and estimated offering expenses to be paid by
    us and the repayment of the remaining $35.0 million of notes issued in
    connection with the acquisition of Transcription Enterprises Limited.

   You should read this information together with the consolidated financial
statements and the notes to these statements appearing elsewhere in this
prospectus.

<TABLE>
<CAPTION>
                                             As of December 31, 1999
                                     -------------------------------------------
                                                                    Pro Forma
                                       Actual       Pro Forma      As Adjusted
                                     ------------  ------------   --------------
                                      (in thousands, except per share data)

<S>                                  <C>           <C>            <C>
Notes payable, including current
 portion............................ $        --   $     35,000    $        --
                                     ------------  ------------    ------------
Stockholders' equity:
  Convertible preferred stock,
   $0.0001 par value: 12,253 shares
   authorized, 8,103 issued and
   outstanding, actual; no shares
   issued or outstanding, pro forma
   and pro forma as adjusted........            1           --              --
  Common stock, $0.0001 par value:
   30,000 shares authorized, actual,
   pro forma and pro forma as
   adjusted; 9,570 shares issued and
   outstanding, actual; 17,673
   shares issued and outstanding,
   pro forma; 27,017 shares issued
   and outstanding, pro forma as
   adjusted.........................            1             2               3
 Additional paid in capital.........       50,100        95,820         155,648
 Receivable from stockholders.......         (315)         (315)           (315)
 Deferred stock compensation........      (21,220)      (21,220)        (21,220)
 Accumulated deficit................      (16,162)      (16,462)        (16,462)
                                     ------------  ------------    ------------
  Total stockholders' equity .......       12,405        57,825         117,654
                                     ------------  ------------    ------------
    Total capitalization............ $     12,405  $     92,826    $    123,948
                                     ============  ============    ============
</TABLE>

                                       18
<PAGE>

                                    DILUTION

   Our pro forma net tangible book value as of December 31, 1999, after giving
effect to our acquisition of Transcription Enterprises Limited effected in
January 2000 and the conversion of our outstanding preferred stock into common
stock, was $(27.6) million or $(1.29) per share of common stock. Pro forma net
tangible book value per share represents total tangible assets less total
liabilities, divided by the number of outstanding shares of common stock.

   Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of our common stock in this
offering and the net tangible book value per share of our common stock
immediately afterwards. After giving effect to our sale of the 5,534,000 shares
of common stock offered by this prospectus and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us, our net tangible book value at December 31, 1999 would have been
$32.2 million or $1.19 per share. This represents an immediate increase in net
tangible book value to existing stockholders of $2.48 per share and an
immediate dilution to new public investors of $10.81 per share. The following
table illustrates the per share dilution:

<TABLE>
<S>                                                           <C>     <C>    <C>
Assumed initial public offering price per share.............          $12.00
  Pro forma net tangible book value per share as of December
   31, 1999.................................................  $(1.29)
  Increase per share attributable to new public investors...    2.48
                                                              ------         ---
Pro forma net tangible book value per share after offering..            1.19
                                                                      ------ ---
Dilution per share to new public investors..................          $10.81
                                                                      ======
</TABLE>

   The following table sets forth on a pro forma basis as of December 31, 1999,
after giving effect to the conversion of our preferred stock and the
acquisition of Transcription Enterprises Limited, and assuming a three-for-two
forward stock split of all the outstanding common stock, the differences
between the number of shares of common stock purchased from us, the total price
paid, and the average price per share paid by the existing stockholders and new
public investors, deducting estimated underwriting discounts and commissions
and offering expenses to be paid by us, using an assumed initial public
offering price of $12.00 per share:

<TABLE>
<CAPTION>
                                                   Total Cash
                             Shares Purchased     Consideration
                            ------------------ ------------------- Average Price
                              Number   Percent   Amount    Percent   Per Share
                            ---------- ------- ----------- ------- -------------
<S>                         <C>        <C>     <C>         <C>     <C>
Existing stockholders...... 21,483,450   79.5% $24,488,000   29.0%    $ 1.14
New public investors.......  5,534,000   20.5   59,828,000   71.0      10.81
                            ----------  -----  -----------  -----
  Total.................... 27,017,450  100.0% $84,316,000  100.0%
                            ==========  =====  ===========  =====
</TABLE>

   If the underwriters' over-allotment option is exercised in full, the number
of shares held by new investors increase to 6,364,100, or 22.9%, of the total
shares of common stock outstanding after this offering.

                                       19
<PAGE>

                            SELECTED FINANCIAL DATA

   The following selected financial data are qualified by reference to, and
should be read in conjunction with, Management's Discussion and Analysis of
Financial Condition and Results of Operations and the financial statements and
notes thereto and other information contained in this prospectus. The selected
balance sheet data as of December 31, 1998 and 1999 and selected statements of
operations data for the years ended December 31, 1997, 1998 and 1999 have been
derived from our audited financial statements and the notes thereto included
elsewhere in this prospectus. The selected balance sheet data as of December
31, 1996 and 1997 and the selected statement of operations data for the year
ended December 31, 1996 were derived from financial statements not included in
this prospectus.

<TABLE>
<CAPTION>
                                               Years ended December 31,
                                            ---------------------------------
                                             1996     1997    1998     1999
                                            -------  ------  -------  -------
                                              (in thousands, except per
                                                     share data)
<S>                                         <C>      <C>     <C>      <C>
Statement of Operations Data
Revenue.................................... $    51  $  620  $   736  $ 5,492
                                            -------  ------  -------  -------
Costs and expenses:
  Cost of revenue..........................       9      57      127      307
  Research and development.................     202     993    2,721    4,816
  Sales and marketing......................       2      58    1,404    4,277
  General and administrative...............      43     131    2,355    1,303
  Amortization of deferred stock
   compensation(*).........................      --      --      862    3,990
                                            -------  ------  -------  -------
    Total costs and expenses...............     256   1,239    7,469   14,693
                                            -------  ------  -------  -------
Loss from operations.......................    (205)   (619)  (6,733)  (9,201)
Interest income, net.......................       6      35      182      373
                                            -------  ------  -------  -------
Net loss................................... $  (199) $ (584) $(6,551) $(8,828)
                                            =======  ======  =======  =======
Net loss per common share, basic and
 diluted................................... $ (0.04) $(0.08) $ (0.89) $ (1.26)
                                            =======  ======  =======  =======
Weighted-average common shares, basic and
 diluted...................................   4,722   7,397    7,373    7,019
                                            =======  ======  =======  =======
Pro forma net loss per common share, basic
 and diluted (unaudited)...................                           $ (0.64)
                                                                      =======
Pro forma weighted-average common share,
 basic and diluted (unaudited).............                            13,885
                                                                      =======
<CAPTION>
                                                  As of December 31,
                                            ---------------------------------
                                             1996     1997    1998     1999
                                            -------  ------  -------  -------
                                                    (in thousands)
<S>                                         <C>      <C>     <C>      <C>
Balance Sheet Data
Cash and cash equivalents.................. $   615  $  656  $ 4,973  $13,486
Working capital............................     340     377    2,319   10,499
Total assets...............................     650   1,081    6,611   17,605
Total stockholders' equity.................     338     474    2,815   12,405
<CAPTION>
                                               Years ended December 31,
                                            ---------------------------------
                                             1996     1997    1998     1999
                                            -------  ------  -------  -------
                                                    (in thousands)
<S>                                         <C>      <C>     <C>      <C>
(*) Amortization of Deferred Stock
 Compensation:
  Cost of revenue..........................      --      --  $    22  $   117
  Research and development.................      --      --      465    1,836
  Sales and marketing......................      --      --      361    1,444
  General and administrative...............      --      --       14      593
                                            -------  ------  -------  -------
                                                 --  $   --  $   862  $ 3,990
                                            =======  ======  =======  =======
</TABLE>


                                       20
<PAGE>

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   Our actual results could differ materially from those discussed in the
forward-looking statements contained in this section. The following discussion
and analysis of our financial condition and results of operations should be
read in conjunction with "Selected Financial Data" and our financial statements
and notes thereto appearing elsewhere in this prospectus.

Overview

   We design and develop proprietary technologies and software products that
enable the design and manufacture of semiconductors with subwavelength feature
sizes. From our incorporation in October 1995 through February 1997, we
primarily focused our activities on conducting research and development and
establishing markets and distribution channels for our proprietary technologies
and software products. In February 1997, we shipped our first software product,
IC Workbench.

   In January 2000, we acquired Transcription Enterprises Limited for
approximately $45.7 million in Series E preferred stock and $40.0 million in
notes payable, resulting in goodwill and other intangible assets of $85.4
million which will be amortized on a straight-line basis over two to five
years. We will account for the acquisition under the purchase method of
accounting and, as a result, our historical results of operations do not
include the results of operations of Transcription.

   Had the acquisition taken place on January 1, 1999, we would have had
combined revenues of $16.8 million in 1999 after giving effect to reduction of
pro forma combined revenues related to deferred revenues on Transcription
contracts. Our pro forma combined costs and expenses for the year ended
December 31, 1999 would have been $37.0 million, including $4.4 million of
costs and expenses from Transcription and amortization of intangible assets
associated with the acquisition of $18 million. Pro forma net interest expense
for the year would have been $3.2 million, and the pro forma net loss would
have been $20.7 million, or $(2.95) per share.

   Because of the significance of the acquisition, we do not believe the
discussion and analysis of our historical financial condition and results of
operations set for the below are indicative, nor should they be relied upon as
an indicator, of our future performance.

   We derive revenue from intellectual property and software licenses,
maintenance and related technical services. To date, we have derived a
significant portion of our revenue from research and development licenses to
integrated device manufacturers, or IDMs, and foundries of our phase shifting
technologies and software and OPC software licenses, as well as licenses of
photomask verification software to semiconductor resellers. An IDM is a
traditional semiconductor company that designs and manufactures its own ICs.
Our research and development licenses limit the use of our proprietary
technologies for pre-production purposes.

   We expect to enter into production licenses with semiconductor manufacturers
as they adopt our proprietary technologies for production. Production licenses
grant licensees the right to use our phase shifting intellectual property and
software to design and manufacture subwavelength ICs. We entered into our first
production license with an IDM in December 1999. We expect production licenses
to account for a significant portion of our revenue in the future and that fees
for production licenses will be time-based, and structured on a per fabrication
facility or per device basis.

   We license our intellectual property and software products through our
direct sales force and to resellers. To date, our direct sales force has
primarily focused on selling research and development licenses to semiconductor
manufacturers. We anticipate an increase in direct sales efforts related to
converting these manufacturers to production licensees. Our reseller licensees
are primarily leading semiconductor equipment manufacturers that integrate our
software products with their equipment.

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<PAGE>


   In the fourth quarter of 1999 and first quarter of 2000, we entered into
agreements with a major design tool vendor that provides the vendor with
distribution rights to our phase shifting and OPC technologies, and under which
we will jointly develop phase shifting design methodologies. In addition, the
vendor has agreed to integrate portions of our software products with its
physical design and vertification tools. Under the agreements, we will receive
fees totaling up to $26 million payable over a period of approximately three
years. Each agreement may be extended by the vendor for an additional two-year
period for additional fees of up to an aggregate of $24 million.

   Revenue from existing research and development licenses is recognized
ratably over a related service period. Maintenance revenue is typically priced
based on a percentage of the license fee and is recognized ratably over the
term of the agreement, typically 12 months. We typically recognize revenue from
technical services as the services are performed. For licenses to resellers and
licenses of our manufacturing data preparation software, where the license fee
is fixed or determinable and the collection of the fee is probable, revenue is
recognized upon delivery if no significant post delivery obligations remain. We
record billed amounts due from customers in excess of recognized revenue as
deferred revenue. The timing and amounts billed to customers can vary
significantly depending on specific contract terms and can therefore have a
significant impact on the amount of deferred revenue in any given period.

   We have adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." This statement requires enterprises to report
information about operating segments in annual financial statements and
selected information about reportable segments in interim financial reports. It
also establishes standards for related disclosures about products, geographic
areas and major customers. The method for determining what information to
report is based upon the "management" approach. This method requires us to
report certain financial information related to continuing operations that is
provided to our chief operating decision-maker for the purpose of evaluating
financial performance and resource allocation. Our chief operating decision-
maker reviews revenue by both geography and customer. We allocate resources and
generate revenue based on requirements of our customers in the semiconductor
industry. We are not organized into business units nor do we capture expenses
or allocated resources based on segmentation of our business. Thus, we operate
in a single segment.

   Since inception, we have incurred substantial costs to develop our
proprietary technologies and software products, to recruit and train personnel
for our engineering, sales and marketing and technical support departments, and
to establish an administrative organization. As a result, we have incurred net
losses in each year since inception and had an accumulated deficit of $16.2
million as of December 31, 1999. We anticipate that our operating expenses will
increase substantially in future years as we increase sales and marketing
operations, increase research and development, broaden technical support
services and expand international operations. In addition, we expect to incur
additional non-cash operating expenses relating to amortization of deferred
stock compensation and goodwill associated with our acquisition of
Transcription Enterprises Limited. Accordingly, we expect to incur additional
losses for the foreseeable future. In addition, our limited operating history
makes it difficult for us to predict future operating results and, accordingly,
there can be no assurance that we will achieve or sustain revenue growth or
profitability.

Results of Operations

Years 1998 and 1999

   Revenue. Revenue increased from $736,000 in 1998 to $5.5 million in 1999.
The increase in 1999 was primarily due to increased research and development
licenses to foundries and IDMs and increased reseller sales.

 Costs and Expenses

   Cost of revenue. Cost of revenue includes primarily salary and related costs
for engineers associated with maintenance and technical services. Cost of
revenue increased from $127,000 in 1998 to $307,000 in 1999. This increase was
due primarily to an increase in the time spent on service and integration
efforts by our engineering personnel. Cost of revenue decreased as a percentage
of sales from 17.0% of revenue in 1998 to

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<PAGE>

6.0% of revenue in 1999. We anticipate that cost of revenue will increase in
dollar amount as we support our expanding number of industry partners and
customers and assist our research and development licensees to transition into
production. We expect, however, that cost of revenue will continue to decrease
as a percentage of revenue in the long term.

   Research and development. Research and development expenses consist
primarily of personnel and related costs. Research and development expenses
increased from $2.1 million in 1998, exclusive of a $600,000 bonus paid to one
of our founders and executive officers, to $4.8 million in 1999. The increase
in dollar amounts reflects our expanding research and development efforts in
subwavelength technologies and products. Research and development expenses
decreased as a percentage of revenue from 285.3% of revenue in 1998, exclusive
of the $600,000 bonus, to 87.3% of revenue in 1999. A significant portion of
the increase was due to the addition of personnel and personnel-related costs
for enhancement of existing applications and development of new products. We
anticipate that we will continue to commit substantial resources to research
and development in the future. We expect that research and development expenses
will increase in dollar amounts to support increased research and development
efforts, but decline as a percentage of revenue in the long term.

   Sales and marketing. Sales and marketing expenses consist primarily of
salaries and related costs for sales and marketing personnel, sales
commissions, tradeshows and other marketing activities. Sales and marketing
expenses increased from $1.4 million in 1998 to $4.3 million in 1999. This
increase was primarily due to the hiring of additional sales and marketing
personnel, increased sales commissions and higher tradeshow expenses. Sales and
marketing expenses decreased as percentage of revenue from 190.2% of revenue in
1998 to 77.8% of revenue in 1999. We expect that sales and marketing expenses
will increase in dollar amounts to support increased sales efforts, but decline
as a percentage of revenue in the long term.

   General and administrative. General and administrative expenses consist
primarily of salaries and related costs for operations and finance employees
and legal and accounting services. General and administrative expenses
increased, exclusive of the $1.4 million bonus to a founder and officer in
1998, from $1.0 million in 1998 to $1.3 million in 1999. Exclusive of the
bonus, general and administrative expenses increased in 1999 primarily as a
result of increased spending in personnel and personnel-related costs. General
and administrative expenses decreased as a percentage of revenue from 129.8% of
revenue in 1998, exclusive of the $1.4 million bonus, to 23.6% of revenue in
1999. We expect that general and administrative will increase in dollar amounts
to support increased administrative efforts, but decline as a percentage of
revenue in the long term.

   On February 1, 2000, we granted stock options to purchase an aggregate of
2,007,000 shares of common stock. In connection with the grant of these stock
options, we recognized deferred stock compensation totaling $17.0 million,
which will be amortized over the four year vesting period of the stock options.

   Amortization of deferred stock compensation. Amortization of deferred stock
compensation represents the amount of amortization related to the difference
between the exercise price of options granted and the estimated fair market
value of the underlying common stock on the date of the grant. We recognized
stock-based compensation of $2.8 million in 1998 and $23.3 million in 1999
related to the grant of stock options. We are amortizing these amounts over the
vesting periods of the individual options, using the multiple option method.
Amortization of deferred stock-based compensation totaled $862,000 and $4.0
million for 1998 and 1999, respectively. Outstanding options will continue to
vest over the next four years. Future compensation expense from options granted
through December 31, 1999 is estimated to be $11.2 million for 2000, $5.9
million for 2001, $3.0 million for 2002 and $1.1 million for 2003.

   Interest income. Interest income increased from $182,000 in 1998 to $373,000
in 1999 primarily due to higher average cash and short-term investment
balances.

Years 1997 and 1998

   Revenue. Revenue increased from $620,000 in 1997 to $736,000 in 1998. This
increase was primarily attributable to increased reseller sales, as well as
maintenance and support on an increased number of customers.

                                       23
<PAGE>

 Costs and Expenses

   Cost of Revenue. Cost of revenue increased from $57,000 in 1997 to $127,000
in 1998. This increase was due primarily to increased service and integration
efforts by our engineering personnel.

   Research and development. Research and development expenses increased from
$1.0 million in 1997 to $2.7 million in 1998. This increase was due to the
addition of personnel and higher personnel-related costs to enhance and expand
our product offerings and a $600,000 bonus paid to a founder and officer.

   Sales and marketing. Sales and marketing expenses increased from $58,000 in
1997 to $1.4 million in 1998. This increase was primarily due to the addition
of personnel and higher personnel-related costs resulting from the continued
growth of our sales and marketing organizations, as well as costs associated
with the sales and marketing of our products.

   General and administrative. General and administrative expenses increased
from $131,000 in 1997 to $2.4 million in 1998. General and administrative
expenses increased in 1998 partly as a result of increased spending in legal,
accounting and human resources professional services. General and
administrative expenses also included a bonus of $1.4 million to one of our
founders and executive officers in 1998.

   Interest income. Interest income increased from $35,000 in 1997 to $182,000
in 1998 primarily due to higher average cash and short-term investment
balances.

Net Operating Losses and Tax Credit Carryforwards

   As of December 31, 1999, we had federal net operating losses and research
and development credit carryforwards of approximately $6.9 million and
$217,000, respectively. The net operating loss and research and development
credit carryforwards will expire at various dates, beginning in 2010, if not
utilized. Under the provisions of the Internal Revenue Code of 1986, as
amended, substantial changes in our ownership may limit the amount of net
operating loss carryforwards that can be utilized annually in the future to
offset taxable income. A valuation allowance has been established to fully
reserve the potential benefits of these carryforwards in our financial
statements to reflect the uncertainty of future taxable income required to
utilize available tax loss carryforwards and other deferred tax assets.

Liquidity and Capital Resources

   Since inception, we have funded our operations primarily through the private
sale of our equity securities in aggregate net proceeds of approximately $24.5
million. As of December 31, 1999 we had $10.5 million in working capital and
$13.5 million in cash and cash equivalents. We anticipate using available cash
to fund growth in operations, invest in capital equipment, acquire businesses,
and license technologies or software products related to our line of business.

   Net cash used in operating activities was $3.3 million in 1998, compared to
$4.4 million in 1999. Net cash used in operating activities in 1999 primarily
reflects a net loss of $8.8 million, partly offset by amortization of deferred
stock compensation costs of $4.0 million.

   Net cash provided by financing activities was approximately $719,000 in
1997, $8.0 million in 1998 and $14.4 million in 1999. Net cash provided by
financing activities includes proceeds from the issuance of preferred and
common stock and stock warrants.

   Capital expenditures were approximately $82,000 in 1997, $455,000 in 1998
and $1.5 million in 1999. Our capital expenditures consisted of purchases of
computer hardware and software, office furniture and equipment and leasehold
improvements. Purchases of computer equipment represent the largest component
of our capital expenditures. We expect to invest approximately $2.0 million in
2000 mainly for computer equipment, facilities and business systems upgrades.

                                       24
<PAGE>

   On January 1, 2000, we acquired Transcription Enterprises Limited. In
connection with the acquisition, we issued $40.0 million in promissory notes.
Shortly after issuance of the notes, we repaid $5.0 million of the principal,
leaving a balance of $35.0 million outstanding under the notes. The remaining
principal amount, plus interest at 8% per annum, is payable in 16 equal
quarterly payments of $2.2 million, plus interest commencing on April 1, 2000.
We expect to repay these notes in full with the net proceeds of this offering.

   We expect to experience significant growth in our operating expenses,
particularly research and development and sales and marketing expenses, for the
foreseeable future in order to execute our business strategy. As a result, we
anticipate that such operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources. In
addition, we may utilize cash resources to fund acquisitions of, or investments
in, complementary businesses, technologies or product lines. We believe that
the net proceeds from the sale of the common stock in this offering, together
with funds generated from operations, will be sufficient to meet our working
capital requirements for at least the next 12 months. Thereafter, we may find
it necessary to obtain additional equity or debt financing. In the event
additional financing is required, we may not be able to raise it on acceptable
terms or at all.

Recent Accounting Pronouncements

   In June 1998, FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities", which establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, collectively referred to as derivatives, and for hedging activities.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. This statement does not apply to us as we currently do not
have any derivative instruments or hedging activities.

Disclosures About Market Risk

   Our exposure to market risk is limited to interest income sensitivity, which
is affected by changes in the general level of U.S. interest rates,
particularly since the majority of our investments are in short-term debt
securities issued by corporations. We place our investments with high quality
issuers and limit the amount of credit exposure to any one issuer. Due to the
nature of our short-term investments, we believe that we are not subject to any
material market risk exposure.

Year 2000 Compliance

   As of March 2, 2000, we had not experienced, nor do we expect to experience,
any Year 2000-related disruption in the operation of our systems. To our
knowledge, none of our material suppliers or vendors experienced any material
Year 2000 problems or had any difficulty resolving the so-called "century leap
year" algorithm. Although most Year 2000 problems should have become evident on
January 1, 2000 or February 29, 2000, additional Year 2000-related problems may
become evident in the future.

                                       25
<PAGE>

                                    BUSINESS

Overview

   We are a leading commercial provider of proprietary technologies and
software products that enable the design and manufacture of subwavelength
semiconductors using existing design tools and semiconductor equipment. We
believe we accelerate the semiconductor technology roadmap by at least two
years, enabling the production of semiconductors with feature sizes of 0.09
micron. Our comprehensive solution addresses each key stage of the design-to-
silicon flow, including physical design of semiconductors; verification that
the design is optimal; manufacturing data preparation, manufacturing and
inspection of photomasks, or templates; and the manipulation of light waves to
create images of IC patterns, or photolithography. By offering a subwavelength
solution that is used in every key stage of the semiconductor design and
manufacturing process, we help to integrate the entire design-to-silicon flow
for subwavelength ICs.

   Our patented phase shifting, proprietary OPC and process modeling
technologies form the foundation of our subwavelength solution. By enabling our
industry partners and customers to produce smaller, faster and more power
efficient semiconductors with existing semiconductor equipment, our
subwavelength solution allows our industry partners and customers to introduce
new high performance semiconductors more quickly, while significantly
increasing their return on invested capital. Motorola and one of our industry
partners demonstrated success with our proprietary technologies, and MIT
Lincoln Laboratory, a research laboratory, demonstrated the future potential of
our proprietary technologies by creating 0.05 micron features. We believe our
technology leadership and our relationships with leading companies within the
semiconductor industry drive the adoption of our comprehensive subwavelength
solution as the industry standard. Our industry partners and customers include
Applied Materials, KLA-Tencor, DuPont Photomask, Phototronics, Cadence, TSMC
and UMC.

Industry Background

   Businesses and individuals increasingly rely on electronic products and
systems powered by semiconductors. These products and systems include desktop
and portable personal computers, mobile phones, Internet appliances, video game
consoles, and high-speed networking and communications products that serve as
the backbone of the Internet. The semiconductor industry could not enhance
these electronic products or continue to introduce new, more sophisticated
products without these advances. Growing recognition of the benefits of
advances in electronics, including enhanced productivity and communications
capability, drives demand for higher performance, lower cost, smaller and more
power efficient products with greater functionality. To meet this demand,
manufacturers of electronic products and systems require an increasing supply
of faster, cheaper and more power efficient semiconductors. The Semiconductor
Industry Association estimated, in its October 1999 report, that the worldwide
market for semiconductors will grow from $144 billion in 1999 to $233 billion
in 2002, or 61.8%. Delivering these advanced semiconductors will require rapid
advances in IC design and manufacturing technologies.

 The Historical March to Smaller Feature Sizes and Systems-on-a-Chip

   The ability to produce advanced ICs depends on developing technology that
enables the design and manufacture of semiconductors with smaller feature
sizes. A semiconductor's "feature size" relates to the size of circuit
components in the device and is measured in microns, or millionths of a meter.
Advanced semiconductors today have feature sizes of 0.18 to 0.25 micron. To
illustrate how small these features are, when placed side by side, one thousand
0.10 micron transistors can fit within the width of a single human hair.
Smaller feature sizes significantly increase performance while decreasing the
size, cost and power consumption of semiconductors. Smaller feature sizes also
allow multiple components, such as microprocessors, memory, analog components
and digital signal processors, to be integrated into a single semiconductor.
The resulting complex semiconductor, commonly referred to as system-on-a-chip,
offers significant performance, cost, power and reliability benefits over
systems that require multiple semiconductors to perform the same tasks.

                                       26
<PAGE>


   Advances in semiconductor design and manufacturing technologies enabled
reductions in feature sizes from 3.0 micron in 1980 to 0.18 micron in today's
advanced production fabrication facilities. These advances led to significant
improvements in electronic systems and products. For example, today's cellular
phones compared to those of a few years ago have a battery life of days instead
of hours, weigh ounces instead of pounds and can be produced at a fraction of
the price. In addition, today's cellular phones have many times the computing
power of the most advanced personal computer in 1980.

   To date, the semiconductor industry relied upon advances in semiconductor
equipment to produce smaller feature sizes on semiconductors. However, to fully
realize the benefits of smaller feature sizes, significant advances have also
been required in each of the following stages of the semiconductor design-to-
silicon flow:

  . Semiconductor Design Tools. A variety of complex software programs used
    to design, simulate and verify semiconductor designs.

  . Photomasks. Transparent templates used to transfer images of electronic
    circuits onto silicon wafers.

  . Semiconductor Equipment. Sophisticated equipment used to manufacture
    semiconductors.

  . Semiconductor Manufacturing. Complex processes required to create
    semiconductors on silicon.

   Historically, leading semiconductor companies designed, manufactured and
tested their semiconductors in their own facilities using internally developed
tools. The growing complexity of the design and manufacturing processes and the
escalating cost of manufacturing facilities resulted in a disaggregation of the
semiconductor industry into companies separately focusing on each individual
stage of the design-to-silicon flow. This disaggregation is fueling the rapid
growth of "fabless" semiconductor companies, which do not own or operate their
own semiconductor fabrication facilities, design tool vendors, semiconductor
equipment manufacturers and third-party semiconductor manufacturers, or
foundries. Each of these industry markets faces significant challenges as
feature sizes continue to decrease.


                                       27
<PAGE>

 The Subwavelength Challenge

   Semiconductor manufacturing equipment transmits light at a specific
wavelength through a photomask to create images of IC patterns on a
semiconductor. This process is referred to as photolithography or optical
lithography. At feature sizes below 0.25 micron, the semiconductor industry
reached a critical technology transition. At and above 0.25 micron, the
wavelength of light used is smaller than the IC features. However, at 0.18
micron and below, the wavelength of light used in production semiconductor
manufacturing equipment is significantly larger than the IC features, resulting
in image quality that degrades rapidly. This is like trying to paint a one-inch
line with a four-inch paint brush. This growing disparity between feature sizes
and wavelength of light is referred to as the "subwavelength gap." As a result,
manufacturers in the industry cannot produce semiconductors with feature sizes
of 0.18 micron and smaller with acceptable yield levels using traditional
technologies. Furthermore, as the demand for reduced feature sizes continues to
outpace the reduction in wavelengths used by available equipment, this
subwavelength gap will widen.


                              [GRAPH APPEARS HERE]

   In its 1999 International Technology Roadmap, the Semiconductor Industry
Association predicted that the semiconductor industry would introduce
microprocessors with 0.10 micron feature sizes for semiconductors by the end of
2001 and 0.10 micron DRAM by the end of 2005. Advances in manufacturing
equipment technology alone can no longer enable the progression to smaller
feature sizes and we do not expect alternative non-optical manufacturing
processes to be commercially viable for many years. As a result, the
semiconductor industry must develop and integrate new subwavelength solutions
into all aspects of the design-to-silicon flow.


                                       28
<PAGE>

Our Solution

   We are a leading commercial provider of proprietary technologies and
software products that enable the design and manufacture of subwavelength
semiconductors using existing design tools and semiconductor equipment. We have
accelerated the semiconductor technology roadmap by at least two years,
enabling the production of semiconductors with feature sizes of 0.09 micron.
Our comprehensive solution addresses each key stage of the design-to-silicon
flow, including physical design, design verification, manufacturing data
preparation, photomask manufacturing inspection and photolithography. By
offering a subwavelength solution that is used in every stage of the
semiconductor design and manufacturing process, we integrate the entire design-
to-silicon flow for subwavelength ICs.


                           [FLOW CHART APPEARS HERE]

   Our patented phase shifting and proprietary OPC and process modeling
technologies serve as the foundation for our subwavelength solution. Our
subwavelength solution leverages our expertise in semiconductor and photomask
manufacturing processes, semiconductor equipment, IC design, software
development and subwavelength technologies.

   Our proprietary technologies and software products are designed to offer the
following key benefits:

   Proven Path to Smaller, Faster, Cheaper and Power Efficient Devices. Our
industry partners and customers demonstrate the success of our proprietary
technologies and software products. For example, Motorola used our phase
shifting technology and software to enable its 0.18 micron wafer fabrication
facilities to produce 0.10 micron features. Similarly, in November 1999, one of
our industry partners announced that it developed the world's fastest digital
signal processor operating at one volt. To create this high-performance digital
signal processor, the partner reduced the feature sizes from 0.25 micron to
0.12 micron using our phase shifting technology software. Further, in February
2000, MIT Lincoln Laboratory, a research laboratory, demonstrated the future
potential of our technologies and products by successfully creating 0.05 micron
features. MIT used our phase shifting technology software and 0.25 micron
semiconductor manufacturing equipment.

   Accelerate Time to Market. In today's economy, semiconductor manufacturers
can achieve a significant market advantage by being the first to introduce more
advanced semiconductors. Introducing next generation

                                       29
<PAGE>


semiconductors has historically required the semiconductor industry to install
new equipment or to construct new manufacturing facilities, which may take up
to three years to complete. Our phase shifting technology and software products
enable companies to use existing equipment to produce smaller, faster and more
power efficient semiconductors, thereby enabling them to introduce new products
more rapidly.

   Increase Return on Capital Equipment Investment. We design our proprietary
technologies and software products to enable existing semiconductor
manufacturing equipment to produce subwavelength ICs. Using our technologies
and products, semiconductor manufacturers will not be required to spend
billions of dollars to produce ICs with smaller and smaller feature sizes. As a
result, these semiconductor manufacturers can significantly increase their
return on invested capital. Furthermore, we believe that the use of our
proprietary technologies and software products results in higher manufacturing
yields.

   Integrate the Key Stages of the Design-to-Silicon Flow. We design our
proprietary technologies and software products on a common platform and
architecture and are implemented in key stages of the design-to-silicon flow.
Our software products utilize a common process modeling and simulation
technique that allows the tools and equipment used in subsequent stages to
understand and process the results generated by each of the prior stages. For
example, the separate tools and equipment used to design, verify and
manufacture semiconductors can coordinate with each other to ensure an accurate
design-to-silicon flow. This coordination is particularly critical in the
semiconductor industry, which disaggregated into different companies that
specialize in separate key stages of the design-to-silicon flow. We believe
this is necessary to the successful production of subwavelength semiconductors.

Our Strategy

   Our objective is to establish our proprietary technologies and software
products as the industry standard for the design and manufacture of
subwavelength semiconductors. Key elements of our strategy include:

   Drive Continued Adoption of Our Subwavelengh Solution. We seek to
proliferate our proprietary technologies and software products as the solution
to the subwavelength gap problem. As part of this strategy, we intend to
continue to expand our relationships with leading integrated device
manufacturers, or IDMs, such as Lucent and Motorola, and leading foundries such
as TSMC and UMC. Due to the increasing proportion of semiconductors
manufactured at foundries, we intend to increasingly focus our efforts on
establishing our patented phase shifting technologies as the standard at TSMC,
UMC and other foundries to further drive the adoption of our subwavelength
solution by each of the other participants in the design-to-silicon flow.

   Expand Relationships with Our Industry Partners. We intend to strengthen and
expand our industry partner relationships with the leading companies within
each stage of the design-to-silicon flow. To date, we have developed
relationships with semiconductor design tool vendors such as Cadence, photomask
manufacturers such as Dupont Photomask and Photronics, and semiconductor
equipment manufacturers such as Applied Materials and KLA-Tencor. We believe
that these broad-based industry relationships will help to proliferate our
proprietary technologies and software products as the industry standard.

   Leverage Our Comprehensive Platform. We intend to leverage the common
platform of our proprietary technologies and software products to aggressively
market our products to each key market in the semiconductor industry. This
common platform enables data and information regarding subwavelength designs to
be shared by participants in each key stage of the design-to-silicon flow.
Because our proprietary technologies and software products ensure the accurate
and consistent communication of subwavelength design and process data, each
participant in the design-to-silicon flow benefits from their use.

   Leverage Our Dominant Market Position in Manufacturing Data Preparation
Products. The vast majority of semiconductor, photomask and semiconductor
equipment manufacturers and foundries use our manufacturing data preparation
software as the essential link between the design and production stages of the
design-to-silicon flow. We intend to build on this dominant market position in
manufacturing data preparation to market our subwavelength proprietary
technologies and software products to these customers.

                                       30
<PAGE>


   Extend Technology Leadership Position. We believe we were among the first to
recognize that the subwavelength gap would represent a significant challenge to
continued advances in semiconductor technology. To capitalize on this business
opportunity, we engaged in significant research and development activities over
the past four years, pioneering proprietary and manufacturable phase shifting
technologies that we believe are the key to bridging the subwavelength gap. We
assembled a strong team of subwavelength experts, more than half of which have
graduate technical degrees, and we intend to continue expanding our research
and development efforts to further enhance our proprietary technologies.

   Maintain Time-Based Software and Intellectual Property Licensing Models. Our
business model allows us to build on the sales and marketing efforts of our
industry partners, which resell, market and promote our technologies and
products. We seek to generate the majority of our future revenue through time-
based license fees, intellectual property licensing agreements and other
innovative, ongoing agreements with IDMs, foundries and reseller licensees.

Technology

   As feature sizes decreased to dimensions smaller than the wavelength of
light used in optical lithography equipment, phase shifting and OPC
technologies became critical to the continued growth of the semiconductor
industry. Widespread deployment of subwavelength technologies requires the
industry to create an efficient and integrated IC design and manufacturing
process and introduce new technologies into several stages of the design-to-
silicon flow. Our proprietary technologies and software products allow IC
designers, as well as manufacturers of photomasks, semiconductor equipment and
semiconductor devices, to successfully deploy phase shifting and OPC
technologies. We believe we are the only company exclusively focused on
delivering a comprehensive solution that enables the design and manufacture of
subwavelength ICs.

                                       31
<PAGE>

 Phase Shifting

   The foundation of our subwavelength process technologies lies in our phase
shifting technology, which manipulates light waves to produce high-resolution
images of subwavelength IC features. Our phase shifting technology sequences
positive and negative light wave patterns to prevent interfering waves from
causing the image on silicon to blur or disappear entirely. This enables
designers and manufacturers to create IC features that are less than half the
size of those that can be produced using conventional optical lithography
techniques. Our phase shifting technology also dramatically reduces sensitivity
to variations in the manufacturing process such as focus deviations and lens
imperfections, significantly improving manufacturing yields. We developed the
industry's first production-worthy, commercial phase shifting technology by
combining the multidisciplinary expertise of our scientists and engineers and
investing significantly in joint research and development activities with
leading photomask and semiconductor manufacturers.


                              [CHART APPEARS HERE]

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<PAGE>

   Optical Proximity Correction

   Our OPC technologies embed corrective features in the IC design and
photomask to reduce image distortions caused by interfering light waves. We
developed these technologies in close collaboration with photomask and
semiconductor manufacturers to improve photomask manufacturability without
sacrificing performance. Our OPC technologies focus on correcting distortions
in semiconductor features that would most affect the semiconductor's
performance. OPC makes it possible to obtain an IC pattern that more closely
resembles the original desired design. However, as feature sizes continue to
decrease, OPC is no longer sufficient to ensure acceptable manufacturing
yields. At these smaller feature sizes, semiconductor manufacturers will employ
both OPC and phase shifting process technologies.


                             [4 CHARTS APPEAR HERE]

   Process Modeling and Simulation

   Historically, the designed layout of a semiconductor, its representation on
the photomask and the corresponding features on the semiconductor were
essentially identical. At subwavelength feature sizes, this relationship no
longer exists. As a result of distortions created during the manufacturing
process and the application of phase shifting and OPC, the design of a
semiconductor, its representation on the photomask and the pattern transferred
to the semiconductor all look different. We developed proprietary process
modeling and simulation technologies that recharacterize the relationship
between device design, photomask pattern and semiconductor features. This
recharacterized relationship allows designers and manufacturers to accurately
translate designs and photomasks to final semiconductors. Semiconductor
manufacturers can calibrate our process models to accurately characterize their
specific processes and use them in our software products throughout the design-
to-silicon flow. Manufacturers can use a common process model throughout the
design-to-silicon flow to facilitate consistency in the communication of
process and design data.

                                       33
<PAGE>

   Implementation Technologies

   We developed several technologies necessary to implement the mainstream
design and manufacturing use of phase shifting and OPC technologies. These
include:

  .  design automation algorithms for phase shifting and OPC;

  .  hierarchical design data management technologies;

  .  subwavelength design verification technologies;

  .  photomask defect analysis technologies;

  .  high-performance process simulation algorithms and process model
     calibration technologies; and

  .  algorithms for manufacturing data preparation.

Products

   We offer technology products, software products and services that together
provide a comprehensive subwavelength design-to-silicon solution.

 Technology Products

   Phase Shift Technology. Our phase shifting technology licenses allow the
licensee to produce subwavelength semiconductor devices using our proprietary
technology. We offer limited use research and development licenses that allow
the licensee to use our proprietary technology for pre-production purposes. We
also offer production licenses of our phase shifting technology that are time
based, or are licensed per fabrication facility or per device produced.

   Subwavelength Process Development. We offer a comprehensive implementation
package that includes a development plan, calibration and test photomasks and
on-site customer assistance to develop advanced subwavelength manufacturing
processes using our phase shifting and OPC technologies and software products.
Our engineers and scientists work on-site at our customers' fabrication
facilities to develop these processes and generate design rules, calibrated
models and associated design-to-silicon flows.

                                       34
<PAGE>

 Software Products

   We offer a comprehensive suite of complex, tightly integrated software
products that all of the key markets within the semiconductor industry can use.
These markets use our software products independently or integrate them with IC
design tools, and photomask and semiconductor manufacturing equipment. Our
products address the needs of subwavelength design and manufacture in four key
sectors of the design-to-silicon flow:


<TABLE>
<CAPTION>
 Sector                          Products                    Applications

 <S>                        <C>                <C>
 Physical Design and        iNPhase            . Ensure compatability of semiconductor
 Post-
  Layout Data Processing    TROPiC              designs with subwavelength processes
                            iMagic             . Create phase shifted and OPC device
                            SiVL                design layout
                                               . Verify silicon performance of designs

- ---------------------------------------------------------------------------------------
 Manufacturing Data         CATS               . Process design data required to
  Preparation and           iNMask              fabricate and inspect photomasks
  Photomask Manufacturing   iNMask-MRC         . Verify input data, manufacturing data
                                                 processing and photomask layout
                                               . Convert photomask design data to
                                                formats required by specific photomask
                                                manufacturing equipment
                                               . Verify photomask and wafer
                                                manufacturability

- ---------------------------------------------------------------------------------------
 Photomask Inspection       Virtual Stepper    . Characterize located photomask defects
  and Measurement           iNSpect            . Transcribe and transfer design data to
                                                photomask and wafer inspection and
                                                measurement equipment
- ---------------------------------------------------------------------------------------
 IC Fabrication and         IC Workbench       . Optimize fabrication process
 Process                                         parameters
  Development               ModelCal           . Generate calibrated process models and
                            RuleGen             design rules for phase shift and OPC
                            CheckIt             processes and our products
                                               . Verify silicon performance of designs
</TABLE>


   Each of these products is described below.

 Physical Design and Post-Layout Data Processing Products

   iNPhase. Our iNPhase product automates and integrates the design,
verification and OPC functions of our phase shifting technology. iNPhase also
verifies that the semiconductor design is free of "phase conflicts," or design
configurations that could result in manufacturing failures.

   TROPiC. This integrated product automatically corrects designs for process-
induced distortions of subwavelength features. TROPiC implements our OPC
technologies that control photomask complexity to lower photomask cost without
sacrificing semiconductor performance.

   iMagic. Our process simulation software product uses process models that are
calibrated to individual semiconductor manufacturers' processes. iMagic is used
by designers to simulate the final IC features that correspond to their
designs.

   SiVL. Our silicon-versus-layout product utilizes our proprietary process
simulation technologies to verify that conventional, phase shifting and OPC
designs produce printed IC patterns within specified tolerances. By

                                       35
<PAGE>

accurately predicting "silicon level" failures, SiVL reduces or eliminates the
need to repeat the design and manufacturing process. SiVL integrates with tools
used to verify that the IC patterns are within specified tolerances.

 Manufacturing Data Preparation and Photomask Manufacturing Products

   CATS. This family of products includes products that automatically create
different photomask layers by sizing and combining design layers. Our CATS
products allow users to view the input and output data of the manufacturing
data preparation process and verify photomask design accuracy using a
combination of graphical algorithmic and query analyses.

   iNMask. Our iNMask formatting product automatically transcribes photomask
layout data into input data formats optimized for specific photomask
manufacturing equipment. iNMask supports leading photomask equipment
manufacturers, including Etec, Hitachi and Leica.

   iNMask-MRC. This product verifies that the photomask data files produce
manufacturable photomasks and wafers. The data is checked for variations from
manufacturing requirements, including minimum widths, spacing and layer to
layer errors.

 Photomask Inspection and Metrology Products

   Virtual Stepper. This product allows photomask manufacturers to accurately
assess the impact of photomask defects on the silicon wafer. Photomask
manufacturers using Virtual Stepper can quickly determine photomask quality,
improving their productivity and yield. The Virtual Stepper takes direct input
from defect inspection and review equipment manufactured by leading equipment
companies including Applied Materials, KLA-Tencor and Zygo.

   iNSpect. Our iNSpect product automatically transcribes photomask layout data
into input data formats optimized for specific photomask and wafer inspection
equipment. iNSpect also identifies measurement locations for photomask and
wafer measurement equipment. This product supports leading equipment
manufacturers, including Applied Materials, KLA-Tencor, Leica and Zygo.

 Semiconductor Fabrication and Process Development

   IC Workbench. IC Workbench is an interactive process simulation, analysis
and optimization tool. This product includes a powerful graphical user
interface, design data viewer and editor with real-time simulation feedback.
This allows users to rapidly evaluate the impact of design and process
parameters on the final silicon results while optimizing subwavelength
processes.

   ModelCal. This product enables users to automatically calibrate process
models using empirical measurement data from specific semiconductor
manufacturers' processes. ModelCal implements our proprietary model calibration
technology to produce extremely accurate process models using our calibration
photomask designs for both phase shifting and OPC applications.

   RuleGen. This product automatically generates design rules and parameters
for phase shifting and OPC processes using our calibrated process models. The
output of RuleGen is fully compatible with the input requirements of InPhase
and TROPiC.

   CheckIt. This product performs accurate, exhaustive, silicon-level
verification for phase shifting and OPC designs prior to IC production. CheckIt
accurately predicts potential failures in the manufacture of semi-conductors
and marginal locations on phase shifting and OPC designs.

                                       36
<PAGE>

Services

   Design Services. We assist our industry partners and customers with
semiconductor designs that use our phase shifting and OPC technologies. Our
design services include creating phase shifted designs, applying OPC technology
to designs and verifying the final design layout. Our design services help
industry partners and customers rapidly adopt our technologies.

   Technology Integration Services. We offer technology integration services to
allow our industry partners to integrate our software products with their
products for marketing to their customers. We develop software interfaces to
semiconductor design tools and equipment to enable the necessary data
communication to integrate the operation of the combined products.

 Customers and Industry Partners

   We license our proprietary technologies and software products to companies
in key markets within the semiconductor industry. Our customers include
licensees of our phase shifting technology and software, manufacturing data
preparation software and silicon verification and photomask verification
software. Our industry partners integrate our technologies and software into
their products and act as resellers. The following customers and/or industry
partners accounted for license, maintenance and technical service revenues of
more than $100,000 in 1999:


<TABLE>
   <S>                            <C>
   IDMs and Foundries             Design Tool Vendors
   CNet                           Cadence Design Systems
   Conexant
   Fujitsu                        Semiconductor Equipment
   IBM                            Manufacturers
   LG International               Applied Materials
   Lucent                         KLA-Tencor
   Matsushita                     Ultrabeam
   Motorola                       Zygo
   National Semiconductor
   NEC                            Mask Manufacturers
   OKI                            Align Rite
   Samsung                        Compugraphics
   Siemens                        Dai Nippon Printing
   ST Microelectronics            DuPont Photomask
   Texas Instruments              Hoya
   Tokyo University               Photronics
   Toshiba                        Precision Semiconductor
   TSMC                           Mask Corporation
   UMC                            Taiwan Mask Corporation
   VLSI Technology                Toppan
   World Semiconductor
    Manufacturing Company
</TABLE>


   All of the companies listed above are our customers. In addition, Lucent,
Motorola, Toshiba, TSMC, UMC, Cadence, Applied Materials, KLA-Tencor, Zygo,
DuPont Photomask, Photronics and Taiwan Mask Corporation are our industry
partners.

                                       37
<PAGE>

Sales and Marketing

   We rely on our direct sales force and on our industry partner relationships
to penetrate each key market of the semiconductor industry. Domestically, our
direct sales force operates primarily out of our headquarters in California. We
also employ sales personnel in Minnesota and Texas. In addition, we maintain
sales personnel and support staff who work closely with resellers and partners
in Korea, Japan, The Netherlands and Taiwan. We intend to continue to expand
our sales and support personnel both domestically and internationally. As of
January 1, 2000, we had 28 employees involved in sales and marketing.

   Our marketing personnel focus on developing our relationships with industry
partners. Our industry partners include leading semiconductor equipment
manufacturers, such as Applied Materials and KLA-Tencor, and design tool
companies, such as Cadence. We also entered into joint-marketing relationships
with leading photomask manufacturers, such Dupont Photomask and Photronics. Our
direct sales efforts have focused primarily on licensing to foundries and IDMs.
To date, we have concentrated our sales and marketing efforts on selling
research and development licenses. We expect to extend these efforts to
generate production licenses as semiconductor manufacturers move into
production of subwavelength ICs. We have already entered into a production
license with a leading IDM. We believe that our broad-based sales and marketing
efforts will facilitate the adoption of our subwavelength technologies as the
industry standard.

Research and Development

   Our future success will depend to a large extent on our ability to rapidly
develop and introduce new proprietary technologies and software products and
enhancements to our existing products. We have made and expect to continue to
make substantial investments in research and development. The complexity of
phase shifting and OPC technologies requires expertise in physical IC design
and layout, photomask manufacturing, optical lithography, numerical algorithms
and software development. We believe that the multidisciplinary expertise of
our team of scientists and engineers will continue to advance our market and
technological leadership.

   As of January 1, 2000, our engineering group consisted of 51 employees, 67%
of whom have advanced degrees, including 35% who have Ph.D.s. These employees
are focused on the following objectives:

   Product Development. Our product development group is organized in teams
around the different products we offer. A separate team within this group
develops our common core technology and ensures that each product fits into
this common architecture.

   Advanced Research. Our advanced research group works independently from our
product development group to assess and develop new technologies that meet the
evolving needs of subwavelength design and manufacturing.

   Product Engineering. Our product engineering group is primarily focused on
product release, platform support, quality assurance and product documentation.

Competition

   The semiconductor industry is highly competitive and characterized by
rapidly changing design and process technologies. The market for phase shifting
and OPC solutions is rapidly evolving and we expect competition to continue to
increase. We face direct competition from other providers of phase shifting,
OPC and manufacturing data preparation solutions, including Avant! and Mentor
Graphics. We also compete with companies that have developed or have the
ability to develop their own proprietary phase shifting and OPC enabling
solutions, such as IBM. Many of these companies are larger than we are, have
greater financial or other resources than we do and therefore can withstand
adverse market or economic conditions more readily than we can. We may also
face competition from alternatives to current photolithography systems. In
addition, commercially viable manufacturing processes that provide alternatives
to our subwavelength solution may be developed in the future by existing or
potential competitors. We believe that the principal competitive factors in

                                       38
<PAGE>

our market include technology viability, product availability, performance,
reliability, functionality, cost and customer service. We believe we compete
favorably with respect to each of these factors.

Intellectual Property

   Our future success and competitive position depend upon our continued
ability to develop and protect proprietary technologies. We rely significantly
on a combination of patents, copyrights, trademarks and trade secrets to
protect our proprietary technologies and prevent competitors from using our
technologies in their products. We have been issued two U.S. patents and have
five U.S. patent applications currently pending in the U.S. and nine foreign
patent applications currently pending in selected foreign countries. In the
future, we may seek additional patent protection when we feel it is necessary.

   Our existing or future patents may be circumvented, blocked, licensed to
others or challenged as to inventorship, ownership, scope, validity or
enforceability. Third parties have advised us of literature which they believe
to be relevant to our patents. We do not believe this literature will
materially affect the scope or enforceability of our present or future patents.
We may not receive competitive advantages from the rights granted under our
patents. In addition, our future patent applications may not be issued with the
scope of the claims sought by us, if at all. Furthermore, others may develop
technologies that are similar or superior to our proprietary technologies,
duplicate our proprietary technologies or design around the patents owned or
licensed by us. We are aware of certain patents drawn to our attention with
which our products or patents may conflict. We believe that one of these
patents may be invalid, but if found to be valid, we further believe that it
would be licensable under reasonable terms. We are evaluating the other
patents, but we believe that these patents are either invalid or that our
patents and products do not directly infringe these patents. In addition, in
foreign countries, we may not receive effective patent and trademark
protection. We cannot be sure that steps we take to protect our proprietary
technologies will prevent misappropriation of our technologies.

   In addition, we generally enter into confidentiality agreements with our
employees, industry partners and customers, as well as generally control access
to and distribution of our documentation and other proprietary information.
Despite this protection, unauthorized parties may copy aspects of our current
or future software products or obtain and use information that we regard as
proprietary.

   The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions. There are also numerous
patents in the semiconductor industry and new patents are being issued at a
rapid rate. This often results in significant and often protracted and
expensive litigation. There is no intellectual property litigation currently
pending against us. However, from time to time third parties may notify us of
intellectual property infringement claims. If it is necessary or desirable, we
may seek licenses under these third party patents or intellectual property
rights. However, we cannot be sure that third parties will offer licenses to us
or that we accept the terms of any offered licenses.

   If we fail to obtain a license from a third party for proprietary
technologies that we use, we could incur substantial liabilities, or suspend
sales of our software products or our use of processes requiring the
technologies. Litigation could cause us to incur significant expenses, harm our
sales of the challenged technologies or software products and divert the
efforts of our technical and management personnel, whether or not a court
decides the litigation is in our favor. In the event we receive an adverse
result in any litigation, we could be required to pay substantial damages,
cease sale of infringing products, expend significant resources to develop or
acquire non-infringing technology and discontinue the use of processes
requiring the infringing technology or obtain licenses to the infringing
technology. We may not be successful in the development or acquisition of
intellectual property, or the necessary licenses may not be available under
reasonable terms, and any development, acquisition or license could require us
to expend a substantial amount of time and other resources. Any of these
developments would harm our business.

Employees

   As of January 1, 2000, we employed 98 individuals in the United States, of
which 96 were located in the Silicon Valley. As of January 1, 2000, we also
employed seven individuals abroad to provide technical support

                                       39
<PAGE>

to customers in Asia and Europe, two of which were located in Korea, two in
Taiwan, one in Japan and two in The Netherlands. None of our employees is
represented by a labor union or is subject to a collective bargaining
agreement. We believe that our relationship with our employees is good.

Facilities

   Our executive offices and principal operations are currently located in
approximately 39,300 square feet of office space in San Jose, California under
a lease that expires in May 2004. We also lease approximately 2,400 square feet
of office space in Los Gatos, California under a lease that expires in January
2001. We believe that our existing facilities are adequate for our current
needs.

Legal Proceedings

   We are not currently party to any material legal proceedings.

                                       40
<PAGE>

                                   MANAGEMENT

   The following table sets forth information regarding our executive officers
and directors as of January 24, 2000:

<TABLE>
<CAPTION>
 Name                       Age Position
 ----                       --- --------
 <C>                        <C> <S>
 William H. Davidow(b).....  64 Chairman of the Board
 Y. C. (Buno) Pati.........  35 President, Chief Executive Officer and
                                Director
 Yao-Ting Wang.............  36 Chief Technology Officer and Director
 Richard Mora..............  53 Chief Financial Officer and Vice President,
                                Operations
 Atul Sharan...............  40 Vice President, Marketing and Business
                                Development
 Lars Herlitz..............  35 Vice President, Engineering
 John Traub................  53 Vice President, Worldwide Sales
 Kevin MacLean.............  37 Vice President and General Manager,
                                Transcription
 Roger Sturgeon............  55 Director and Fellow
 Thomas Kailath(b).........  64 Director
 Narendra K. Gupta(a)......  51 Director
 Abbas El Gamal(a).........  49 Director
 Harvey Jones(a)(b)........  47 Director
</TABLE>
- --------
(a) Member of the Audit Committee
(b) Member of the Compensation Committee

   William H. Davidow has served as our Chairman of the Board since January
2000 and as a director of our company since June 1998. Mr. Davidow has served
as a partner at Mohr, Davidow Ventures since May 1985 and has been a high-
technology industry executive and a venture investor for over 20 years. From
August 1973 to January 1985, Mr. Davidow was at Intel Corporation where he was
Senior Vice President of marketing and sales, Vice President of the
microcomputer division and Vice President of the microcomputer systems
division. Mr. Davidow received a Ph.D. in electrical engineering from Stanford
University, an M.S. in electrical engineering from the California Institute of
Technology, an M.S. in electrical engineering from Dartmouth College and a B.S.
in electrical engineering from Dartmouth. Mr. Davidow is chairman of the board
at both Rambus Corporation and Viant Corporation. Mr. Davidow also serves on
the boards of several other start-up companies.

   Dr. Y. C. (Buno) Pati has served as our President and Chief Executive
Officer and a director since he co-founded our company in October 1995. From
October 1995 to December 1996, Dr. Pati served as an assistant professor of
electrical engineering and computer science at Harvard University. From October
1992 to October 1995, Dr. Pati conducted research efforts in computational and
system sciences applied to integrated circuit manufacturing at Stanford
University. Dr. Pati has published numerous articles in signal processing,
communications, fast lithography simulations and automated phase shifting
photomask design. Dr. Pati received a B.S., an M.S. and a Ph.D. in electrical
engineering from the University of Maryland at College Park.

   Dr. Yao-Ting Wang has served as our Chief Technology Officer and a director
since he co-founded our company in October 1995. Dr. Wang's doctoral
dissertation research was on automated design of phase shifting photomasks
using fast algorithms and signal processing techniques. Dr. Wang is active in
the areas of fast lithography simulations and automated advanced photomask
designs, with specific interests in communications, signal processing and
lithographic techniques. Dr. Wang received a B.S. degree from National Taiwan
University and a Ph.D. in Electrical Engineering from Stanford University.

   Richard Mora has served as our Chief Financial Officer and Vice President,
Operations since May 1999. From August 1994 to April 1999, Mr. Mora was Chief
Financial Officer and Vice President of Finance at Mattson Technologies, Inc.,
a semiconductor equipment manufacturer. During 1994, Mr. Mora was also Vice

                                       41
<PAGE>

President and General Manager of the High Temp Products Division at Mattson.
From September 1988 to August 1994, Mr. Mora served as Chief Financial Officer
and Vice President of Finance at Actel Corporation, a semiconductor
manufacturer. From June 1985 to August 1988, Mr. Mora was Chief Financial
Officer and Vice President of Finance at HHB Systems. Mr. Mora received a B.S.
in Accounting from Santa Clara University and is a Certified Public Accountant.

   Atul Sharan has served as our Vice President, Marketing and Business
Development since October 1998. From April 1997 to October 1998, Mr. Sharan was
director of strategic business development at Ambit Design Systems where he
helped establish and manage key partner relationships with LSI Logic and
Cadence. From May 1991 to March 1997, Mr. Sharan held senior sales and
marketing management positions at Compass Design Automation. While at Compass
as General Manager-Compass India Operations, Mr. Sharan helped establish a
software development center in India. From December 1984 to May 1991, Mr.
Sharan worked in semiconductor manufacturing operations at VLSI Technology and
Integrated Device Technology. While at IDT, Mr. Sharan helped initiate the
company's first overseas test and assembly plant in Penang, Malaysia.
Mr. Sharan received an M.B.A. from the University of California at Berkeley, an
M.S. in engineering from the University of Houston, Texas and a B.Tech. Degree
in engineering from the Indian Institute of Technology in Kanpur, India.

   Lars Herlitz has served as our Vice President, Engineering since December
1998. From March 1994 to November 1998, Mr. Herlitz served in various positions
at Escalade Corporation, an engineering design automation company focused on
system-on-chip design. Mr. Herlitz culminated his career at Escalade as Vice
President of Engineering from 1997 to 1998. From December 1987 to March 1994,
Mr. Herlitz served in various positions at Cadence, including as Director of
Engineering from 1993 to 1994. Mr. Herlitz received an M.S. in electrical
engineering and computer science from the University of Linkoping in Sweden.

   John Traub has served as our Vice President, Worldwide Sales since September
1999. From December 1998 to September 1999, Mr. Traub served as Vice President
of Worldwide Sales at Ultratech Stepper, Inc. From June 1997 to December 1998,
he was President and Chief Executive Officer of Cyberspace Inc., a technology
consulting company which he founded. From June 1989 to June 1997, Mr. Traub
held various positions at Systems Chemistry, Inc., a manufacturer of ultra-high
parity chemical systems, including Vice President of Worldwide Sales, Chairman,
President and Chief Executive Officer. From April 1982 to June 1989, he was
founder and Managing Director and Vice President of Business Development of
Align-Rite Ltd. in Wales, where he successfully expanded the U.S. company's
business into the European market.

   Kevin MacLean has served as our Vice President and General Manager,
Transcription since January 2000. In June 1986, Mr. MacLean co-founded
Transcription Enterprises Limited, where he served as Vice President until we
acquired the company in January 2000. Mr. MacLean received a B.S. in mechanical
engineering from Cornell University.

   Roger Sturgeon has served as a director of our company and a Fellow since
January 2000. In June 1986, he co-founded Transcription Enterprises Limited,
where he served as President until we acquired the company in January 2000. Mr.
Sturgeon received an M.S. in electrical engineering and computer science from
the University of California at Berkeley and a B.S. in engineering sciences
from the University of California at Berkeley.

   Dr. Thomas Kailath has served as a director of our company since October
1995 and was Chairman of the Board from October 1995 to January 2000. Dr.
Kailath has served as the Hitachi American Professor of Engineering at Stanford
University since 1987. From January 1981 to June 1987, Dr. Kailath was
Associate Department Chairman of the Department of Electrical Engineering at
Stanford University and served as Director of the Information Systems
Laboratory from January 1971 to January 1981. In February 1980, Dr. Kailath co-
founded Integrated Systems Inc., a leading developer of embedded software, and
has served as a director of Integrated Systems since its inception. Dr. Kailath
received an Sc.D. in Electrical Engineering from

                                       42
<PAGE>

the Massachusetts Institute of Technology, an S.M. in Electrical Engineering
from MIT and a B.E. in telecommunications from the University of Poona, India.
Dr. Kailath is a member of the National Academy of Engineering and the American
Academy of Arts and Sciences. Dr. Kailath serves on the board of Excess
Bandwidth Corporation.

   Dr. Narendra K. Gupta has served as director of our company since April
1997. Dr. Gupta co-founded Integrated Systems in 1980 and has served as its
Chairman since November 1992. He was the President and Chief Executive Officer
of Integrated Systems from its inception until May 1994. Dr. Gupta received a
Ph.D. in engineering from Stanford and an M.S. in engineering from the
California Institute of Technology. Dr. Gupta also received a B. Tech. Degree
in mechanical engineering from the Indian Institute of Technology. Dr. Gupta
was elected a Fellow of the Institute for Electrical and Electronics in 1991.

   Dr. Abbas El Gamal has served as a director of our company since April 1997.
Dr. El Gamal has been on the faculty of the Electrical Engineering department
at Stanford University since September 1981. In December 1990, Dr. El Gamal co-
founded Silicon Architects, which was acquired by Synopsis in 1995 and served
as its Chief Technical Officer until May 1995. In July 1986, Dr. El Gamal co-
founded Actel Corporation and served as its Chief Scientist until November
1990. From July 1984 to July 1986, Dr. El Gamal served as a director of LSI
Logic's Research Lab, where he developed silicon compilation technology, DSP
and image processing ASICs. Dr. El Gamal's research interests include CMOS
image sensors and digital cameras, image processing, photomask programmable
gate arrays and information theory. He has authored or co-authored over 100
papers and 20 patents in these areas. Dr. El Gamal received a Ph.D. in
electrical engineering from Stanford, an M.S. in Statistics from Stanford and a
B.S. in Electrical Engineering from Cairo University, Egypt. Dr. El Gamal is a
Fellow of The Institute of Electrical and Electronics Engineers and serves on
the boards of Lightspeed Semiconductor and PiXIM, Inc.

   Harvey Jones has served as a director of our company since June 1998. From
December 1987 to February 1998, Mr. Jones was employed by Synopsys, an
electronic design automation software company. Mr. Jones served as President
and Chief Executive Officer of Synopsys from December 1987 to January 1995, and
as its Executive Chairman of the Board from January 1995 to February 1998. From
April 1981 to November 1987, Mr. Jones served in various positions at Daisy
Systems, a computer-aided engineering company he co-founded, most recently as
President and Chief Executive Officer. From August 1974 to March 1981, Mr.
Jones served in various positions at Calma, a computer-aided design company,
most recently as Vice President of Marketing. In addition to his operational
roles, Mr. Jones has been an investor and active board member of such ventures
as Remedy Corporation, an enterprise software company, and NVIDIA Corporation,
a 3-D graphics processor company. Mr. Jones received an M.S. degree from MIT's
Sloan School of Management and a B.S. in mathematics and computer sciences from
Georgetown University.

Classified Board

   Immediately following the offering, our board of directors will consist of
eight directors divided into three classes with each class serving for a term
of three years as follows:

<TABLE>
<CAPTION>
         Class                Expiration          Member
         -----                ----------          ------
         <S>                  <C>        <C>
         Class I.............    2001    El Gamal, Jones and Wang
         Class II............    2002    Kailath and Sturgeon
         Class III...........    2003    Davidow, Gupta and Pati
</TABLE>

   At each annual meeting of stockholders, directors will be elected by the
holders of common stock to succeed those directors whose terms are expiring. In
addition, our bylaws provide that the authorized number of directors may be
changed only by resolution of the board of directors. Any additional
directorships resulting

                                       43
<PAGE>

from an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one-third of
the total number of directors. This classification of the board of directors
may have the effect of delaying or preventing changes in control of our
company.

Board Committees

   The board of directors has a compensation committee and an audit committee.
The compensation committee, currently comprised of Mr. Davidow, Mr. Jones and
Mr. Kailath, administers the 1997 stock plan, the 2000 stock plan, the 2000
employee stock purchase plan and all matters concerning executive compensation
and employee agreements. The audit committee, currently comprised of Mr. El
Gamal, Mr. Gupta and Mr. Jones, performs the following functions:

  . monitors our system of internal controls;
  . corporate financial reporting and internal and external audits;
  . provides the board of directors with the results of its examinations and
    recommendations;
  . outlines to the board of directors the improvements made or to be made in
    internal accounting controls;
  . nominates independent auditors; and
  . provides the board of directors with other information and materials
    necessary to make the board of directors aware of significant financial
    matters.

   Each of the audit committee and compensation committee was established in
January 2000.

Director Compensation

   We do not currently pay compensation to directors for serving in that
capacity, nor do we reimburse directors for expenses incurred in attending
board meetings. In November 1999, Mr. Davidow received an option to purchase an
aggregate of 150,000 shares of common stock at an exercise price per share of
$1.00. On February 1, 2000, Mr. Sturgeon received an option to purchase an
aggregate of 225,000 shares of common stock at an exercise price per share of
$2.67. Please see "Related Party Transactions--Restricted Stock Purchase
Agreements." On February 1, 2000, each of Mr. Davidow, Mr. El Gamal, Mr. Gupta,
Mr. Jones and Mr. Kailath received an option to purchase 7,500 shares of common
stock at an exercise price per share of $2.67 in consideration for their prior
services on the board of directors. The board has the discretion to grant
options to non-employee directors under the 2000 stock plan. See "Employee
Benefit Plans--2000 Stock Plan."

Compensation Committee Interlocks and Insider Participation

   The compensation committee is currently comprised of Mr. Davidow, Mr. Jones
and Mr. Kailath. None of these committee members has at any time been an
officer or employee of our company. No interlocking relationship exists between
our board of directors or compensation committee and the board of directors or
compensation committee of any other company, nor has any such interlocking
relationship existed in the past.

Limitation on Liability and Indemnification Matters

   Our amended and restated certificate of incorporation limits the personal
liability of directors for breach of fiduciary duty to the maximum extent
permitted by Delaware law. Delaware law provides that directors of a
corporation will not be personally liable to us or our stockholders for
monetary damages for breach of their fiduciary duties as directors, except for:

  . any breach of the director's duty of loyalty to us or our stockholders;

  . acts or omissions not in good faith or that involve intentional
    misconduct or a knowing violation of law;

  . unlawful payments of dividends or unlawful stock repurchases, redemptions
    or other distributions; or

  . any transaction from which the director derived an improper personal
    benefit.

                                       44
<PAGE>

   Our bylaws require that we indemnify our directors and officers to the
extent permitted by Delaware law. We may, in our discretion, indemnify other
employees and agents to the extent permitted by Delaware law. We believe that
indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any of our officers, directors, employees or
other agents for any liability incurred in that capacity or arising out of that
status, regardless of whether indemnification is permitted under Delaware law.

   We have also entered into agreements to indemnify our directors and
officers. These agreements indemnify our directors and officers for some
expenses, including attorneys' fees, judgments, fines and settlement amounts
incurred by them in any action or proceeding, including any action by or in the
right of our company, arising out of their services as one of our directors or
officers, any of our subsidiaries or any other company or enterprise to which
the person provides services at our request. In addition, we have obtained
directors' and officers' insurance providing indemnification for some of our
directors, officers and employees for certain liabilities. We believe that
these provisions, agreements and insurance are necessary to attract and retain
qualified directors and officers.

   The limited liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against our directors for breach of their fiduciary duty and may reduce the
likelihood of derivative litigation against our directors and officers, even
though a derivative action, if successful, might otherwise benefit us and our
stockholders. Moreover, a stockholder's investment in us may be adversely
affected to the extent we pay the costs of settlement or damage awards against
our directors and officers under these indemnification provisions.

   At present, there is no pending litigation or proceeding involving any of
our directors, officers, employees or agents where indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that might result in a claim for such indemnification.

Executive Compensation

   The following table sets forth information concerning the compensation that
we paid during the fiscal year ended December 31, 1999 to our Chief Executive
Officer and our three other most highly compensated officers who earned more
than $100,000 during that fiscal year. All option grants were made under our
1997 stock plan. The amounts listed under "All Other Compensation" represent
the dollar value of term life insurance premiums paid by us on behalf of the
named executive officer during the fiscal year ended December 31, 1999. There
is no cash surrender value under the life insurance policy.

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                       Annual
                                    Compensation      Long Term Compensation
                                  ---------------- ----------------------------
                                                   Securities
                                   Salary   Bonus  Underlying     All Other
Name and Principal Position         ($)      ($)   Options (#) Compensation ($)
- ---------------------------       -------- ------- ----------- ----------------
<S>                               <C>      <C>     <C>         <C>
Buno Pati........................ $104,000 $    --        --         $ 91
 President and Chief Executive
  Officer
Richard Mora.....................   80,095  25,962   412,500           78
 Chief Financial Officer and Vice
  President, Operations
Atul Sharan......................  130,000  52,000   277,500          101
 Vice President, Marketing and
  Business Development
Lars Herlitz.....................  130,000  37,250   255,000          101
 Vice President, Engineering
</TABLE>


                                       45
<PAGE>

Option Grants in Last Fiscal Year

   The following table sets forth information with respect to stock options
granted to our Chief Executive Officer and our three most highly compensated
executive officers during the fiscal year ended December 31, 1999. We have
never granted any stock appreciation rights. All option grants were made under
our 1997 stock plan. The exercise price per share was equal to the fair market
value of the common stock on the date of grant as determined by the board of
directors. Percentage of total options is based on an aggregate of
3,019,050 shares of common stock granted under the 1997 stock plan in the year
ended December 31, 1999. The potential realizable value is calculated based on
the term of the ten-year option and assumed rates of stock appreciation of 5%
and 10%, compounded annually. These assumed rates comply with the rules of the
Securities and Exchange Commission and do not represent our estimate of future
stock price. Actual gains, if any, on stock option exercises will be dependent
on the future performance of our common stock.

<TABLE>
<CAPTION>
                                        Individual Grants                 Potential Realizable
                         ------------------------------------------------   Value at Assumed
                            Number                                        Annual Rates of Stock
                         of Securities     % of                            Price Appreciation
                          Underlying   Total Options Exercise              for Option Term ($)
                            Options     Granted in   Price Per Expiration ----------------------
Name                      Granted (#)    1999 (%)    Share ($)    Date        5%        10%
- ----                     ------------- ------------- --------- ---------- ---------- -----------
<S>                      <C>           <C>           <C>       <C>        <C>        <C>
Buno Pati...............         --          --          --           --          --         --
Richard Mora............    195,000         6.5        0.50     05/26/09      61,317    155,390
Richard Mora............    217,500         7.2        1.00     12/27/09     136,785    346,639
Atul Sharan.............     90,000         3.0        0.33     03/31/09      18,865     47,807
Atul Sharan.............    187,500         6.2        1.00     12/27/09     117,918    298,827
Lars Herlitz............    172,500         5.7        0.33     02/03/09      36,158     91,631
Lars Herlitz............     82,500         2.7        1.00     12/27/09      51,884    131,484
</TABLE>

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values

   The following table sets forth our Chief Executive Officer and our three
other most highly compensated executive officers information concerning shares
acquired upon exercise of stock options in fiscal year ended December 31, 1999
and exercisable and unexercisable options held as of December 31, 1999. All
options were granted under our 1997 stock plan. The value realized is based on
the assumed initial public offering price of $12.00, minus the per share
exercise price, multiplied by the number of shares issued upon exercise of the
option.

<TABLE>
<CAPTION>
                                                        Number of Unexercised     Value of Unexercised
                                                       Options at December 31,   In-the-Money Options at
                             Shares                           1999 (#)            December 31, 1999 ($)
                           Acquired on      Value     ------------------------- -------------------------
Name                     Exercise (#)(a) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ----                     --------------- ------------ ----------- ------------- ----------- -------------
<S>                      <C>             <C>          <C>         <C>           <C>         <C>
Buno Pati...............          --             --          --         --             --         --
Richard Mora............     412,500      4,635,000          --         --             --         --
Atul Sharan.............      73,500        857,500     339,000         --        101,000         --
Lars Herlitz............     198,282      2,296,102      56,718         --             --         --
</TABLE>
- --------
(a) The shares acquired by each of Mr. Mora, Mr. Sharan and Mr. Herlitz were
    acquired pursuant to restricted stock purchase agreements. We have the
    right to repurchase any unvested shares at their cost in the event of any
    of such employees termination of employment. As of December 31, 1999,
    approximately 412,500 shares held by Mr. Mora, 17,250 shares held by Mr.
    Sharan and 155,157 shares held by Mr. Herlitz were unvested and subject to
    our repurchase.

                                       46
<PAGE>

Employment Agreements

 Mr. Sturgeon.

   On January 1, 2000, Mr. Sturgeon entered into an employment agreement with
Transcription. Pursuant to the employment agreement, Mr. Sturgeon is to serve
as Fellow for a term of two years. Mr. Sturgeon is entitled to a base salary of
$205,000 per year and a bonus for the year 2000 of up to approximately $50,000,
based upon the achievement of mutually agreed upon performance objectives.
Simultaneously with the execution of his employment agreement, Mr. Sturgeon
entered into a non-competition agreement with us and Transcription. Pursuant to
the non-competition agreement, Mr. Sturgeon agreed not to compete against or
solicit the employees of either us or Transcription for, generally, a period of
two years after his termination of employment.

 Mr. MacLean.

   On January 1, 2000, Mr. MacLean entered into an employment agreement with
Transcription. Pursuant to the employment agreement, Mr. MacLean is to serve as
Vice President and General Manager of Transcription for a term of two years.
Mr. MacLean is entitled to a base salary of $200,000 per year and a bonus for
the year 2000 of up to approximately $100,000, based upon the achievement of
mutually agreed upon revenue quotas. Simultaneously with the execution of his
employment agreement, Mr. MacLean entered into a non-competition agreement with
us and Transcription substantially similar to the non-competition agreement
executed by Mr. Sturgeon described above.

 Generally.

   We require each of our employees to enter into confidentiality agreements
prohibiting the employee from disclosing any of our confidential or proprietary
information. In addition, the agreements generally provide that upon
termination, the employee will not solicit our employees for a period of twelve
months. At the time of commencement of employment, our employees also generally
sign offer letters specifying certain basic terms and conditions of employment.
Other than as described above, in general, our employees are not subject to
written employment agreements.

Employee Benefit Plans

 2000 Stock Plan.

   Our 2000 stock plan provides for the granting to employees of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code
and for the granting to employees, directors, and consultants of nonstatutory
stock options and stock purchase rights. As of February 15, 2000, 3,000,000
shares were authorized under the plan, no shares were subject to outstanding
options and approximately 1,450,001 shares remain available for future grant.
The 2000 stock plan provides for annual increases on the first day of each
fiscal year beginning 2001 equal to the lesser of:

  . 3,000,000 shares;
  . 5% of our outstanding shares as of such date; or
  . a lesser amount determined by the board of directors.

   The 2000 stock plan may be administered by the board of directors or a
committee of the board. The board has the power to determine the terms of the
options granted, including the exercise price, the number of shares subject to
each option, the exercisability of the option grant and the form of
consideration payable upon such exercise. The board also has the authority to
amend, suspend or terminate the 2000 stock plan, provided that no such action
may affect any share of common stock previously issued and sold or any option
previously granted under the plan. The 2000 stock plan terminates in 2010.

                                       47
<PAGE>

   The 2000 stock plan provides that in the event we merge with or into another
corporation, or we sell substantially all of our assets, each option may be
assumed or substituted by the successor corporation. If the outstanding options
are not assumed or substituted by the successor corporation, each outstanding
option will fully vest and become exercisable, and the optionee will have 15
days to exercise the option, after which such time the option will terminate.

   Non-Employee Director Stock Program. Pursuant to the 2000 stock plan, the
board has the discretion to grant options to non-employee directors. The
director option component of the 2000 stock plan will not become effective
until the date of this offering. Each non-employee director who first becomes a
board member after the date of this offering may be granted options for up to
30,000 shares. In addition, each non-employee director may be granted options
for up to 7,500 shares annually.

   The exercise price of all options granted to non-employee directors under
the 2000 stock plan is required to be 100% of the fair market value per share
of the common stock, determined with reference to the closing price of the
common stock as reported on the Nasdaq National Market on the date of grant.

   In the event of a change of control, each option granted pursuant to the
non-employee director stock program will become fully-vested and exercisable.

   1997 Stock Plan. Our 1997 stock plan provides for the granting to employees
of incentive stock options within the meaning of Section 422 of the Internal
Revenue Code and for the granting to employees and consultants of nonstatutory
stock options. The terms of the 1997 stock plan are substantially similar to
those of the 2000 stock plan. As of February 15, 2000, 6,196,500 shares were
authorized under the plan, 1,238,155 shares were subject to outstanding options
and approximately 962,910 shares remain available for future grant. Upon the
completion of this offering, the 1997 stock plan will terminate, no further
option grants will be made under the 1997 stock plan, and any shares reserved
but not yet issued under the 1997 stock plan will be available for future grant
under the 2000 stock plan.

   The stock option agreements under the 1997 stock plan provide for the full
acceleration of vesting of options and stock purchase rights if such options or
stock purchase rights are not assumed or substituted by the successor
corporation in a merger or asset sale.

   2000 Employee Stock Purchase Plan. As of February 15, 2000, a total of
300,000 shares of common stock have been reserved for issuance under our 2000
employee stock purchase plan, plus annual increases on the first day of each
fiscal year beginning 2001 equal to the lesser of:

  . 675,000 shares;
  . 2% of our outstanding shares as of such date; or
  . a lesser amount determined by the board of directors.

   The 2000 employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, contains 24 month offering periods.
The offering periods generally start on the first trading day on or after May
15 and November 15 of each year, except for the first such offering period,
which will commence on the first trading day on or after the effective date of
this offering and ends on the last trading day on or before May 14, 2002.
Subsequent offering periods will each have a six-month duration commencing on
the first trading day on or after May 15 and November 15 of each year.

   Employees are eligible to participate if they are employed by us or any
participating subsidiary for at least 20 hours per week and more than five
months in any calendar year. However, the following employees may not be
granted options to purchase stock under the purchase plan:

  . any employee who immediately after the grant would own stock possessing
    5% or more of the total combined voting power or value of all classes of
    our capital stock; or

  . any employee whose rights to purchase stock under all of our employee
    stock purchase plans accrues at a rate which exceeds $25,000 worth of
    stock for each calendar year.

                                       48
<PAGE>

   Participants may purchase common stock through payroll deductions of up to
15% of the participant's compensation. The maximum number of shares a
participant may purchase during a six month offering period is 2,000 shares.

   Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the purchase plan is 85% of the lower of the fair market value
of the common stock at the beginning of the offering period and the fair market
value of the common stock at end of the offering period.

   The purchase plan provides that in the event we merge with or into another
company, or we sell substantially all of our assets, each outstanding option
may be assumed or substituted by the successor company. If the successor
company refuses to assume or substitute the options, the offering period then
in progress will be shortened and a new exercise date will be set, which will
occur before the proposed merger or sale.

   The purchase plan will become effective on the effective date of this
offering and will terminate ten years thereafter, unless sooner terminated by
the board of directors. The board has the authority to amend or terminate the
purchase plan, except that no such action may adversely affect any outstanding
rights to purchase stock.

401(k) Savings Plan

   We sponsor a 401(k) savings in which eligible employees may participate. The
401(k) savings plan is intended to qualify under Sections 401(a) and 401(k) of
the Internal Revenue Code of 1986, as amended. Contributions to the 401(k)
savings plan and income earned on such contributions are not taxable to
employees until withdrawn from the 401(k) savings plan. Subject to restrictions
imposed by the Internal Revenue Code on highly compensated employees, employees
may generally defer up to 15% of their pre-tax earnings up to the statutorily
prescribed annual limit, which is $10,500 for the 2000 calendar year, and to
have the amount of such reduction contributed to the 401(k) savings plan. The
401(k) savings plan permits, but does not require, additional matching
contributions to the 401(k) savings plan. To date, we have not made any
matching contributions to the 401(k) savings plan. The 401(k) savings plan may
be amended or terminated by us at anytime, and in our sole discretion.

                                       49
<PAGE>

                           RELATED PARTY TRANSACTIONS

Equity Investment Transactions

   In October and December 1996, we sold 2,250,006 shares of Series A preferred
stock for $0.24 per share. In June and August 1997, we sold 1,050,000 shares of
Series B preferred stock for $0.67 per share. In June and August 1998, we sold
2,445,089 shares of Series C preferred stock for $3.26 per share. In June and
August 1999, we sold 2,357,906 shares of Series D preferred stock for $5.89 per
share. In January 2000, we issued 3,809,994 shares of Series E preferred stock,
for $10.67 per share, in connection with our acquisition of Transcription. Upon
consummation of this offering, each outstanding share of Series A, Series B,
Series C and Series D preferred stock will automatically convert into one share
of common stock. Listed below are the directors, executive officers, and
stockholders who beneficially own 5% or more of our securities who participated
in these financings.

<TABLE>
<CAPTION>
                                                                                           #/Shares
  Directors, Executive    Series A  Series B  Series C  Series D  Series E    Aggregate   of Common
        Officers          Preferred Preferred Preferred Preferred Preferred     Cash      Stock upon
  and 5% Stockholders       Stock     Stock     Stock     Stock     Stock   Consideration Conversion
  --------------------    --------- --------- --------- --------- --------- ------------- ----------
<S>                       <C>       <C>       <C>       <C>       <C>       <C>           <C>
Entities affiliated with
 Mohr, Davidow
 Ventures(a)............        --      --    1,687,116     --           --  $ 5,500,000  1,687,116
Thomas Kailath(b).......   416,667      --       19,500     --           --      163,579    436,167
Narendra Gupta(c).......   416,666      --      338,248     --           --    1,202,705    754,914
Abbas El Gamal..........   416,667      --           --     --           --      100,000    416,667
Roger Sturgeon..........        --      --           --     --    2,388,715   25,479,632  2,388,715
Kevin MacLean...........        --      --           --     --    1,194,356   12,739,808  1,194,356
</TABLE>
- --------
(a)  The Mohr, Davidow Ventures shares include shares purchased by Mohr,
     Davidow Ventures V, L.P. and Mohr, Davidow Ventures V, L.P., as nominee
     for MDV Entrepreneur's Network Fund II (A), L.P. and MDV Entrepreneur's
     Network Fund II (B), L.P. Entities affiliated with Mohr, Davidow Ventures
     also hold warrants exercisable for an aggregate of 150,000 shares of
     Series C preferred stock, at an exercise price per share of $3.26, for an
     additional aggregate cash consideration of $489,000. Mr. Davidow, a
     partner of Mohr, Davidow Ventures and a director of our company, disclaims
     beneficial ownership of the securities held by these entities except for
     his proportional interest in the entities.

(b)  Includes shares held by Paul V. Kailath Revocable Trust u/a/d 10/1/89 and
     Priya S. Kailath Revocable Trust u/a/d 10/1/89. Includes 145,833 shares of
     Series A preferred stock and 19,500 shares of Series C preferred stock
     held by a limited number of relatives of Dr. Kailath.

(c)  Includes shares held by Dr. Gupta, as custodian, for his minor children.
     Includes 31,500 shares of Series C preferred stock held by a limited
     number of relatives of Dr. Gupta.

Restricted Stock Purchase Agreements

 Mr. Davidow.

   In November 1999, Mr. Davidow exercised an option grant to purchase 150,000
shares of common stock and entered into a restricted stock purchase agreement
regarding the shares. Pursuant to the restricted stock purchase agreement, we
have the right to repurchase any of the unvested shares upon termination of his
services. As of February 15, 2000, 93,750 shares held by Mr. Davidow remain
unvested. All 150,000 of Mr. Davidow's shares will be released from our
repurchase option on June 24, 2002. Mr. Davidow paid the $1.00 exercise price
per share for such shares in cash. In addition, Mr. Davidow's stock option
agreement provides that if we enter into any transaction which involves a
change of control, the shares held by Mr. Davidow will automatically vest in
full. Generally, a "change of control" is defined to include mergers, asset
sales or other transactions involving a transfer of at least 50% of our
securities.

                                       50
<PAGE>

 Mr. Mora.

   In May and December 1999, Mr. Mora exercised option grants to purchase an
aggregate of 412,500 shares of common stock and entered into restricted stock
purchase agreements regarding the shares. Pursuant to the restricted stock
purchase agreements, we have the right to repurchase any of the unvested shares
upon his termination of employment. As of February 15, 2000, an aggregate of
412,500 shares held by Mr. Mora remain unvested. All 412,500 of Mr. Mora's
shares will be released from our repurchase option on December 27, 2003. Mr.
Mora paid the $0.50 exercise price per share for 195,000 of such shares by
delivery of two-year full-recourse promissory note bearing interest at 4.90%
per annum, compounded annually. Mr. Mora paid the $1.00 exercise price per
share for the remaining 217,500 shares by delivery of a two-year full-recourse
promissory note bearing interest at 5.74% per annum, compounded annually. Each
of the notes is secured by the shares of common stock purchased by Mr. Mora. As
of February 15, 2000, approximately $320,226 in unpaid principal and interest
was outstanding in the aggregate under the notes. In addition, each of Mr.
Mora's option agreements provide that:

  . upon a change of control of our company, 50% of the shares subject to the
    options held by Mr. Mora that have not vested as of six months after the
    change of control shall vest in full; as of February 15, 2000, an
    aggregate of 412,500 shares have not vested; and

  . if Mr. Mora's employment is terminated as a result of an involuntary or
    constructive termination within 12 months of the change of control, all
    of the shares subject to the options held by Mr. Mora will vest in full.

 Mr. Sharan.

   In October 1998 and March and December 1999, Mr. Sharan received option
grants to purchase an aggregate of 412,500 shares of common stock and entered
into restricted stock purchase agreements regarding the shares. Pursuant to the
restricted stock purchase agreements, we have the right to repurchase any of
the unvested shares upon his termination of employment. As of February 15,
2000, an aggregate of 342,188 shares held by Mr. Sharan remain unvested. All
342,188 of Mr. Sharan's shares will be released from our repurchase option on
October 21, 2003. Mr. Sharan paid the $0.33 exercise price for 151,500 of such
shares by delivery of a two-year full-recourse promissory note bearing interest
at 5.88% per annum, compounded annually. Mr. Sharan paid the $1.00 exercise
price per share for 187,500 of such shares by delivery of a two-year full-
recourse promissory note bearing interest at 5.88% per annum, compounded
annually. Each of the notes is secured by shares of common stock purchased by
Mr. Sharan. As of February 15, 2000, approximately $238,747 in unpaid principal
and interest was outstanding in the aggregate under the notes. Mr. Sharan paid
the remainder of the exercise price of such shares in cash. In addition, each
of Mr. Sharan's option agreements provided that:

  . upon a change of control of our company, 50% of the shares subject to the
    options held by Mr. Sharan that have not vested as of six months after
    the change of control shall vest in full; as of February 15, 2000, an
    aggregate of 342,188 shares have not vested; and

  . if Mr. Sharan's employment is terminated as a result of an involuntary or
    constructive termination within 12 months of the change of control, all
    of the shares subject to the options held by Mr. Sharan will vest in
    full.

 Mr. Herlitz.

   In February and December 1999, Mr. Herlitz received option grants to
purchase an aggregate of 255,000 shares of our common stock. Mr. Herlitz has
exercised and entered into restricted stock purchase agreements regarding all
172,500 shares of the February 1999 option grant and 25,782 shares of the
82,500 shares of common stock subject to the December 1999 option grant.
Pursuant to the restricted stock purchase agreements, we have the right to
repurchase any of the unvested shares upon his termination of employment. As of
February 15, 2000, 129,375 shares of the February 1999 option grant and 25,782
shares of the December 1999 option grant held by Mr. Herlitz remain unvested.
All 198,282 of Mr. Herlitz's shares will

                                       51
<PAGE>

be released from our repurchase option on December 14, 2003. Mr. Herlitz paid
the $0.33 exercise price per share for 172,500 of the shares, and the $1.00
exercise price per share for the remaining 25,782 shares, in cash. The
remaining 56,718 shares subject to the December 1999 option grant held by Mr.
Herlitz have not been exercised, but are exercisable at any time at an exercise
price per share of $1.00. In addition, each of Mr. Herlitz's option agreements
provide that:

  . upon a change of control of our company, 50% of the shares subject to the
    options held by Mr. Herlitz that have not vested as of six months after
    the change of control shall vest in full; as of February 15, 2000, an
    aggregate of 211,875 shares have not vested; and

  . if Mr. Herlitz's employment is terminated as a result of an involuntary
    or constructive termination within 12 months of the change of control,
    all of the shares subject to the options held by Mr. Herlitz will vest in
    full.

 Mr. Traub.

   In November and December 1999, Mr. Traub received option grants to purchase
an aggregate of 232,500 shares of common stock. Mr. Traub has exercised and
entered into restricted stock purchase agreements for 37,500 shares of the
150,000 shares of common stock subject to the November 1999 option grant and
20,625 of the 82,500 shares of common stock subject to the December 1999 option
grant. Pursuant to the restricted stock purchase agreements, we have the right
to repurchase any of the unvested shares upon his termination of employment. As
of February 15, 2000, all of the 58,125 shares held by Mr. Traub remain
unvested. All 58,125 of Mr. Traub's shares will be released from our repurchase
option on December 27, 2003. Mr. Traub paid the $1.00 exercise price per share
for all such shares in cash. The remaining 174,375 shares subject to the option
grants held by Mr. Traub have not been exercised, but are exercisable at any
time at an exercise price per share of $1.00. In addition, each of Mr. Traub's
option agreements provide that:

  . upon a change of control of our company, 50% of the shares subject to the
    options held by Mr. Traub that have not vested as of six months after the
    change of control shall vest in full; as of February 15, 2000, an
    aggregate of 232,500 shares have not vested; and

  . if Mr. Traub's employment is terminated as a result of an involuntary or
    constructive termination within 12 months of the change of control, all
    of the shares subject to the options held by Mr. Traub will vest in full.

 Mr. Jones.

   In April 1999, Mr. Jones exercised an option grant to purchase 150,000
shares of common stock and entered into a restricted stock purchase agreement
regarding the shares. Pursuant to the restricted stock purchase agreement, we
have the right to repurchase any of the unvested shares upon termination of his
services. As of February 15, 2000, 93,750 shares held by Mr. Jones remain
unvested. All 150,000 of Mr. Jones' shares will be released from our repurchase
option on June 24, 2002. Mr. Jones paid the $0.33 exercise price per shares for
such shares in cash. In addition, Mr. Jones' stock option agreement provides
that if we enter into any transaction which involves a change of control, the
shares held by Mr. Jones will automatically vest in full.

 Mr. Sturgeon.

   In February 2000, Mr. Sturgeon exercised an option grant to purchase an
aggregate of 225,000 shares of common stock and entered into a restricted stock
purchase agreement regarding the shares. Pursuant to the restricted stock
purchase agreement, we have the right to repurchase any of the unvested shares
upon his termination of employment from Transcription. As of February 15, 2000,
all 225,000 shares held by Mr. Sturgeon remain unvested. All 225,000 of Mr.
Sturgeon's shares will be released from our repurchase option on January 1,
2004. Mr. Sturgeon paid the $2.67 exercise price per share for such shares in
cash. In addition, Mr. Sturgeon's restricted stock purchase agreement provides
that in the event of Mr. Sturgeon's termination of employment from
Transcription due to death or disability prior to January 1, 2002, 6.25% of the
shares will be

                                       52
<PAGE>

released from our repurchase option for each three month period, measured from
January 1, 2000, for which Mr. Sturgeon completed employment with Transcription
prior to his termination as a result of death or disability. Further:

  . upon a change of control of our company, 50% of the shares subject to
    options held by Mr. Sturgeon that have not vested as of the later of
    January 2, 2002 or six months after the change of control shall vest in
    full; as of February 15, 2000, an aggregate of 225,000 shares have not
    vested; and

  . if Mr. Sturgeon's employment is terminated as a result of an involuntary
    or constructive termination within 12 months of the change of control,
    all of the shares subject to options held by Mr. Sturgeon will vest in
    full.

 Mr. MacLean.

   In February 2000, Mr. MacLean exercised an option grant to purchase an
aggregate of 225,000 shares of common stock and entered a restricted stock
purchase agreement regarding the shares. Pursuant to the restricted stock
purchase agreement, we have the right to repurchase any of the unvested shares
upon his termination of employment from Transcription. As of February 15, 2000,
all 225,000 shares held by Mr. MacLean remain unvested. All 225,000 of Mr.
MacLean's shares will be released from our repurchase option on January 1,
2004. Mr. MacLean paid the $2.67 exercise price per share for such shares by
delivery of a one-year full-recourse promissory note bearing interest at 8.0%
per annum, compounded annually. The note is secured by the shares of common
stock purchase by Mr. MacLean. As of February 15, 2000, approximately $601,973
in unpaid principal and interest was outstanding under the note. In addition,
in the event Mr. MacLean's employment with Transcription is terminated prior to
January 1, 2002 as a result of death or disability, the shares will be released
from our repurchase option according to the same accelerated schedule described
under Mr. Sturgeon's restricted stock purchase agreement above. Further:

  . upon a change of control of our company, 50% of the shares subject to
    options held by Mr. MacLean that have not vested as of the later of
    January 2, 2002 or six months after the change of control shall vest in
    full; as of February 15, 2000, an aggregate of 225,000 shares have not
    vested; and

  . if Mr. MacLean's employment is terminated as a result of an involuntary
    termination within 12 months of the change of control, all of the shares
    subject to options held by Mr. MacLean will vest in full.

 Mr. Pati.

   In February 2000, Mr. Pati exercised an option grant to purchase an
aggregate of 600,000 shares of common stock and entered into a restricted stock
purchase agreement regarding the shares. Pursuant to the restricted stock
purchase agreement, we have the right to repurchase any of the unvested shares
upon his termination of employment. As of February 15, 2000, all 600,000 shares
held by Mr. Pati remain unvested. All 600,000 of Mr. Pati's shares will be
released from our repurchase option on February 1, 2004. Mr. Pati paid the
$2.67 exercise price per share for the shares by delivery of a two-year full-
recourse promissory note bearing interest at 6.20% per annum, compounded
annually. The note is secured by the shares of common stock purchase by Mr.
Pati. As of February 15, 2000, approximately $1,601,696 in unpaid principal and
interest was outstanding under the note. In addition, Mr. Pati's option
agreement provides that:

  . upon a change of control of our company, 50% of the shares subject to the
    options held by Mr. Pati that have not vested as of six months after the
    change of control shall vest in full; as of February 15, 2000, an
    aggregate of 600,000 shares have not vested; and

  . if Mr. Pati's employment is terminated as a result of an involuntary
    termination within 12 months of the change of control, all of the shares
    subject to options held by Mr. Pati will vest in full.

                                       53
<PAGE>

 Mr. Wang.

   In February 2000, Mr. Wang exercised an option grant to purchase an
aggregate of 499,999 shares of common stock and entered into a restricted stock
purchase agreement regarding the shares. Pursuant to the restricted stock
purchase agreement, we have the right to repurchase any of the unvested shares
upon his termination of employment. As of February 15, 2000, all 499,999 shares
held by Mr. Wang remain unvested. All 499,999 of Mr. Wang's shares will be
released from our repurchase option on February 1, 2004. Mr. Wang paid the
$2.67 exercise price per share for the shares by delivery of a two-year full-
recourse promissory note bearing interest at 6.20% per annum, compounded
annually. The note is secured by the shares of common stock purchase by Mr.
Wang. As of February 15, 2000, approximately $1,334,746 in unpaid principal and
interest was outstanding under the note. In addition, Mr. Wang's option
agreement provides that:

  . upon a change of control of our company, 50% of the shares subject to the
    options held by Mr. Wang that have not vested as of six months after the
    change of control shall vest in full; as of February 15, 2000, an
    aggregate of 499,999 shares have not vested; and

  . if Mr. Wang's employment is terminated as a result of involuntary or
    constructive termination within 12 months of the change of control, all
    of the shares subject to the options held by Mr. Pati will vest in full.

 Mr. Gupta.

   In February 2000, Mr. Gupta exercised an option grant to purchase 7,500
shares of common stock and entered into a restricted stock purchase agreement
regarding the shares. Pursuant to the restricted stock purchase agreement, we
have the right to repurchase any of the unvested shares upon termination of his
services. As of February 15, 2000, all 7,500 shares held by Mr. Gupta remain
unvested. All 7,500 of Mr. Gupta's shares will be released from our repurchase
option on February 1, 2004. Mr. Gupta paid the $2.76 exercise price per share
for such shares in cash. In addition, Mr. Gupta's stock option agreement
provides that if we entered into any transaction which involves a change of
control, the shares held by Mr. Gupta will automatically vest in full.

Acquisition of Transcription

 Agreement and Plan of Reorganization.

   Pursuant to an agreement and plan of reorganization, dated December 21,
1999, among Transcription, Transcription Enterprises Limited, Mr. Sturgeon, Mr.
MacLean and us, we acquired Transcription. The acquisition was effective
January 1, 2000 and, as a result, Transcription is now our wholly-owned
subsidiary.

   The consideration paid by us for Transcription Enterprises Limited was a
combination of stock and promissory notes. We issued 3,809,994 shares of our
Series E preferred stock, which the parties agreed had a fair market value of
$10.67 per share. Mr. Sturgeon received 2,388,715 of such shares, or an
aggregate of $25,479,632, and Mr. MacLean received 1,194,356 of such shares, or
an aggregate of $12,739,808. We also issued an aggregate principal amount of
$40,000,000 in promissory notes, $5,000,000 of which has already been paid by
us. As of January 1, 2000, the aggregate principal amounts of the notes
outstanding to Mr. Sturgeon and Mr. MacLean is approximately $21,943,574 and
$10,971,787, respectively.

   As collateral security for the payment of any indemnification obligations of
the former shareholders of Transcription Enterprises Limited, subject to a
deductible of $100,000, 1,904,995 shares of the Series E preferred stock we
issued to such shareholders were pledged to us. Such shares were withheld from
the former shareholders, on a pro rata basis, and are being held in escrow with
an escrow agent. 1,194,357 of the shares of Series E preferred stock issued to
Mr. Sturgeon and 597,178 of the shares of Series E preferred stock issued to
Mr. MacLean have been pledged to us and are in escrow. Generally, all of the
pledged shares to be issued to the former shareholders of Transcription
Enterprises Limited, other than Mr. Sturgeon and Mr. MacLean, or

                                       54
<PAGE>

approximately 113,460 shares, will be released from the escrow upon the closing
of this offering. The remaining pledged shares, approximately 1,791,535 shares,
will be released to Mr. Sturgeon and Mr. MacLean as follows:

  . 50% of such shares will be released on January 1, 2001; and

  . the remaining 50% of the pledged shares will be released on January 1,
    2002.

   Pursuant to the reorganization agreement, 55% of a specified amount of the
accounts receivable of Transcription Enterprises Limited is to be distributed
to the former shareholders of the company, on a pro rata basis, as such
receivables are collected by Transcription. We are entitled to retain 45% of
such accounts receivable, plus all fees associated with maintenance, support or
other services rendered by Transcription Enterprises Limited on such accounts.
We currently anticipate that we will collect and retain approximately
$1,126,000 of the accounts receivables and maintenance services and distribute
approximately $1,253,000 of such receivables to the former shareholders of
Transcription Enterprises Limited. Of that $1,253,000 amount, Mr. Sturgeon and
Mr. MacLean are to receive $786,000 and $393,000, respectively.

 Promissory Notes.

   We issued an aggregate principal amount of $40,000,000 in promissory notes,
with each note dated January 1, 2000, to the ten former shareholders of
Transcription Enterprises Limited. An aggregate principal amount of $5,000,000
under the notes was paid by us to such shareholders shortly after January 1,
2000. The remaining $35,000,000 in unpaid principal amount under the notes
bears interest at a rate of 8.0% per annum. The unpaid principal amount, plus
accrued interest, is due and payable in 16 equal quarterly installments of
approximately $2,187,500, commencing on April 1, 2000, and thereafter on July
1, October 1 and December 31, with the final installments due December 31,
2003. With some limitations, the notes may be prepaid in whole or in part by us
at any time, without penalty.

   The holders of a majority of the outstanding aggregate principal amount of
the notes have the option to set-off, on behalf of all holders of the notes,
any indemnification obligations owned to us under the agreement and plan of
reorganization against the outstanding aggregate principal amount of the notes.
Any such set-off is to be on a pro rated basis.

   In the event of our default under the notes, the outstanding aggregate
principal amounts of the notes, and all accrued interest on the notes, will be
immediately due and payable. Events of default under the notes include:

  . default in the payment of principal or interest on a payment date;

  . our general nonpayment of our debts as they become due, or the
    institution of bankruptcy proceedings against us which we do not cure
    within 60 days;

  . the entry of an order for relief relating to bankruptcy, or an order
    ordering our liquidation or winding up; or

  . our default of a material term under the security agreement which is not
    cured within 30 days.

 Security Agreement.

   Pursuant to the security agreement, dated January 1, 2000, the former
shareholders of Transcription Enterprises Limited were granted a security
interest in the assets of Transcription, including, without limitation, all
software, licenses, intellectual property and receivables. In addition,
Transcription agreed to several standards covenants for such agreements,
including without limitation to preserve and protect the assets and pay all
material taxes on the assets as they become due. Upon our event of default
under the notes, or Transcription's default of a material term of the security
agreement which is not cured within 30 days, the former shareholders of
Transcription Enterprises Limited may foreclose on Transcription's assets.

                                       55
<PAGE>

Other Transactions

   We have entered into indemnification agreements with each of our executive
officers and directors.

   We have granted options to certain of our executive officers and directors.
Please see "Management--Director Compensation" and "--Option Grants in Last
Fiscal Year" and "Related Party Transactions--Restricted Stock Purchase
Agreements."

   Holders of preferred stock are entitled to certain registration rights with
respect to the common stock issued or issuable upon conversion of the preferred
stock. Please see "Description of Capital Stock--Registration Rights."

   We believe that all related-party transactions described above were on terms
no less favorable than could have been otherwise obtained from unrelated third
parties.

                                       56
<PAGE>

                             PRINCIPAL STOCKHOLDERS

   The following table sets forth certain information with respect to
beneficial ownership of our common stock, as of February 15, 2000, and as
adjusted to reflect the sale of common stock offered by us in this offering,
for:

  .  each person who we know beneficially owns more than 5% of the common
     stock;

  .  each of our directors;

  .  each executive officer named in the Summary Compensation Table; and

  .  all of our directors and officers as a group.

   Unless otherwise indicated, the principal address of each of the
stockholders below is c/o Numerical Technologies, Inc., 70 West Plumeria Drive,
San Jose, California 95134. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and includes voting or
investment power with respect to the securities. Except as indicated by
footnote, and subject to applicable community property laws, each person
identified in the table possesses sole voting and investment power with respect
to all shares of common stock shown held by them. The number of shares of
common stock outstanding used in calculating the percentage for each listed
person includes shares of common stock underlying options or warrants held by
such person that are exercisable within 60 days of February 15, 2000, but
excludes shares of common stock underlying options or warrants held by any
other person. Percentage of beneficial ownership is based on 23,548,005 shares
of common stock outstanding as of February 15, 2000, after giving effect to the
conversion of all outstanding shares of preferred stock upon the closing of
this offering. The numbers shown in the table assume no exercise by the
underwriters of their over-allotment option.

<TABLE>
<CAPTION>
                                   Shares Owned
                                   Prior to the           Percentage
                                     Offering         Beneficially Owned
                                   ------------ ------------------------------
                                      Number    Before Offering After Offering
                                   ------------ --------------- --------------
<S>                                <C>          <C>             <C>
5% Stockholders:
Funds affiliated with Mohr,
 Davidow Ventures(a)..............   1,837,116        7.8%            6.3%

Directors and Executive Officers:
Buno Pati(b)......................   3,118,500       13.2            10.7
Roger Sturgeon(c).................   2,613,715       11.1             9.0
Yao-Ting Wang(d)..................   2,592,499       11.0             8.9
William H. Davidow(a) (e).........   1,994,616        8.4             6.8
Kevin MacLean(c)..................   1,419,356        6.0             4.9
Thomas Kailath(f).................   1,071,414        4.5             3.7
Narendra K. Gupta(g)..............     954,414        4.1             3.3
Abbas El Gamal(h).................     649,167        2.8             2.2
Richard Mora(i)...................     412,500        1.8             1.4
Atul Sharan(j)....................     412,500        1.8             1.4
Harvey Jones(e)...................     310,873        1.3             1.1
Lars Herlitz(k)...................     255,000        1.1               *
John Traub(l).....................     236,746        1.0               *
All executive officers and
 directors as a group (13)
 persons)(m)......................  16,041,300       67.0            54.4
</TABLE>
- --------
*  Less than 1%

(a) Principal address is 2775 Sand Hill Road, Suite 240, Menlo Park, CA 94025.
    Number of shares includes 1,569,018 shares held by Mohr, Davidow Ventures
    V, L.P., 118,098 shares held by Mohr, Davidow Ventures V, L.P., as nominee
    for MDV Entrepreneurs' Network Fund II (A), L.P. and MDV Entrepreneurs'
    Network Fund II (B), L.P., a warrant issued to Mohr, Davidow Ventures V,
    L.P. to purchase 139,500 shares exercisable within 60 days of February 15,
    2000 and a warrant issued to

                                       57
<PAGE>


   Mohr, Davidow Ventures V, L.P., as nominee for MDV Entrepreneurs' Network
   Fund II(A), L.P. and MDV Entrepreneurs' Network Fund II (B), L.P. to
   purchase 10,500 shares exercisable within 60 days of February 15, 2000.
   Each of the following individuals is a Member, Fifth MDV Partners, L.L.C.,
   General Partner of Mohr, Davidow Ventures V, L.P. and Mohr, Davidow
   Ventures V, L.P. as nominee for MDV Entrepreneurs' Network Fund II (A),
   L.P. and MDV Entrepreneur's Network Fund II (B), L.P., and, as such, each
   has the authority to make all decisions concerning the shares held by these
   funds, including selling and voting: Jonathan D. Feiber, Nancy J.
   Schoendorf and George Zachary. Mr. Davidow, a director of our company, is a
   partner at Mohr, Davidow Ventures. Mr. Davidow disclaims beneficial
   ownership of the shares held by these entities except to the extent of his
   proportional interest in the entities.
(b) Includes 600,000 shares issued upon exercise of a stock option, all of
    which are subject to a repurchase option we hold as of February 15, 2000.
(c) Includes 225,000 shares issued upon exercise of a stock option, all of
    which are subject to a repurchase option we hold as of February 15, 2000.
(d) Includes 499,999 shares issued upon exercise of a stock option, all of
    which are subject to a repurchase option we hold as of February 15, 2000.
(e) Includes 150,000 shares issued upon exercise of stock options, 93,750 of
    which are subject to a repurchase option we hold as of February 15, 2000,
    and an option to purchase 7,500 shares exercisable within 60 days of
    February 15, 2000.
(f) Includes 676,080 shares held by Thomas and Sarah Kailath Revocable Living
    Trust Dated 02/15/89, 185,001 shares held by Thomas Kailath, Trustee of
    the Paul V. Kailath Irrevocable Trust UAD 10-1-89, 205,833 shares held by
    Thomas Kailath, Trustee of the Priya S. Kailath Irrevocable Trust
    UAD 10-1-89, and an option to purchase 7,500 shares exercisable within 60
    days of February 15, 2000.

(g) Includes 232,500 shares held directly by Dr. Gupta, all of which were
    issued upon exercise of a stock option, 49,688 of which are subject to a
    repurchase option we hold as of February 15, 2000, 306,748 shares held by
    Naren and Vinita Gupta Living Trust dated 12/2/94, 416,666 shares held by
    Mr. Gupta as custodian for his minor children, and an option to purchase
    7,500 shares exercisable within 60 days of February 15, 2000.
(h) Includes 225,000 shares held by El Gamal Family Partnership, all of which
    were issued upon exercise of a stock option by Dr. El Gamal, 42,188 of
    which are subject to a repurchase option we hold as of February 15, 2000,
    and an option to purchase 7,500 shares exercisable within 60 days of
    February 15, 2000.
(i) All of such shares issued upon exercise of stock options, all of which are
    subject to a repurchase option we hold as of February 15, 2000. Includes
    54,000 shares held by Mr. Mora as custodian for his minor children.
(j) All of such shares issued upon exercise of stock options, 342,188 of which
    are subject to a repurchase option we hold as of February 15, 2000.
    Includes 19,500 shares held by Mr. Sharan as custodian for his minor
    child.
(k) Includes 198,282 shares issued upon exercise of stock options, 155,157 of
    which are subject to a repurchase option we hold as of February 15, 2000,
    and options to purchase 56,718 shares exercisable within 60 days of
    February 15, 2000.
(l)  Includes 58,125 shares issued upon exercise of stock options, all of
    which are subject to a repurchase option we hold as of February 15, 2000,
    and options to purchase 174,375 shares exercisable within 60 days of
    February 15, 2000.
(m) Includes an aggregate of:

   .  2,797,345 shares of which are subject to a repurchase option we hold as
of February 15, 2000;

   .  3,388,906 shares issued upon exercise of stock options; and

   .  options and warrants to purchase 411,093 shares exercisable within 60
days of February 15, 2000.


                                      58
<PAGE>

                          DESCRIPTION OF CAPITAL STOCK

   Upon the completion of this offering, our authorized capital stock will
consist of 100,000,000 shares of common stock, $0.0001 par value, and 5,000,000
shares of preferred stock, $0.0001 par value.

   The following summary of the rights of the common stock and preferred stock
does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of our amended and restated certificate of
incorporation and bylaws which are included as exhibits to the registration
statement of which this prospectus is a part and by the provisions of Delaware
law.

Common Stock

   After giving effect to the three for two forward stock split of the all
outstanding common stock and preferred stock and the conversion of all
previously outstanding preferred stock into shares of common stock, as of
February 15, 2000, there were 23,548,005 shares of common stock outstanding
held of record by approximately 191 stockholders. There will be 29,082,005
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of certain outstanding options or
warrants, after giving effect to the sale of common stock in the offering.

   Subject to preferences that may be applicable to any preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to the following rights:

  . to receive dividends out of assets legally available therefor at such
    times and in such amounts as the board of directors from time to time may
    determine;

  . one vote for each share held on all matters submitted to a vote of
    stockholders; and

  . upon our liquidation, dissolution or winding-up, to share ratably in all
    assets remaining after payment of liabilities and the liquidation of any
    preferred stock.

   Cumulative voting for the election of directors is not authorized by our
certificate of incorporation, which means that the holders of a majority of the
shares voted can elect all of the directors then standing for election. The
common stock is not entitled to preemptive rights and is not subject to
conversion or redemption. Each outstanding share of common stock is, and all
shares of common stock to be outstanding upon completion of this offering will
be, upon payment therefor, duly and validly issued, fully paid and
nonassessible.

Preferred Stock

   Upon the consummation of this offering, each outstanding share of Series A,
Series B, Series C, Series D and Series E preferred stock will automatically
convert into one share of common stock. Pursuant to our amended and restated
certificate of incorporation, the board of directors has the authority, without
further action by the stockholders, to issue up to 5,000,000 shares of
preferred stock in one or more series and to fix the designations, powers,
preferences, privileges, which may be greater than the rights of the common
stock. The board, without stockholder approval, can issue preferred stock with
voting, conversion or other rights that could adversely affect the voting power
and other rights of the holders of common stock. Preferred stock could thus be
issued quickly with terms calculated to delay or prevent a change in control of
our company or make removal of management more difficult. Additionally, the
issuance of preferred stock may have the effect of decreasing the market price
of the common stock. At present, there are no shares of preferred stock
outstanding, and we have no plans to issue any of the preferred stock.

Registration Rights

   Upon completion of the offering, the holders of an aggregate of
approximately 17,481,325 shares of common stock will be entitled to certain
rights with respect to the registration of such shares under the Securities Act
of 1933. Under the terms of the 1999 second amended and restated shareholders
rights

                                       59
<PAGE>

agreement, as amended, if we propose to register any of its securities under
the Securities Act of 1933, either for our own account or for the account of
other security holders, these holders are entitled to notice of such
registration and are entitled to include shares of common stock in the
registration. The rights are subject to conditions and limitations, among them
the right of the underwriters of an offering subject to the registration to
limit the number of shares included in such registration. A limited number of
the holders of these rights may also require us to file a registration
statement under the Securities Act of 1933 with respect to their shares of
common stock and we are required to use our best efforts to effect such
registration, subject to conditions and limitations. Furthermore, stockholders
with registration rights may require us to file additional registration
statements on Form S-3, subject to conditions and limitations.

Delaware Anti-Takeover Law and Certain Charter and Bylaws Provisions

   Delaware Anti-Takeover Statute. We are subject to Section 203 of the
Delaware General Corporation Law. In general, these provisions prohibit a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date that the
stockholder became an interested stockholder, unless the transaction in which
the person became an interested stockholder is approved in a manner presented
in Section 203 of the Delaware General Corporation Law.

   Generally, a "business combination" is defined to include mergers, asset or
stock sales and other transactions resulting in financial benefit to a
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years, did own, 15% or
more of a corporation's outstanding voting stock.

   Certificate of Incorporation and Bylaws. Our certificate of incorporation
and bylaws include provisions that:

  . allow the board of directors to issue, without further action by the
    stockholders, up to 5,000,000 shares of undesignated preferred stock;

  . require that any action to be taken by our stockholders be effected at a
    duly called annual or special meeting and not by written consent;

  . divide the board of directors into three classes, with each class serving
    for a term of three years;

  . prohibit cumulative voting in the election of directors;

  . require that special meetings of our stockholders be called only by the
    board of directors, the chairman of the board, the chief executive
    officer and the president;

  . establish an advance notice procedure for stockholder proposals to be
    brought before an annual meeting of our stockholders, including proposed
    nominations of persons for election to the board of directors; and

  . require that certain amendments to the certificate of incorporation and
    the bylaws require the approval of the holders of at least 66 2/3% of the
    voting power of all outstanding stock.

   These provisions are intended to enhance the likelihood of continuity and
stability in the composition of the board and in the policies formulated by the
board and to discourage certain types of transactions that may involve an
actual or threatened change of control of our company. These provisions are
designed to reduce our vulnerability to an unsolicited proposal for a takeover
that does not contemplate the acquisition of all of our outstanding shares or
an unsolicited proposal for the restructuring or sale of all or part of our
company. These provisions, however, could discourage potential acquisition
proposals and could complicate, delay or prevent a change in control of our
company. They may also have the effect of preventing changes in our management.
We believe that the benefits of increased protection of our potential ability
to negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure us outweighs the disadvantages of discouraging these
proposals, including proposals that are priced above the then current market
value of our common stock, because, among other things, negotiation of these
proposals could result in an improvement of their terms.

                                       60
<PAGE>

Transfer Agent and Registrar

   The transfer agent and registrar for common stock is ChaseMellon Shareholder
Services, L.L.C.

Listing

   Our common stock will be listed on the Nasdaq National Market under the
trading symbol "NMTC." We have not applied to list our common stock on any
other exchange or quotation system.

                                       61
<PAGE>

                        SHARES ELIGIBLE FOR FUTURE SALE

   Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market
following the offering could cause the prevailing market price of our common
stock to fall and impede our ability to raise equity capital at a time and on
terms favorable to us.

   Upon completion of the offering, we will have outstanding an aggregate of
29,082,005 shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or outstanding
warrants after February 15, 2000. Of these outstanding shares, the 5,534,000
shares sold in the offering will be freely tradable without restriction or
further registration under the Securities Act of 1933, unless purchased by our
"affiliates" as that term is defined in Rule 144 under the Securities Act of
1933. The remaining 23,548,005 shares of common stock outstanding upon
completion of the offering and held by existing stockholders will be
"restricted securities" as that term is defined in Rule 144 under the
Securities Act of 1933. Restricted shares may be sold in the public market only
if registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated under the Securities Act of 1933, which rules
are summarized below, or another exemption. Sales of the restricted shares in
the public market, or the availability of such shares for sale, could adversely
affect the market price of the common stock.

   All officers, directors and certain other holders of common stock have
entered into contractual "lock-up" agreements providing that they will not
offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of shares of common stock owned by them or that could be purchased by
them through the exercise of options or warrants for a period of 180 days after
the date of this prospectus without the prior written consent of Credit Suisse
First Boston Corporation. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, additional shares will be available beginning 181
days after the effective date of the offering, subject in some cases to certain
volume limitations.

   Of the remaining restricted shares:

  . 3,655,379 shares are subject to our repurchase option in the event of
    termination of employment; and

  . 3,809,994 shares will not be eligible for sale pursuant to Rule 144 until
    the expiration of a one-year holding period on January 1, 2001.

   Beginning 181 days after the date of this prospectus, approximately 102,671
additional shares subject to vested options will be available for sale subject
to compliance with Rule 701 and upon the expiration of agreements not to sell
such shares entered into between the underwriters and such stockholders. Any
shares subject to lock-up agreements may be released at any time without notice
by the underwriters.

   In general, under Rule 144 as currently in effect, beginning 91 days after
the date of this prospectus, a person, or persons whose shares are aggregated,
who has beneficially owned restricted shares for at least one year, including
persons who may be deemed to be our "affiliates", would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:

  . 1% of the number of shares of common stock then outstanding, which will
    equal approximately 290,820 shares immediately after the offering; or

  . the average weekly trading volume of the common stock as reported through
    the Nasdaq National Market during the four calendar weeks preceding the
    filing of a Form 144 with respect to such sale.

   Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us. Under Rule 144(k), a person who is not deemed to have been our
affiliate at any time during the 90 days preceding a sale, and who has
beneficially owned for at least two years the restricted shares proposed to be
sold, including the holding period of any prior owner except an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.

                                       62
<PAGE>

   Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 permits resales of shares issued
prior to the date the issuer becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, pursuant to certain compensatory benefit
plans and contracts commencing 90 days after the issuer becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, in reliance upon
Rule 144 but without compliance with certain restrictions, including the
holding period requirements. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of such options, including exercises after the date the issuer becomes
so subject. Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 91 days
after the date of this prospectus, may be sold by persons other than affiliates
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its one-year minimum holding period
requirements.

   We have agreed not to sell or otherwise dispose of any shares of common
stock or any securities convertible into or exercisable or exchangeable for
common stock, or enter into any swap or similar agreement that transfers, in
whole or in part, the economic risk of ownership of the common stock, for a
period of 180 days after the date of this prospectus, without the prior written
consent of Credit Suisse First Boston Corporation, subject to limited
exceptions.

   We intend to file a registration statement under the Securities Act of 1933
covering the shares of common stock subject to outstanding options or reserved
for issuance under the 2000 stock plan, 1997 stock plan and 2000 employee stock
purchase plan. This registration statement is expected to be filed
simultaneously with the effectiveness of the registration statement covering
the shares of common stock offered in this offering and will automatically
become effective upon filing. Accordingly, shares registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to affiliates and the expiration of a 180-day lockup period, be available for
sale in the open market, except to the extent that such shares are subject to
our vesting restrictions or the contractual restrictions described above.

                                       63
<PAGE>

                                  UNDERWRITING

   Under the terms and subject to the conditions contained in an underwriting
agreement, dated        2000, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, Chase Securities, Inc.
and SG Cowen Securities Corporation are acting as representatives, the
following respective numbers of shares of common stock:

<TABLE>
<CAPTION>
                                                                       Number of
   Underwriters                                                         Shares
   ------------                                                        ---------
   <S>                                                                 <C>
   Credit Suisse First Boston Corporation.............................
   Chase Securities, Inc. ............................................
   SG Cowen Securities Corporation....................................
                                                                       ---------
     Total............................................................ 5,534,000
                                                                       =========
</TABLE>

   The underwriting agreement provides that the underwriters are obligated to
purchase shares of common stock in the offering if any are purchased, other
than those shares covered by the over-allotment option described below. The
underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.

   We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to an additional 830,100 shares from us at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover any over-allotments of common stock.

   The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $    per share. The
underwriters and selling group members may allow a discount of $    per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.

   The following table summarizes the compensation and estimated expenses we
will pay.

<TABLE>
<CAPTION>
                                       Per Share                       Total
                             ----------------------------- -----------------------------
                                Without          With         Without          With
                             Over-Allotment Over-allotment Over-Allotment Over-allotment
                             -------------- -------------- -------------- --------------
   <S>                       <C>            <C>            <C>            <C>
   Underwriting discounts
    and commissions paid by
    us.....................   $              $              $              $
   Expenses paid by us.....     $              $              $              $
</TABLE>

   The underwriters have informed us that they do not expect discretionary
sales to exceed 5.0% of the shares of common stock being offered.

   We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the data of this prospectus.

   Our officers and directors and certain other stockholders, including holders
of our preferred stock and warrants, have agreed that they will not offer,
sell, contract to sell pledge or otherwise dispose of, directly or indirectly,
any shares of our common stock or securities convertible into or exchangeable
or exercisable for shares of our common stock, or publicly disclose the
intention to make any such offer, sale, pledge or disposal, without, in each
case, the prior written consent of Credit Suisse First Boston Corporation for a
period of 180 days after the date of this prospectus.

                                       64
<PAGE>


   The underwriters have reserved for sale, at the initial public offering
price, up to 276,700 shares of the common stock for employees, directors and
certain other persons associated with us who have expressed an interest in
purchasing common stock in the offering. In addition, at our request, the
underwriters will reserve up to 416,667 shares of common stock at the initial
public offering price for sale to KLA-Tencor. There can be no assurance that
any of the reserved shares will be purchased. KLA-Tencor will agree that, if it
purchases any shares of common stock or other securities of Numerical
Technologies, it will not sell or otherwise dispose of or hedge such shares or
securities until 180 days after this offering. The number of shares available
for sale to the general public in the offering will be reduced to the extent
any of the reserved shares are purchased. Any reserved shares not so purchased
will be offered by the underwriters to the general public on the same terms as
the other shares.

   We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.

   We will list the shares of common stock on The Nasdaq Stock Market's
National Market.

   A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The underwriters may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the representatives of the underwriters to underwriters that may
make Internet distributions on the same basis as other allocations. Other than
the prospectus in electronic format, the information contained on any
underwriter's web site or on any web site maintained by an underwriter is not
part of this prospectus or the registration statement of which this prospectus
forms a part, has not been approved or endorsed by us or any underwriter in its
capacity as an underwriter and should not be relied upon by investors.

   Prior to the offering, there has been no public market for the common stock.
The initial public offering price for the common stock will be determined by
negotiation between us and the representatives, and does not reflect the market
price for the common stock following the offering. Among the principal factors
considered in determining the initial public offering price will be:

  . the information in this prospectus and otherwise available to the
    representatives;
  . market conditions for initial public offerings;
  . the history of and prospects for the industry in which we will compete;
  . the ability of our management;
  . our prospects for future earnings;
  . the present state of our development and our current financial condition;
  . the recent market prices of, and the demand for, publicly traded common
    stock of generally comparable companies; and
  . the general condition of the securities markets at the time of this
    offering.

   The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Securities Exchange Act of 1934, as amended.

  . Over-allotment involves sales in excess of the offering size, which
    creates a syndicate short position.

  . Stabilizing transactions permit bids to purchase the underlying security
    so long as the stabilizing bids do not exceed a specified maximum.

  . Syndicate covering transactions involve purchases of the common stock in
    the open market after the distribution has been completed in order to
    cover syndicate short positions.

  . Penalty bids permit the representatives to reclaim a selling concession
    from a syndicate member when the common stock originally sold by the
    syndicate member is purchased in a stabilizing or syndicate covering
    transaction to cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq Stock Markets National Market or otherwise and, if
commenced, may be discontinued at any time.

                                       65
<PAGE>

                          NOTICE TO CANADIAN RESIDENTS

Resale Restrictions

   The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.

Representations of Purchasers

   Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that: (i) such purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under the securities laws; (ii) where
required by law, such purchaser is purchasing as principal and not as agent;
and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."

Rights of Action (Ontario Purchasers)

   The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.

Enforcement of Legal Rights

   All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or these persons. All or a substantial portion of the assets of
the issuer and these persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against the
issuer or persons outside of Canada.

Notice to British Columbia Residents

   A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. This report must be
in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.

Taxation and Eligibility for Investment

   Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in the
common stock in their particular circumstances and with respect to the
eligibility of the common stock for investment by the purchaser under relevant
Canadian legislation.

                                       66
<PAGE>

                                 LEGAL MATTERS

   The validity of the shares of common stock offered by this prospectus will
be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. Certain legal matters in connection with
this offering will be passed upon for the underwriters by Morrison & Forrester,
LLP, Palo Alto, California. WS Investment Company, an investment partnership
composed of certain current and former members of and persons associated with
Wilson Sonsini Goodrich & Rosati, Professional Corporation, as well as an
individual attorney of this firm, beneficially own an aggregate of 87,000
shares of our common stock.

                                    EXPERTS

   The balance sheets of Numerical Technologies, Inc. at December 31, 1998 and
1999 and the statements of operations, of stockholders' equity and of cash
flows for each of the three years in the period ended December 31, 1999,
included in this prospectus, have been included herein in reliance upon the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.

   The balance sheets of Transcription Enterprises Limited at December 31, 1998
and 1999 and the statements of operations, of shareholders' equity and of cash
flows for the years then ended, included in this prospectus, have been included
herein in reliance upon the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.

                      WHERE YOU CAN FIND MORE INFORMATION

   We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, under the Securities Act of 1933, a registration statement on Form S-1
relating to the common stock offered hereby. This prospectus does not contain
all of the information set forth in the registration statement and the exhibits
and schedules thereto. For further information with respect to our company and
the shares we are offering by this prospectus you should refer to the
registration statement, including the exhibits and schedules thereto. You may
inspect a copy of the registration statement without charge at the Public
Reference Section of the Securities and Exchange Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549 or at the Securities and Exchange
Commission's regional offices at 5670 Wilshire Boulevard, 11th Floor, Los
Angeles, California 90036. The public may obtain information on the operation
of the Public Reference Room by calling the Securities and Exchange Commission.
The Securities and Exchange Commission also maintains an Internet site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission. The Securities and Exchange Commission's World Wide Web address is
http://www.sec.gov.

   We intend to furnish holders of the common stock with annual reports
containing, among other information, audited financial statements certified by
an independent public accounting firm and quarterly reports containing
unaudited condensed financial information for the first three quarters of each
fiscal year. We intend to furnish such other reports as it may determine or as
may be required by law.

                                       67
<PAGE>

                          NUMERICAL TECHNOLOGIES, INC.

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S>                                                                         <C>
Numerical Technologies, Inc.
Report of Independent Accountants..........................................  F-2
Balance Sheets.............................................................  F-3
Statements of Operations...................................................  F-4
Statements of Stockholders' Equity.........................................  F-5
Statements of Cash Flows...................................................  F-6
Notes to Financial Statements..............................................  F-7

Unaudited Pro Forma Combined Financial Information
Overview................................................................... F-18
Unaudited Pro Forma Combined Balance Sheet................................. F-19
Unaudited Pro Forma Combined Statement of Operations....................... F-20
Notes to Unaudited Pro Forma Combined Financial Information................ F-21

Transcription Enterprises Ltd.
Report of Independent Accountants.......................................... F-23
Balance Sheets............................................................. F-24
Statements of Operations................................................... F-25
Statements of Shareholders' Equity (Deficit)............................... F-26
Statements of Cash Flows................................................... F-27
Notes to Financial Statements.............................................. F-28
</TABLE>

                                      F-1
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

   The reincorporation and three-for-two stock split described in Note 1 to the
financial statements have not been consummated at February 2, 2000. When they
have been consummated, we will be in a position to furnish the following
report:

To the Board or Directors and
 Stockholders of
Numerical Technologies, Inc.

   In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Numerical Technologies, Inc. at
December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

/s/ PricewaterhouseCoopers LLP

San Jose, California
February 2, 2000


                                      F-2
<PAGE>

                          NUMERICAL TECHNOLOGIES, INC.

                                 BALANCE SHEETS
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                    Pro Forma
                                                                  Stockholders'
                                                 December 31,        Equity
                                               -----------------  December 31,
                                                1998      1999        1999
                                               -------  --------  -------------
                                                                   (Unaudited)
<S>                                            <C>      <C>       <C>
ASSETS
Current assets:
  Cash and cash equivalents................... $ 4,973  $ 13,486
  Accounts receivable.........................   1,083     1,819
  Prepaid and other...........................      60       394
                                               -------  --------
    Total current assets......................   6,116    15,699
Property and equipment, net...................     456     1,613
Other assets..................................      39       293
                                               -------  --------
                                               $ 6,611  $ 17,605
                                               =======  ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable............................ $   239  $    613
  Accrued expenses............................   1,341     1,945
  Deferred revenue............................   2,216     2,642
                                               -------  --------
    Total current liabilities.................   3,796     5,200
                                               -------  --------

Commitments (See Note 3)

Stockholders' equity:
Convertible preferred stock, $0.0001 par
 value:
  Authorized: 12,253 shares;
  Issued and outstanding: 5,745 and 8,103
   shares in 1998 and 1999, respectively, and
   none in pro forma (unaudited)..............       1         1    $     --
Common stock, $0.0001 par value:
  Authorized: 30,000 shares;
  Issued and outstanding: 7,727 and
   9,570 shares in 1998 and 1999,
   respectively, and 17,673 in pro forma
   (unaudited)................................       1         1           1
Additional paid in capital....................  12,090    50,100      50,101
Receivable from stockholders..................      (5)     (315)       (315)
Deferred stock compensation...................  (1,938)  (21,220)    (21,220)
Accumulated deficit...........................  (7,334)  (16,162)    (16,162)
                                               -------  --------    --------
    Total stockholders' equity................   2,815    12,405    $ 12,405
                                               -------  --------    ========
                                               $ 6,611  $ 17,605
                                               =======  ========
</TABLE>

      The accompanying notes are an integral part of financial statements.

                                      F-3
<PAGE>

                          NUMERICAL TECHNOLOGIES, INC.

                            STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                      For the Years Ended
                                                          December 31,
                                                     ------------------------
                                                      1997    1998     1999
                                                     ------  -------  -------
<S>                                                  <C>     <C>      <C>
Revenue............................................. $  620  $   736  $ 5,492
                                                     ------  -------  -------
Costs and expenses:
  Cost of revenue...................................     57      127      307
  Research and development..........................    993    2,721    4,816
  Sales and marketing...............................     58    1,404    4,277
  General and administrative........................    131    2,355    1,303
  Amortization of deferred stock compensation (*)...     --      862    3,990
                                                     ------  -------  -------
    Total costs and expenses........................  1,239    7,469   14,693
                                                     ------  -------  -------
Loss from operations................................   (619)  (6,733)  (9,201)
Interest income.....................................     35      182      373
                                                     ------  -------  -------
Net loss............................................ $ (584) $(6,551) $(8,828)
                                                     ======  =======  =======
Net loss per common share, basic and diluted........ $(0.08) $ (0.89) $ (1.26)
                                                     ======  =======  =======
Weighted average common shares, basic and diluted...  7,397    7,373    7,019
                                                     ======  =======  =======
Pro forma net loss per common share, basic and
 diluted (unaudited)................................                  $ (0.64)
                                                                      =======
Pro forma weighted average common shares, basic and
 diluted (unaudited)................................                   13,885
                                                                      =======
(*) Amortization of Deferred Stock Compensation:
  Cost of revenue...................................     --  $    22  $   117
  Research and development..........................     --      465    1,836
  Sales and marketing...............................     --      361    1,444
  General and administrative........................     --       14      593
                                                     ------  -------  -------
                                                     $   --  $   862  $ 3,990
                                                     ======  =======  =======
</TABLE>


   The accompanying notes are an integral part of these financial statements.

                                      F-4
<PAGE>

                          NUMERICAL TECHNOLOGIES, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY
              For the Years Ended December 31, 1997, 1998 and 1999
                                 (in thousands)

<TABLE>
<CAPTION>
                           Convertible
                            Preferred                             Receivable Deferred
                              Stock     Common Stock   Additional    from     Stock
                          ------------- --------------  Paid in     Stock-   Compen-   Accumulated
                          Shares Amount Shares  Amount  Capital    holders    sation     Deficit    Total
                          ------ ------ ------  ------ ---------- ---------- --------  ----------- -------
<S>                       <C>    <C>    <C>     <C>    <C>        <C>        <C>       <C>         <C>
Balance, December 31,
 1996...................  2,250  $ --   7,083    $ 1    $   538     $ --     $    --    $   (199)  $   340
Exercise of common stock
 options................    --     --     847    --          23       --          --         --         23
Issuance of Series B
 preferred stock and
 warrants, net of
 issuance costs of $7...  1,050    --     --     --         746       (50)        --         --        696
Net loss................    --     --     --     --         --        --          --        (584)     (584)
                          -----  -----  -----    ---    -------     -----    --------   --------   -------
Balance, December 31,
 1997...................  3,300    --   7,930      1      1,307       (50)        --        (783)      475
Exercise of common stock
 options................    --     --     825    --          61        (5)        --         --         56
Return of common stock..    --     --    (525)   --         --        --          --         --        --
Repurchase of common
 stock..................    --     --    (503)   --          (2)      --          --         --         (2)
Issuance of Series C
 preferred stock and
 warrants, net of
 issuance costs of $47..  2,445      1    --     --       7,924       --          --         --      7,925
Repayment of note
 receivable.............    --     --     --     --         --         50         --         --         50
Deferred stock
 compensation related to
 grants of stock options
 and issuance of common
 stock..................    --     --     --     --       2,800       --       (2,800)       --        --
Amortization of deferred
 stock compensation.....    --     --     --     --         --        --          862        --        862
Net loss................    --     --     --     --         --        --          --      (6,551)   (6,551)
                          -----  -----  -----    ---    -------     -----    --------   --------   -------
Balance, December 31,
 1998...................  5,745      1  7,727      1     12,090        (5)     (1,938)    (7,334)    2,815
Exercise of common stock
 options................    --     --   2,001    --       1,333      (315)        --         --      1,018
Repurchase of common
 stock..................    --     --    (158)   --         (20)      --          --         --        (20)
Issuance of Series D
 preferred stock, net of
 issuance
 costs of $455..........  2,358    --     --     --      13,425       --          --         --     13,425
Repayment of note
 receivable.............    --     --     --     --         --          5         --         --          5
Deferred stock
 compensation related to
 grants of stock options
 and issuance of common
 stock..................    --     --     --     --      23,272       --      (23,272)       --        --
Amortization of deferred
 stock compensation.....    --     --     --     --         --        --        3,990        --      3,990
Net loss................    --     --     --     --         --        --          --      (8,828)   (8,828)
                          -----  -----  -----    ---    -------     -----    --------   --------   -------
Balance, December 31,
 1999...................  8,103  $   1  9,570    $ 1    $50,100     $(315)   $(21,220)  $(16,162)  $12,405
                          =====  =====  =====    ===    =======     =====    ========   ========   =======
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                      F-5
<PAGE>

                          NUMERICAL TECHNOLOGIES, INC.

                            STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                         For the Years Ended
                                                            December 31,
                                                        -----------------------
                                                        1997    1998     1999
                                                        -----  -------  -------
<S>                                                     <C>    <C>      <C>
Cash flows from operating activities:
Net loss..............................................  $(584) $(6,551) $(8,828)
Adjustments to reconcile net loss to net cash used in
 operating activities:
  Depreciation........................................     24       99      340
  Amortization of deferred stock compensation.........             862    3,990
  Changes in assets and liabilities:
    Accounts receivable...............................   (323)    (758)    (736)
    Prepaid and other.................................     (4)     (67)    (334)
    Other assets......................................     (7)     (31)    (254)
    Accounts payable..................................     90      111      374
    Accrued expenses..................................     81    1,244      604
    Deferred revenue..................................    127    1,834      426
                                                        -----  -------  -------
      Net cash used in operating activities...........   (596)  (3,257)  (4,418)
                                                        -----  -------  -------
Cash flows from investing activities:
Purchases of property and equipment...................    (82)    (455)  (1,497)
                                                        -----  -------  -------
      Net cash used in investing activities...........    (82)    (455)  (1,497)
                                                        -----  -------  -------
Cash flows from financing activities:
Proceeds from exercise of common stock options........     23       56    1,018
Proceeds from issuance of preferred stock.............    696    7,925   13,425
Repurchase of common stock............................     --       (2)     (20)
Repayment of notes receivable for preferred and common
 stock................................................     --       50        5
Proceeds from related party loan......................     --      250       --
Repayment of related party loan.......................     --     (250)      --
                                                        -----  -------  -------
      Net cash provided by financing activities.......    719    8,029   14,428
                                                        -----  -------  -------
Net increase in cash and cash equivalents.............     41    4,317    8,513

Cash and cash equivalents at beginning of year........    615      656    4,973
                                                        -----  -------  -------

Cash and cash equivalents at end of year..............  $ 656  $ 4,973  $13,486
                                                        =====  =======  =======

Supplemental disclosures noncash financing activities:
  Stockholder notes receivable exchanged for common
   stock or preferred stock...........................  $  50  $     5  $   315
                                                        =====  =======  =======
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                      F-6
<PAGE>

                          NUMERICAL TECHNOLOGIES, INC.

                         NOTES TO FINANCIAL STATEMENTS

NOTE 1--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 Nature of business

   Numerical Technologies, Inc. (the "Company") designs and develops
proprietary technologies and software products that enable the design and
manufacture of integrated circuits with subwavelength feature sizes. The
Company markets and sells its products and services to semiconductor
manufacturers, resellers and original equipment manufacturers primarily in
North America, Europe, Japan and the Pacific Rim.

 Reincorporation and stock split

   In January 2000, the Company's Board of Directors authorized the
reincorporation of the Company in the State of Delaware. As a result of the
reincorporation, the Company is authorized to issue 100,000,000 shares of
$0.0001 par value Common Stock and 5,000,000 shares of $0.0001 par value
Preferred Stock. In January 2000, the Company's Board of Directors approved a
three-for-two share split of the Company's Preferred and Common Stock. The
share split will take effect immediately prior to the closing of the initial
public offering. All share and per share information have been adjusted to
reflect the reincorporation and the share split.

 Certain risks and concentrations

   At December 31, 1999, substantially all of the Company's cash and cash
equivalents were invested with two financial institutions.

   The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The
Company had amounts receivable from one customer representing 86% and four
customers representing 84% of accounts receivable at December 31, 1998 and
1999, respectively. The Company has experienced no losses and does not consider
allowance for doubtful accounts necessary at December 31, 1998 and 1999.

   In 1997, four customers accounted for 40%, 29%, 19% and 12% of total
revenues. In 1998, three customers accounted for 37%, 30% and 25% of total
revenues. In 1999, three customers accounted for 23%, 17%, and 16% of total
revenues.

 Financial instruments

   The carrying amount of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and accrued
expenses, approximate fair value due to their short maturities.

 Cash and cash equivalents

   The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase and money market funds to be cash
equivalents. At December 31, 1999, cash and cash equivalents included
restricted cash of $204,000 related to a certificate of deposit issued as
collateral for a Letter of Credit.

 Property and equipment

   Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated on a straight-line basis over their
estimated useful lives of 2 to 3 years. When assets are sold or retired, the
cost and related accumulated depreciation is removed from the accounts and the
resulting gains or losses are included in the statement of operations.


                                      F-7
<PAGE>

                          NUMERICAL TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

 Software development costs

   Software development costs incurred in the research and development of new
products and enhancements to existing products are charged to expense as
incurred. Software development costs are capitalized after technological
feasibility has been established. The period between achievement of
technological feasibility, which the Company defines as the establishment of a
working model, until the general availability of such software to customers,
has been short, and software development costs qualifying for capitalization
have been insignificant. Accordingly, the Company has not capitalized any
software development costs since its inception.

 Income taxes

   Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.

 Use of estimates

   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

 Revenue recognition

   The Company recognizes revenues in accordance with the provisions of
Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition", as
amended by SOP 98-4 and 98-9. The Company's revenues are derived from
intellectual property and software licenses and maintenance and technical
services. Revenues are recognized for the various contract elements based upon
vendor-specific objective evidence ("VSOE") of fair value of each element. If
VSOE of fair value does not exist but postcontract customer services ("PCS") is
the only undelivered element, the Company recognized the fee including up-front
payments for licenses, under the arrangement ratably over the contractual PCS
period. To date, the Company has not established VSOE for the service or annual
maintenance elements of the contracts. License revenues, including up-front
fees, are recognized when persuasive evidence of an agreement exists, the
product has been delivered, no significant post-delivery obligations remain,
the license fee is fixed or determinable and collection of the fee is probable.
Revenue for technical services is recognized as the services are performed.
Maintenance services are typically priced based on a percentage of the license
fee and have a one-year term, renewable annually. Services provided to
customers under maintenance agreements include technical product support and
unspecified product upgrades. Deferred revenues include billings in excess of
recognized revenue and payments received in advance of revenue recognition.

   Prior to the adoption of SOP 97-2, on January 1, 1998, the Company
recognized revenue for software and intellectual property upon delivery if
remaining obligations were insignificant and collection of the resulting
accounts receivable was probable. Revenue from software maintenance contracts,
including amounts unbundled from license, were deferred and recognized ratably
over the period of the contract. The adoption of SOP 97-2, SOP 98-4 and 98-9
have not had and are not expected to have a material impact on the Company's
results of operations, financial position or cash flows.


                                      F-8
<PAGE>

                          NUMERICAL TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


 Stock-based compensation

   The Company accounts for its stock based compensation in accordance with the
provisions of Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees" and complies with the disclosure
provisions of Statement of Financial Accounting Standard No. 123 ("SFAS
No. 123"). Deferred compensation recognized under APB No. 25 is amortized over
the vesting period on an accelerated basis using the model presented in
Financial Accounting Standards Board Interpretation No. 28, "Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans" ("FIN
No. 28"). Accordingly, the percentages of the deferred compensation amortized
in the first, second, third and fourth years following the option grant date
are approximately 52%, 27%, 15% and 6%, respectively, for options with a
four-year vesting period.

 Net loss per share

   The basic net loss per share is computed by dividing the net loss
attributable to common stockholders for the period by the weighted average
number of the common shares outstanding during the period. The diluted net loss
per share is the same as the basic net loss per share for the periods presented
because common equivalent shares, composed of common shares subject to
repurchase and common shares issuable upon the exercise of stock options and
warrants and upon conversion of convertible preferred shares, are considered
when their effect would be dilutive. In 1997, 1998 and 1999, 4,337,000,
7,580,000 and 11,976,000, respectively, antidilutive securities including
options, warrants and convertible preferred stock were excluded from the net
loss per share computation.

 Pro forma net loss per share (unaudited)

   Pro forma net loss per share for the year ended December 31, 1999 is
computed using the weighted average number of common shares outstanding,
including the pro forma effects of the automatic conversion of convertible
preferred shares into common shares effective upon the closing of the Company's
initial public offering on an as-if-converted basis. Pro forma diluted net loss
per share is computed using the pro forma weighted average number of common and
common equivalent shares outstanding. Common equivalent shares, composed of
common shares subject to repurchase and common shares issuable upon the
exercise of stock options and warrants, are not included in pro forma diluted
net loss per share as such shares are antidilutive. Antidilutive securities
totaling 3,873,000 including options and warrants were excluded from the pro
forma net loss per share computation.

 Pro forma December 31, 1999 balance sheet (unaudited)

   Upon consummation of the offering, all shares of convertible preferred stock
outstanding will convert into an aggregate of 8,103,000 shares of common stock.
The effect of this conversion has been reflected in the accompanying unaudited
pro forma consolidated balance sheet as of December 31, 1999.

 Comprehensive income

   The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS 130"), FAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. There was no difference between the
Company's net loss and its total comprehensive loss for each of the periods
presented.

 Recent accounting pronouncements

   In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, or SFAS 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS 133 establishes new standards of

                                      F-9
<PAGE>

                          NUMERICAL TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

accounting and reporting for derivative instruments and hedging activities.
SFAS 133 requires that all derivatives be recognized at fair value in the
statement of financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that
exists. SFAS 133 will be effective for fiscal years beginning after June 15,
2000. The Company does not currently hold derivative instruments or engage in
hedging activities.

NOTE 2--BALANCE SHEET DETAIL

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                 --------------
                                                                  1998    1999
                                                                 ------  ------
   <S>                                                           <C>     <C>
   Property and equipment:
     Computer equipment......................................... $  393  $1,362
     Furniture and equipment....................................    133     490
     Computer software..........................................     63     234
                                                                 ------  ------
                                                                    589   2,086
     Less accumulated depreciation..............................   (133)   (473)
                                                                 ------  ------
                                                                 $  456  $1,613
                                                                 ======  ======
   Accrued expenses:
     Payroll and related expenses............................... $1,259  $1,204
     Other accrued expenses.....................................     82     741
                                                                 ------  ------
                                                                 $1,341  $1,945
                                                                 ======  ======
</TABLE>

NOTE 3--COMMITMENTS

 Operating leases

   The Company leases its facility under a noncancelable operating lease which
expires in May 2004. The Company has the option to renew the lease for three
years. The lease requires a security deposit of $272,000 in the form of cash
and a letter of credit. The letter of credit is secured by a $204,000
certificate of deposit, which was considered restricted cash at December 31,
1999. The terms of the lease provide for rental payments on a graduated scale.
The Company recognized rent expense on a straight-line basis over the period,
and has accrued for rent expense incurred but not paid. The Company is
responsible for maintenance, insurance and taxes.

   Minimum lease payments as of December 31, 1999 for noncancelable operating
leases are as follows:

<TABLE>
<CAPTION>
                                                                         Lease
     Year                                                               Payments
     ----                                                               --------
     <S>                                                                <C>
     2000..............................................................  $  723
     2001..............................................................     748
     2002..............................................................     770
     2003..............................................................     793
     2004..............................................................     478
                                                                         ------
                                                                         $3,512
                                                                         ======
</TABLE>

   Rent expense was $60,000, $229,000 and $474,000 for 1997, 1998 and 1999,
respectively.

                                      F-10
<PAGE>

                          NUMERICAL TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


NOTE 4--CAPITAL STOCK

 Convertible preferred stock

   At December 31, 1999, the amounts, terms and liquidation values of Series A,
Series B, Series C, Series D and Series E convertible preferred stock are as
follows:

<TABLE>
<CAPTION>
                                                           Common
                                                           Shares
                                                          Reserved
                                             Issued and     for     Liquidation
   Series                 Amount  Designated Outstanding Conversion    Value
   ------                -------- ---------- ----------- ---------- -----------
   <S>                   <C>      <C>        <C>         <C>        <C>
     A.................. $    538    2,250      2,250      2,250      $   540
     B..................      693    1,050      1,050      1,050          700
     C..................    7,636    2,595      2,445      2,445        7,971
     D..................   13,425    2,548      2,358      2,358       13,880
     E..................      --     3,810        --         --           --
                         --------   ------      -----      -----      -------
                         $ 22,292   12,253      8,103      8,103      $23,091
                         ========   ======      =====      =====      =======
</TABLE>

   Each share of preferred stock is convertible into common stock on a one-for-
one basis subject to adjustment for certain changes in capitalization and
certain dilutive issuances. Conversion of preferred stock into common stock is
at the option of the holder, and is automatic upon the earlier of (1) for
Series A, Series B, Series C and Series D preferred stock the election of
holders of at least a majority of the outstanding shares of Series A, Series B,
Series C and Series D preferred stock voting as a class, and for Series E
preferred stock the election of holders of at least a majority of the
outstanding shares of Series E preferred stock voting as a class, or (2) the
closing of a public offering of the Company's common stock at a price per share
of not less than $10.67 and an aggregate offering price of not less than
$15,000,000. The holders of shares of preferred stock are entitled to the
number of votes equal to the number of shares of common stock into which the
preferred shares are convertible.

   The holders of preferred stock may receive noncumulative dividends of $0.02,
$0.07, $0.33, $0.47 and $0.85, per share per annum for Series A, Series B,
Series C, Series D and Series E preferred stock, respectively, when and as
declared by the Board of Directors. No cash dividends may be paid to holders of
common stock during any year until dividends of $0.02, $0.07, $0.33, $0.47 and
$0.85 per share for Series A, Series B, Series C, Series D and Series E
preferred stock, respectively, have been paid in that year. No dividends have
been declared to date. The holders of preferred stock have certain registration
rights.

   The holders of Series E preferred have preference of the holders of common
stock and all other series of preferred stock in liquidation to the extent of
$10.67 per share plus all declared but unpaid dividends. The holders of Series
D preferred stock have preference over the holders of common stock and Series
A, Series B and Series C preferred stock in liquidation to the extent of $5.89
per share plus all declared but unpaid dividends. The holders of Series C
preferred stock have preference over the holders of common stock and Series A
and Series B preferred stock in liquidation to the extent of $3.26 per share
plus all declared but unpaid dividends. Thereafter, Series A and Series B have
preference over common stock in liquidation to the extent of $0.24 and $0.67
per share, respectively, plus all declared but unpaid dividends. The holders of
common stock are then entitled to share ratably in the remaining assets, based
on the number of shares of common stock held by each stockholder.

 Stock Option Plans

  1997 Stock Option Plan

   Under the Company's 1997 Stock Option Plan (the "1997 Plan"), 6,197,000
shares of the Company's common stock are reserved for issuance to employees,
directors and consultants. Options granted under the

                                      F-11
<PAGE>

                         NUMERICAL TECHNOLOGIES, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

1997 Plan may be incentive stock options or non-statutory stock options. Stock
purchase rights may also be granted under the 1997 Plan. Incentive stock
options may only be granted to employees. The 1997 Plan, which is administered
by the board of directors, provides generally that the option price shall not
be less than the fair market value of the shares on the date of grant and that
no portion may be exercised beyond ten years from that date. Under the 1997
Plan, stock options vest over a period that is limited to five years, but are
typically granted with a four year vesting period. Each option outstanding
under the 1997 Plan may be exercised in whole or in part at any time.
Exercised but unvested shares are subject to repurchase by the Company at the
initial exercise price. At December 31, 1999, 2,188,000 shares were subject to
repurchase.

   Activity under this plan is as follows:

<TABLE>
<CAPTION>
                                                  Outstanding Shares
                                                  ------------------- Weighted
                                         Shares   Number              Average
                                        Available   of     Price Per  Exercise
                                        for Grant Shares     Share     Price
                                        --------- ------  ----------- --------
<S>                                     <C>       <C>     <C>         <C>
Options reserved upon adoption of the
 plan..................................   1,107
Options granted........................    (905)     905  $ 0.03-0.07  $0.03
Options exercised......................             (848) $      0.03  $0.03
                                         ------   ------
Balances, December 31, 1997............     202       57  $      0.07  $0.07
Options reserved upon amendment of the
 plan..................................   1,591
Options granted........................  (1,236)   1,236  $0.03-$0.17  $0.17
Options exercised......................             (825) $0.03-$0.17  $0.33
Shares repurchased.....................      35
Options cancelled......................      47      (47) $      0.33  $0.08
                                         ------   ------
Balances, December 31, 1998............     639      421  $      0.33  $0.33
Options reserved upon amendment of the
 plan..................................   3,498
Options granted........................  (3,019)   3,019  $0.33-$1.00  $0.81
Options exercised......................           (2,001) $0.03-$1.00  $0.67
Shares repurchased.....................     158
Options cancelled......................      31      (31) $      0.33
                                         ------   ------
Balances, December 31, 1999............   1,307    1,408  $      0.88  $0.88
                                         ======   ======
</TABLE>

   The weighted average grant date fair value of options granted during 1997,
1998 and 1999 was $0.08, $3.45, and $11.85, respectively.

   The options outstanding and currently exercisable by exercise price at
December 31, 1999 are as follows:

<TABLE>
<CAPTION>
                                                               Options Upon Exercise
                     Options Outstanding                       Subject to Repurchase
   ------------------------------------------------------------------------------------
                                   Weighted
                                   Average
                                  Remaining      Weighted                   Weighted
                       Number    Contractual     Average       Number       Average
   Exercise Prices   Outstanding Life (Years) Exercise Price Exercisable Exercise Price
   ---------------   ----------- ------------ -------------- ----------- --------------
   <S>               <C>         <C>          <C>            <C>         <C>
   $0.33-
    $1.00               1,408        9.73         $0.88         1,303        $0.88
</TABLE>


  Deferred Stock Compensation

   During 1999 and 1998, the Company issued stock options under the 1997 Plan
at exercise prices deemed by the Board of Directors at the date of grant to be
the fair value. In anticipation of the Company's initial

                                     F-12
<PAGE>

                          NUMERICAL TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

public offering, the Company has subsequently determined that, for financial
statement purposes, the estimated value of its common stock was in excess of
the exercise prices. Accordingly the Company has recorded deferred compensation
for the difference between the purchase price of stock issued to employees
under stock options and the fair market value of the Company's stock at the
date of grant. This deferred compensation is amortized to expense over the
period during which the Company's right to repurchase the stock lapses or
options become exercisable, generally four years. At December 31, 1999, the
Company had recorded deferred compensation related to these options in the
total amount of $26.0 million of which $862,000 and $3,990,000 had been
amortized to expense during 1998 and 1999, respectively. Future compensation
expense from options granted through December 31, 1999 is estimated to be $11.2
million, $5.9 million, $3.0 million and $1.1 million for 2000, 2001, 2002 and
2003, respectively.

 Pro forma stock-based compensation

   Had compensation expense for the 1997 Plan been determined based on the fair
value at the grant date for options granted in 1999, 1998 and 1997 consistent
with the provisions of SFAS No. 123, the Company's net loss and net loss per
share would have been increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                       Year Ended December
                                                               31,
                                                      ------------------------
                                                       1997    1998     1999
                                                      ------  -------  -------
                                                      (in thousands, except
                                                         per share data)
   <S>                                                <C>     <C>      <C>
   Net loss
    As reported...................................... $ (584) $(6,551) $(8,828)
                                                      ======  =======  =======
    Pro forma........................................ $ (585) $(6,558) $(8,946)
                                                      ======  =======  =======
   Net loss per common share, basic and diluted
    As reported...................................... $(0.08) $ (0.89) $ (1.26)
                                                      ======  =======  =======
    Pro forma........................................ $(0.08) $ (0.89) $ (1.27)
                                                      ======  =======  =======
</TABLE>

   The increases in the pro forma amounts above reflect the incremental fair
value over the intrinsic value recognized as part of deferred stock
compensation.

   The fair value of each option grant is calculated on the date of grant using
the minimum value method under the Black-Scholes pricing model with a
volatility factor of effectively zero as described by SFAS No. 123, an expected
divident yield of 0%, and with the following assumptions:

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                   ----------------------------
                                                     1997      1998      1999
                                                   --------  --------  --------
   <S>                                             <C>       <C>       <C>
   Risk-free interest rate........................ 5.3%-6.3% 5.3%-5.6% 4.8%-6.1%
   Expected life (years)..........................        5         5         5
</TABLE>

  Warrants

   In June 1997, the Company issued immediately exercisable warrants to
purchase 195,000 shares of the Company's Series B preferred Stock at an
exercise price of $0.67 per share. These warrants were issued to a customer of
the Company in connection with the issuance of Series B preferred stock and
entering into a licensing and services contract (see Note 6). The Company
determined the fair value of such warrants to be approximately $53,000 using
the Black-Scholes model and the following assumptions: no future dividends,
volatility of 60%, a weighted average risk-free interest rate of 5.88% and a
term of 2 years. The warrants expired in June 1999.


                                      F-13
<PAGE>

                          NUMERICAL TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

   In June 1998, in connection with the issuance of Series C preferred stock,
the Company issued immediately exercisable warrants to purchase 150,000 shares
of the Company's Series C preferred stock at an exercise price of $3.26 per
share. The Company determined the fair value of such warrants to be
approximately $289,000 using the Black-Scholes model and the following
assumptions: no future dividends, volatility factor of 60%, a weighted average
risk-free interest rate of 4.73% and a term of 5 years. The warrants will
expire upon the earlier of June 2003 or the closing of a public offering of the
Company's common stock at a price per share of not less than $6.40 and an
aggregate offering price of not less than $15,000,000. At December 31, 1999,
150,000 shares of Series C preferred stock are reserved for the exercise of the
warrants. The Company expects these warrants will be exercised upon the initial
public offering and will recognize a charge of approximately $778,000 related
to the beneficial conversion feature of these warrants.

  Notes receivable from Stockholders

   During 1999, an officer of the Company exercised stock options in exchange
for notes receivable totaling $315,000, which are secured by the underlying
shares of common stock. The notes accrue interest at rates ranging from 4.9% to
5.7% per annum, and are payable, with principal, in 2001.

NOTE 5--INCOME TAXES

   The components of the net deferred tax asset comprise:

<TABLE>
<CAPTION>
                                                            December 31,
                                                        -----------------------
                                                        1997    1998     1999
   (in thousands)                                       -----  -------  -------
   <S>                                                  <C>    <C>      <C>
   Net operating loss carryforward.....................  $240  $ 1,323  $ 2,675
   Research and development credit carryforward........    50      222      382
   Accrued liabilities.................................    65      450    1,444
   Valuation allowance.................................  (355)  (1,995)  (4,501)
                                                        -----  -------  -------
                                                        $  --  $    --  $    --
                                                        =====  =======  =======
</TABLE>

   The Company has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
Annually, management evaluates the recoverability of the deferred tax assets
and the level of the valuation allowance. At such time as it is determined that
it is more likely than not that deferred tax assets are realizable the
valuation allowance will be reduced.

   The Company had the following carryforwards and credits at December 31,
1999:

<TABLE>
<CAPTION>
                                                              Expiration
                                                                 Date    Amount
   (in thousands)                                             ---------- ------
   <S>                                                        <C>        <C>
   Net operating loss carryforwards
     Federal.................................................  2010-2019 $6,904
     State...................................................  2002-2004  5,611
   Research and development credits
     Federal................................................. Indefinite $  217
     State................................................... Indefinite    165
</TABLE>

   For federal and state tax purposes, a portion of the Company's net operating
loss and tax credit carryforwards may be subject to certain limitations on
annual utilization due to an "Ownership Change," as defined by federal and
state tax law.

                                      F-14
<PAGE>

                          NUMERICAL TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


NOTE 6--RELATED PARTY TRANSACTIONS

   During 1997, the Company received $120,000 from a Series B preferred
stockholder under a licensing and service contract negotiated concurrently with
the purchase of Series B preferred stock and warrants to purchase Series B
preferred stock. As the fair value of these warrants was determined to be
approximately $53,000, such amount was allocated to the warrants. The warrants
expired unexercised in June 1999.

   During 1998, the chairman loaned the Company $250,000 for a period of 2
months at an annual interest rate of 8%. The loan was repaid in 1998.

NOTE 7--EMPLOYEE BENEFIT PLAN

   The Company sponsors the Numerical Technologies, Inc. 401(k) Retirement Plan
(the "401(k) Plan"). The 401(k) Plan provides for tax deferred automatic salary
deductions. Under the terms of the 401(k) Plan, employees over the age of 21
are eligible to participate after completing three months of employment. The
Company is permitted to make contributions to the 401(k) Plan as determined by
the Board of Directors. No Company contributions were made to the 401(k) Plan
in 1999, 1998 or 1997.

NOTE 8--OPERATING SEGMENTS

   The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement requires enterprises to
report information about operating segments in annual financial statements and
selected information about reportable segments in interim financial reports. It
also establishes standards for related disclosures about products, geographic
areas and major customers. The method for determining what information to
report is based upon the "management" approach, which requires the Company to
report certain financial information related to continuing operations that is
provided to the Company's chief operating decision-maker for the purpose of
evaluating financial performance and resource allocation. The Company's chief
operating decision-maker reviews revenue by both geography and customer. The
Company is not organized into business units nor does it capture expenses or
allocate resources based on segmentation of its business. Therefore, the
Company believes that it operates in a single segment.

   The following is a summary of the Company's revenue attributed to the
geographic regions in which the technology and services are delivered:

<TABLE>
<CAPTION>
                                                                1997 1998  1999
                                                                ---- ---- ------
   <S>                                                          <C>  <C>  <C>
   United States............................................... $380 $626 $4,300
   Japan.......................................................   --  105    516
   Taiwan......................................................   --   --    558
   Korea.......................................................   --   --    117
   Germany.....................................................  215    5      1
   Other.......................................................   25   --     --
                                                                ---- ---- ------
   Total....................................................... $620 $736 $5,492
                                                                ==== ==== ======
</TABLE>


   The Company has no long-lived assets outside the United States in any of the
years presented.


                                      F-15
<PAGE>

                          NUMERICAL TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

NOTE 9--SUBSEQUENT EVENTS

 Acquisition of Transcription

   On January 1, 2000, Numerical Technologies, Inc. (" Numerical" or the "
Company") acquired Transcription Enterprises Ltd. ("Transcription"), a company
incorporated in California. Under the terms of the acquisition, the Company
issued 3,810,000 shares of Series E Convertible Preferred Stock and $40.0
million in notes payable for all of the outstanding stock of Transcription. The
total purchase price was $86.0 million, including acquisition costs of
$250,000. The transaction will be accounted for as a purchase.

   Under the terms of the agreement, Numerical acquired specified accounts
receivable of Transcription, consisting of 45% of accounts receivable for
license fees, plus all fees associated with maintenance, support and other
services rendered by Transcription on such accounts. The allocation of the
purchase price is as follows: (in thousands):

<TABLE>
   <S>                                                                  <C>
   Net tangible assets................................................. $   243
   In process research and development.................................     300
   Developed technology................................................   7,400
   Customer base.......................................................  14,300
   Covenants not to compete............................................   2,700
   Work force..........................................................   1,500
   Trade name..........................................................     200
   Goodwill............................................................  59,327
                                                                        -------
                                                                        $85,970
                                                                        =======
</TABLE>

   The estimated purchase price was allocated to the identifiable assets
acquired and the liabilities assumed based upon the fair market value on the
acquisition date. The net tangible assets consist primarily of accounts
receivable, property and equipment, and other liabilities. Because the in-
process technology had not reached the stage of technological feasibility at
the acquisition date and had no alternative future use, the amount was
immediately charged to operations. The amounts allocated to developed
technology and customer base and trade name are amortized over the estimated
useful life of five years. The amounts allocated to covenants not to compete
and work force are being amortized over the estimated useful lives of two and
four years, respectively. The excess amount of the purchase price over the fair
market value of the identifiable assets acquired is accounted for as goodwill
and is being amortized over its estimated useful life of five years. The
valuation for the intangible assets has been determined using management's
assumptions and the report from an independent appraiser.

   The following unaudited pro forma consolidated financial information
reflects the results of operations for the years ended December 31, 1999, as if
the acquisition had occurred on January 1, 1999, and after giving effect to
purchase accounting adjustments. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what operating
results would have been had the acquisition actually taken place on January 1,
1999, and may not be indicative of future operating results.

<TABLE>
<CAPTION>
                                                                Year Ended
                                                             December 31, 1999
                                                           ---------------------
                                                                (unaudited)
                                                           (in thousands, except
                                                              per share data)
   <S>                                                     <C>
   Revenues...............................................       $ 19,159
   Loss from operations...................................        (17,912)
   Net loss...............................................        (20,684)
   Basic and diluted net loss per share...................       $  (2.95)
</TABLE>


                                      F-16
<PAGE>

                          NUMERICAL TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

   Under the terms of the acquisition agreement, the $40 million note is
secured by substantially all the assets of Transcription. The note bears
interest at the rate of 8% per annum. $5 million was due and paid upon issuance
of the note, with the remaining principal amount due and payable in 16 equal
quarterly installments of $2.2 million, commencing on April 1, 2000 and
thereafter on each of calendar quarter with the final installment being due on
January 1, 2004. All interest accrued to each payment is due and payable on
such payment date. The major stockholders of Transcription have the right to
setoff certain indemnification claims against the interest and principal of the
note otherwise due.

 2000 Stock Option Plan

   On January 24, 2000, the Company approved the 2000 Stock Option/Stock
Issuance Plan (the "2000 Plan"), under which all remaining shares available for
grant under the Company's 1997 Stock Option Plan and 3,000,000 additional
shares of the Company's common stock has been authorized for issuance. The 2000
Plan is intended to serve as a successor to the 1997 Stock Option Plan and has
term similar to those of the 1997 Plan. Under the 2000 Plan, the term of the
options is generally ten years with a vesting requirement of 25% after one year
of service and monthly, thereafter, fully vesting upon completion of the fourth
year of service. Pursuant to the 2000 Plan, the board of directors has the
discretion to grant options to non-employee directors. The director option
component will not become effective until the date of this offering. Each
nonemployee director who first becomes a board member after the date of this
offering may be granted options for up to 30,000 shares. In addition, each non-
employee director may be granted options for up to 7,500 shares annually.

 2000 Employee Stock Purchase Plan

   On January 24, 2000, the Company approved the Company's 2000 Employee Stock
Purchase Plan (the "ESPP") and authorized 300,000 shares to be issued under the
ESPP. Under the ESPP, employees are granted the right to purchase shares of
common stock at a price per share that is 85% of the lesser of: the fair market
value of the shares at (i) the beginning of a rolling twenty-four-month
offering period, or (ii) the end of each semi-annual purchase period. The ESPP
will become effective on the effective date of this offering.

 Stock-based compensation

   On February 1, 2000, the Company granted under the 1997 and 2000 Plans
approximately 2,007,000 options to purchase the Company's common stock. In
connection with these stock option grants, the Company recognized deferred
compensation of approximately $16,990,000, which is being amortized over
vesting periods for the related options of generally four years.

                                      F-17
<PAGE>

                          NUMERICAL TECHNOLOGIES, INC.

               UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

                                    OVERVIEW

   On January 1, 2000, Numerical Technologies, Inc. (" Numerical" or the "
Company") acquired Transcription Enterprises Ltd. ("Transcription"), a company
incorporated in California. Under the terms of the acquisition, the Company
issued 3,810,000 shares of Series E Convertible Preferred Stock and $40.0
million in notes payable for all of the outstanding stock of Transcription. The
total purchase price was $86.0 million, including acquisition costs of
$250,000.

   Under the terms of the agreement, Numerical acquired specified accounts
receivable of Transcription, consisting of 45% of accounts receivable for
license fees, plus all fees associated with maintenance, support and other
services rendered by Transcription on such accounts. The transaction will be
accounted for as a purchase.

   The allocation of the purchase price is as follows (in thousands):

<TABLE>
   <S>                                                                  <C>
   Net tangible assets................................................. $   243
   In process research and development.................................     300
   Developed technology................................................   7,400
   Customer base.......................................................  14,300
   Covenants not to compete............................................   2,700
   Work force..........................................................   1,500
   Trade name..........................................................     200
   Goodwill............................................................  59,327
                                                                        -------
                                                                        $85,970
                                                                        =======
</TABLE>

   The estimated purchase price was allocated to the identifiable assets
acquired and the liabilities assumed based upon the fair market value on the
acquisition date.The net tangible assets consist primarily of accounts
receivable, property and equipment and other liabilities. Because the in-
process technology has not reached the stage of technological feasibility at
the acquisition date and had no alternative future use, the amount was
immediately charged to operations. The amounts allocated to developed
technology, customer base and trade name are amortized over the estimated
useful life of five years. The amounts allocated to covenants not to compete
and work force are being amortized over the estimated useful lives of two and
four years, respectively. The excess amount of the purchase price over the fair
market value of the identifiable assets acquired is accounted for as goodwill
and is being amortized over its estimated useful life of five years. The
valuation for the intangible assets has been determined using management's
assumptions and the preliminary report from an independent appraiser.

   The accompanying unaudited pro forma combined balance sheet gives effect to
the acquisition of Transcription as if such transaction had occurred on
December 31, 1999, by consolidating the balance sheet of Transcription at
December 31, 1999 with the balance sheet of Numerical at December 31, 1999.

   The accompanying unaudited pro forma combined statement of operations gives
effect to the acquisition of Transcription as if it had occurred on January 1,
1999, by consolidating the results of operations of Transcription for the year
ended December 31, 1999 with the results of operations of Numerical for the
year ended December 31, 1999.

   The unaudited pro forma condensed combined information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the transaction had
been consummated at the dates indicated, nor is it necessarily indicative of
future operating results or the financial position of the combined companies.

                                      F-18
<PAGE>

                          NUMERICAL TECHNOLOGIES, INC.

                   UNAUDITED PRO FORMA COMBINED BALANCE SHEET
                                 (in thousands)

<TABLE>
<CAPTION>
                             Numerical   Transcription      Pro forma
                            ------------ ------------- ----------------------
                            December 31, December 31,
                                1999         1999      Adjustments   Combined
                            ------------ ------------- -----------   --------
<S>                         <C>          <C>           <C>           <C>
ASSETS
Current assets:
  Cash and cash
   equivalents.............   $ 13,486      $  132       $  (250)(a) $  8,236
                                                            (132)(b)
                                                          (5,000)(c)
  Accounts receivable......      1,819       2,424        (1,298)(b)    2,945
  Prepaid and other........        394          31           (31)(b)      394
                              --------      ------       -------     --------
    Total current assets...     15,699       2,587        (6,711)      11,575
Property and equipment,
 net.......................      1,613         211            --        1,824
Intangible assets..........         --          --        85,427 (a)   85,427
Other assets...............        293          42           (42)(b)      293
                              --------      ------       -------     --------
                              $ 17,605      $2,840       $78,674     $ 99,119
                              ========      ======       =======     ========
LIABILITIES AND
 STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable.........   $    613      $   75       $   (75)(b) $    613
  Accrued expenses.........      1,945          72           (72)(b)    1,945
  Deferred revenue.........      2,642       3,410        (2,316)(a)    3,736
  Current portion notes
   payable.................        --          --          8,750 (a)    8,750
                              --------      ------       -------     --------
    Total current
     liabilities...........      5,200       3,557         6,287       15,044
Long term notes payable....        --          --         31,250 (a)   26,250
                                                         (5,000) (c)
                              --------      ------       -------     --------
Total liabilities..........      5,200       3,557       (32,537)      41,294
                              --------      ------       -------     --------
Stockholders' equity:
  Preferred Stock..........          1         --             (1)(h)       --
  Common Stock.............          1          43           (43)(b)        2
                                                               1 (h)
  Additional paid-in
   capital.................     50,100         --         45,720 (a)   95,820
  Receivable from
   stockholders............       (315)        --            --          (315)
  Deferred stock
   compensation............    (21,220)        --                     (21,220)
  Accumulated deficit......    (16,162)       (760)          760 (b)  (16,462)
                                                            (300)(d)
                              --------      ------       -------     --------
    Total stockholders'
     equity................     12,405        (717)       46,137       57,825
                              --------      ------       -------     --------
                              $ 17,605      $2,840       $78,674     $ 99,119
                              ========      ======       =======     ========
</TABLE>

                                      F-19
<PAGE>

                          NUMERICAL TECHNOLOGIES, INC.

              UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                              Numerical  Transcription      Pro forma
                              ---------  ------------- ----------------------
                                For the Year Ended
                                 December 31, 1999     Adjustment    Combined
                              ------------------------ ----------    --------
<S>                           <C>        <C>           <C>           <C>
Revenue.....................  $  5,492      $13,667     $     --     $ 19,159
                              --------      -------     --------     --------
Costs and expenses:
  Cost of revenue...........       307        1,050        1,480 (f)    2,837
  Research and development..     4,816        1,580          863 (f)    7,259
  Sales and marketing.......     4,277          857        3,669 (f)    8,803
  General and
   administrative...........     1,303          920           94 (f)    2,317
  Amortization of deferred
   stock compensation.......     3,990          --           --         3,990
  Amortization of goodwill..       --           --        11,865 (f)   11,865
                              --------      -------     --------     --------
    Total costs and
     expenses...............    14,693        4,407       17,971       37,071
                              --------      -------     --------     --------
Income (loss) from
 operations.................    (9,201)       9,260      (17,971)     (17,912)
Interest income (expense),
 net........................       373           55       (3,200)(e)   (2,772)
                              --------      -------     --------     --------
Income (loss) before
 provision for income
 taxes......................    (8,828)       9,315      (21,171)     (20,684)
Provision for income taxes..       --           120         (120)(g)       --
                              --------      -------     --------     --------
Net income (loss)...........  $(8,828)      $ 9,195     $(21,051)    $(20,684)
                              ========      =======     ========     ========
Net loss per common share,
 basic and diluted, for pro
 forma financial
 statements.................  $  (1.26)                              $  (2.95)(h)
                              ========                               ========
Weighted average common
 shares, basic and diluted,
 for pro forma financial
 statements.................     7,019                                  7,019 (h)
                              ========                               ========
Net loss per common share,
 basic and diluted pro forma
 assuming conversion of all
 outstanding preferred stock
 and warrants:
  Basic and diluted.........                                          $(1.17)
                                                                     ========
  Weighted average shares...                             10,676 (h)    17,695
                                                        ========     ========
</TABLE>

                                      F-20
<PAGE>

                         NUMERICAL TECHNOLOGIES, INC.

               NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
                                  (unaudited)

   The following adjustments were reflected in the unaudited pro forma
combined condensed balance sheet.

(a) To record the acquisition of Transcription assuming the issuance of
    3,810,000 shares of Numerical's Series E valued at $45.7 million and the
    issuance of notes of $40 million in debt.

  Under purchase accounting, the total purchase price will be allocated to
  the acquired assets and liabilities of Transcription based on the relative
  fair values as described in the overview. The amounts and components of the
  purchase price, along with the allocation of the purchase price to assets
  purchased are as follows (in thousands):

<TABLE>
   <S>                                                                  <C>
   Series E Preferred Stock............................................ $45,720
   Notes Payable.......................................................  40,000
   Estimated transaction costs.........................................     250
                                                                        -------
     Gross Purchase Price..............................................  85,970
   In process research and development charge..........................    (300)
                                                                        -------
     Net Purchase price................................................ $85,670
                                                                        =======

   Assets Acquired:
     Accounts Receivable............................................... $ 1,126
     Deferred Revenue..................................................  (1,094)
     Net fixed Assets..................................................     211
                                                                        -------
       Fair value of net tangible assets acquired......................     243
     Developed Technology..............................................   7,400
     Customer Base.....................................................  14,300
     Non-compete agreement.............................................   2,700
     Workforce.........................................................   1,500
     Trademark.........................................................     200
     Goodwill..........................................................  59,327
                                                                        -------
       Net assets acquired............................................. $85,670
                                                                        =======
</TABLE>

(b) To reflect the elimination of certain assets and liabilities of
    Transcription that were not purchased or assumed by Numerical.

(c) To record principal payment of $5.0 million upon issuance of the notes
    payable. The balance of the notes payable of $35 million is expected to be
    paid upon the consummation of the IPO.

(d) To record a charge for in-process research and development.

   The following adjustments have been reflected in the unaudited pro forma
combined condensed statement of operations:

(e) To record interest expense on notes payable at the stated interest rate of
    8.0% per annum on the principal of $40 million, assuming no initial or
    quarterly principal payments.

                                     F-21
<PAGE>

                          NUMERICAL TECHNOLOGIES, INC.

         NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION--(Continued)
                                  (Unaudited)


(f) To record the amortization of identifiable intangible assets and goodwill
    related to the acquisition of Transcription as if the transaction occurred
    on January 1, 1999 as follows:

<TABLE>
<CAPTION>
                                                          Estimated
                                                           Useful      Annual
                                                   Value    Life    Amortization
                                                  ------- --------- ------------
   <S>                                            <C>     <C>       <C>
   Developed Technology.......................... $ 7,400  5 years    $ 1,480
   Customer Base.................................  14,300  5 years      2,860
   Non-compete agreement.........................   2,700  2 years      1,350
   Workforce.....................................   1,500  4 years        375
   Tradename.....................................     200  5 years         40
   Goodwill......................................  59,327  5 years     11,866
                                                                      -------
                                                                      $17,971
                                                                      =======
</TABLE>

(g) To reflect the pro forma combined net loss position resulting in no tax
    provision on a combined basis.

(h) To reflect the shares of Series E convertible preferred stock issued in
    conjunction with the acquisition of Transcription on an "as if converted"
    basis. Antidilutive securities totaling 3,723,000, including options and
    warrants were excluded from the pro forma net loss per share.

<TABLE>
<CAPTION>
                                                                Pro Forma
                                                            -------------------
                                                                        As-If
                                                            Combined  Converted
                                                            --------  ---------
<S>                                                         <C>       <C>
Combined Pro Forma Net Loss...............................  $(24,218) $(24,218)
                                                            ========  ========
Weighted Average Common Shares, basic and diluted.........     7,019     7,019
As if conversion of Series A, B, C and D preferred stock..       --      6,866
As if conversion of Series E preferred stock..............       --      3,810
                                                            --------  --------
                                                               7,019    17,215
                                                            ========  ========
Pro forma net loss per share, basic and diluted...........  $  (3.24) $  (1.32)
                                                            ========  ========
</TABLE>

                                      F-22
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
 Shareholders of
Transcription Enterprises Limited

   In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of Transcription
Enterprises Limited at December 31, 1998 and 1999, and the results of its
operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

/s/ PRICEWATERHOUSECOOPERS LLP

San Jose, California
January 21, 2000

                                      F-23
<PAGE>

                       TRANSCRIPTION ENTERPRISES LIMITED

                                 BALANCE SHEETS
                       (in thousands, except share data)

<TABLE>
<CAPTION>
                             December 31,
                             -------------
                              1998   1999
                             ------ ------
ASSETS
<S>                          <C>    <C>
Current assets:
  Cash and cash
   equivalents.............. $1,497 $  132
  Accounts receivable.......  2,147  2,424
  Prepaid and other.........     90     31
                             ------ ------
    Total current assets....  3,734  2,587
Property and equipment,
 net........................    197    211
Other assets................      3     42
                             ------ ------
                             $3,934 $2,840
                             ====== ======
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY
(DEFICIT)
<S>                          <C>    <C>
Current liabilities:
  Accounts payable.......... $   23 $   75
  Accrued expenses..........    273     72
  Deferred revenue..........  2,584  3,410
                             ------ ------
    Total current
     liabilities............  2,880  3,557
                             ------ ------
Shareholders' equity:
Common stock, no par value:
  Authorized: 10,000 shares;
   Issued and outstanding:
   798 shares...............     43     43
  Retained earnings
   (deficit)................  1,011   (760)
                             ------ ------
    Total shareholders'
     equity (deficit).......  1,054   (717)
                             ------ ------
                             $3,934 $2,840
                             ====== ======
</TABLE>


   The accompanying notes are an integral part of these financial statements.

                                      F-24
<PAGE>

                       TRANSCRIPTION ENTERPRISES LIMITED

                            STATEMENTS OF OPERATIONS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                            For the Years Ended
                                                               December 31,
                                                            -------------------
                                                              1998      1999
                                                            --------- ---------
<S>                                                         <C>       <C>
Revenue:
  License.................................................. $   7,162 $   5,708
  Service..................................................     7,396     7,959
                                                            --------- ---------
    Total revenue..........................................    14,558    13,667
                                                            --------- ---------
Costs and expenses:
  Cost of revenue..........................................       789     1,050
  Research and development.................................     1,704     1,580
  Sales and marketing......................................       779       857
  General and administrative...............................       885       920
                                                            --------- ---------
    Total costs and expenses...............................     4,157     4,407
                                                            --------- ---------
Income from operations.....................................    10,401     9,260
Interest income............................................        78        55
                                                            --------- ---------
Income before provision for income taxes...................    10,479     9,315
Provision for income taxes.................................       118       120
                                                            --------- ---------
Net income................................................. $  10,361 $   9,195
                                                            ========= =========
</TABLE>


   The accompanying notes are an integral part of these financial statements.

                                      F-25
<PAGE>

                       TRANSCRIPTION ENTERPRISES LIMITED

                  STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
                                 (in thousands)

<TABLE>
<CAPTION>
                                             Common Stock  Retained
                                             ------------- Earnings
                                             Shares Amount (Deficit)   Total
                                             ------ ------ ---------  --------
<S>                                          <C>    <C>    <C>        <C>
Balance, December 31, 1997..................  798    $43   $  1,376   $  1,419

  Net income................................   --     --     10,361     10,361
  Distributions to shareholders.............   --     --    (10,726)   (10,726)
                                              ---    ---   --------   --------

Balance, December 31, 1998..................  798     43      1,011      1,054

  Net income................................   --     --      9,195      9,195
  Distributions to shareholders.............   --     --    (10,966)   (10,966)
                                              ---    ---   --------   --------

Balance, December 31, 1999..................  798    $43   $   (760)  $   (717)
                                              ===    ===   ========   ========
</TABLE>



   The accompanying notes are an integral part of these financial statements.

                                      F-26
<PAGE>

                       TRANSCRIPTION ENTERPRISES LIMITED

                            STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                             For the Years
                                                                 Ended
                                                             December 31,
                                                           ------------------
                                                             1998      1999
                                                           --------  --------
<S>                                                        <C>       <C>
Cash flows from operating activities:
Net income................................................ $ 10,361  $  9,195
Adjustments to reconcile net income to net cash used in
 operating activities:
  Depreciation............................................       91       129
  Changes in assets and liabilities:
    Accounts receivable...................................       72      (277)
    Prepaid and other.....................................      (38)       59
    Other assets..........................................       (1)      (39)
    Accounts payable......................................        8        52
    Accrued expenses......................................      (40)     (201)
    Deferred revenue......................................      511       826
                                                           --------  --------
      Net cash provided by operating activities...........   10,964     9,744
                                                           --------  --------
Cash flows from investing activities:
Purchases of property and equipment.......................     (152)     (143)
                                                           --------  --------
      Net cash used in investing activities...............     (152)     (143)
                                                           --------  --------
Cash flows from financing activities:
Distrubutions to shareholders.............................  (10,726)  (10,966)
                                                           --------  --------
      Net cash used in financing activities...............  (10,726)  (10,966)
                                                           --------  --------
Net increase (decrease) in cash and cash equivalents......       86    (1,365)
Cash and cash equivalents at beginning of year............    1,411     1,497
                                                           --------  --------
Cash and cash equivalents at end of year.................. $  1,497  $    132
                                                           ========  ========
</TABLE>



   The accompanying notes are an integral part of these financial statements.


                                      F-27
<PAGE>

                       TRANSCRIPTION ENTERPRISES LIMITED

                         NOTES TO FINANCIAL STATEMENTS

NOTE 1--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 Nature of business

   Transcription Enterprises Limited (the "Company") was incorporated in
California in May 1986 as an S Corporation to develop and market integrated
software products and services that provide semiconductor manufacturers with an
interactive graphics system for fracturing and verifying photomask pattern
data.

 Certain risks and concentrations

   At December 31, 1998 and 1999, substantially all of the Company's cash and
cash equivalents were invested with four major financial institutions.

   The Company markets and sells its products and services to end users and
original equipment manufacturers primarily in North America, Europe and Japan.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The
Company had accounts receivable from one customer representing 10% and one
customer representing 27% of accounts receivable at December 31, 1998 and 1999,
respectively.

   In 1998 and 1999, the Company had one customer who accounted for 12%, and
15% of sales, respectively.

   The Company operates in one industry segment. The following is a summary of
the Company's revenue by geographic operations. Revenues are attributed to the
countries in which the products and services are delivered:

<TABLE>
<CAPTION>
                                       U.S.  Japan  Pac Rim Europe Other  Total
                                      ------ ------ ------- ------ ----- -------
                                                    (in thousands)
   <S>                                <C>    <C>    <C>     <C>    <C>   <C>
   1998.............................. $6,846 $2,814 $2,383  $2,131 $384  $14,558
   1999..............................  6,400  3,101  1,654   2,005  507   13,667
</TABLE>

   The Company had no material long-lived assets outside of the United States.

 Financial instruments

   The carrying amount of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses approximate fair value due to their short maturities.

 Cash and cash equivalents

   The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase and money market funds to be cash
equivalents.

 Property and equipment

   Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated on a straight-line basis over their
estimated useful lives of 3 years.

                                      F-28
<PAGE>

                       TRANSCRIPTION ENTERPRISES LIMITED

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


 Research and development costs

   Costs related to research, design and development of products are charged to
research and development expenses as incurred. Software development costs are
capitalized beginning when a product's technological feasibility has been
established and ending when a product is available for general release to
customers. The Company has not capitalized any software development costs to
date, as such costs have not been significant.

 Use of estimates

   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

 Revenue recognition

   The Company recognizes revenues in accordance with the provisions of
Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition", as
amended by SOP 98-4 and 98-9. The Company's revenues are derived from licenses
of its software and technology and from services the Company provides to its
customers. Revenues are recognized for the various contract elements based upon
vendor-specific objective evidence ("VSOE") of fair value of each element. If
VSOE of fair value exists only for undelivered elements, the Company recognizes
fees assigned to the delivered element(s) as the difference between the total
arrangement fee and the VSOE of the undelivered element.

   License revenues are recognized when persuasive evidence of an agreement
exists, the software and technology has been delivered, no significant post-
delivery obligations remain, the license fee is fixed or determinable and
collection of the fee is probable.

   Services revenues consist of maintenance fees. Maintenance agreements are
typically priced based on a percentage of the product license fee and have a
one-year term, renewable annually. Services provided to customers under
maintenance agreements include technical product support and unspecified
product upgrades. Deferred revenues from advanced payments for maintenance
agreements are recognized ratably over the term of the contract, which is
typically one year.

 Comprehensive income

   The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. There was no difference between the
Company's net income and its total comprehensive income for 1998 and 1999.

 Recent accounting pronouncements

   In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, or SFAS 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS 133 establishes new standards of accounting and reporting for
derivative instruments and hedging activities. SFAS 133 requires that all
derivatives be recognized at fair value in the statement of financial position,
and that the corresponding gains or losses be reported either in the statement
of operations or as a component of comprehensive income, depending on the type
of hedging relationship that exists. SFAS 133 will be effective for fiscal
years beginning after June 15, 2000. The Company does not currently hold
derivative instruments or engage in hedging activities.

                                      F-29
<PAGE>

                       TRANSCRIPTION ENTERPRISES LIMITED

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


NOTE 2--BALANCE SHEET DETAIL

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                 --------------
                                                                  1998    1999
                                                                 ------  ------
                                                                      (in
                                                                  thousands)
   <S>                                                           <C>     <C>
   Property and equipment:
     Computer equipment......................................... $  753  $  895
     Furniture and equipment....................................     14      15
                                                                 ------  ------
                                                                    767     910
     Less accumulated depreciation..............................   (570)   (699)
                                                                 ------  ------
                                                                 $  197  $  211
                                                                 ======  ======
   Accrued expenses:
     Payroll and related expenses............................... $  248  $   65
     Other accrued expenses.....................................     25       7
                                                                 ------  ------
                                                                 $  273  $   72
                                                                 ======  ======
</TABLE>

NOTE 3--COMMITMENTS

 Operating leases

   The Company leases its facility under a noncancelable operating lease, which
expires in January 2001. The Company has the option to renew the lease for five
years. The Company is responsible for maintenance, insurance and taxes.

   Minimum lease payments as of December 31, 1999 for noncancelable operating
leases are as follows:

<TABLE>
<CAPTION>
   Year                                                           Lease Payments
   ----                                                           --------------
   <S>                                                            <C>
   2000..........................................................      $73
   2001..........................................................        6
                                                                       ---
                                                                       $79
                                                                       ===
</TABLE>

   Rent expense was $70,000 and $67,000 for 1999 and 1998, respectively.

NOTE 4--INCOME TAXES

   The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Under those provisions, the Company is not subject
to federal corporate income taxation. Rather, the Company's shareholders
include their respective portions of taxable income in their individual income
tax returns. Therefore, no provision or liability for federal income taxes has
been included in these financial statements.

   The state of California generally conforms to the federal provisions
recognizing S corporations as pass-through entities. However, California
imposes a 1.5% tax at the entity level. The income tax provisions for 1998 and
1999 consist of current state tax expense.

                                      F-30
<PAGE>

                       TRANSCRIPTION ENTERPRISES LIMITED

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


NOTE 5--PROFIT SHARING PLAN

   For the years ended December 31, 1998 and 1999, the company had a
discretionary profit sharing plan under which ten percent of the Company's
profits were redistributed to the employees, a portion of which is invested in
a retirement fund (up to a maximum allowable by the IRS) and the balance is
paid to the employee. The plan was terminated upon the effective date of the
merger described in Note 6.

NOTE 6--SUBSEQUENT EVENT

   On January 1, 2000, the Company was acquired by and became a wholly-owned
subsidiary of Numerical Technologies, Inc. (the Parent). Under the terms of the
acquisition Agreement, each share of the common stock of the Company was
converted to 4.778 shares of Series E Preferred Stock and $50.1575 in principal
amount of a Promissory Note. The maximum consideration to be paid by the
Company pursuant to the Merger is 3,810,000 shares of Series E preferred stock
plus $40.0 million in aggregate principal amount of Notes. The Promissory Notes
are secured by the assets of the Company.

                                      F-31
<PAGE>


[LOGO OF NUMERICAL APPEARS HERE]
<PAGE>

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

   The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in connection
with the sale of common stock being registered. All amounts are estimates,
except the registration fee, the NASD filing fee and the Nasdaq listing fee.

<TABLE>
<CAPTION>
                                                                     Amount To
                                                                      Be Paid
                                                                     ----------
     <S>                                                             <C>
     Registration Fee............................................... $   21,841
     NASD Fee.......................................................      7,500
     Nasdaq Listing Fee.............................................     95,000
     Legal Fees and Expenses........................................    510,000
     Accounting Fees and Expenses...................................    400,000
     Printing and Engraving Expenses................................    275,000
     Blue Sky Fees and Expenses.....................................      8,000
     Transfer Agent Fees............................................     25,000
     Miscellaneous..................................................    257,659
                                                                     ----------
       Total........................................................ $1,600,000
                                                                     ==========
</TABLE>

Item 14. Indemnification of Directors and Officers

   As permitted by Section 145 of the Delaware General Corporation Law, the
registrant's amended and restated certificate of incorporation includes a
provision that eliminates the personal liability of its directors for monetary
damages for breach or alleged breach of their duty of care. In addition, as
permitted by Section 145 of the Delaware General Corporation Law, the bylaws of
the registrant provide that: (1) the registrant is required to indemnify its
directors and executive officers and persons serving in such capacities in
other business enterprises at the registrant's request, to the fullest extent
permitted by Delaware law, including in those circumstances in which
indemnification would otherwise be discretionary; (2) the registrant may, in
its discretion, indemnify employees and agents in those circumstances where
indemnification is not required by law; (3) the registrant is required to
advance expenses, as incurred, to its directors and executive officers in
connection with defending a proceeding, except that it is not required to
advance expenses to a person against whom the registrant brings a claim for
breach of the duty of loyalty, failure to act in good faith, intentional
misconduct, knowing violation of law or deriving an improper personal benefit;
(4) the rights conferred in the bylaws are not exclusive, and the registrant is
authorized to enter into indemnification agreements with its directors,
executive officers and employees; and (5) the registrant may not retroactively
amend the bylaw provisions in a way that is adverse to such directors,
executive officers and employees in these matters.

   The registrant's policy is to enter into indemnification agreements with
each of its directors and executive officers that provide the maximum indemnity
allowed to directors and executive officers by Section 145 of the Delaware
General Corporation Law and the bylaws, as well as certain additional
procedural protections. In addition, such indemnification agreements provide
that the registrant's directors and executive officers will be indemnified to
the fullest possible extent not prohibited by law against all expenses,
including attorney's fees, and settlement amounts paid or incurred by them in
any action or proceeding, including any derivative action by or in the right of
the registrant, on account of their services as directors or executive officers
of the registrant or as directors or officers of any other company or
enterprise when they are serving in such capacities at the request of the
registrant. The registrant will not be obligated pursuant to the
indemnification agreements to indemnify or advance expenses to an indemnified
party with respect to proceedings or claims initiated by the

                                      II-1
<PAGE>

indemnified party and not by way of defense, except with respect to proceedings
specifically authorized by the registrant's board of directors or brought to
enforce a right to indemnification under the indemnification agreement, the
registrant's bylaws or any statute or law. Under the agreements, the registrant
is not obligated to indemnify the indemnified party (1) for any expenses
incurred by the indemnified party with respect to any proceeding instituted by
the indemnified party to enforce or interpret the agreement, if a court of
competent jurisdiction determines that each of the material assertions made by
the indemnified party in such proceeding was not made in good faith or was
frivolous; (2) for any amounts paid in settlement of a proceeding unless the
registrant consents to such settlement; (3) with respect to any proceeding
brought by the registrant against the indemnified party for willful misconduct,
unless a court determines that each of such claims was not made in good faith
or was frivolous; (4) on account of any suit in which judgment is rendered
against the indemnified party for an accounting of profits made from the
purchase or sale by the indemnified party of securities of the registrant
pursuant to the provisions of (S)16(b) of the Securities Exchange Act of 1934,
and related laws; (5) on account of the indemnified party's conduct which is
finally adjudged to have been knowingly fraudulent or deliberately dishonest,
or to constitute willful misconduct or a knowing violation of the law; (6) an
account of any conduct from which the indemnified party derived an improper
personal benefit; (7) on account of conduct the indemnified party believed to
be contrary to the best interests of the registrant or its stockholders; (8) on
account of conduct that constituted a breach of the indemnified party's duty of
loyalty to the registrant or its stockholders; or (9) if a final decision by a
court having jurisdiction in the matter shall determine that such
indemnification is not lawful.

   The indemnification provision in the bylaws and the indemnification
agreements entered into between the registrant and its directors and executive
officers may be sufficiently broad to permit indemnification of the
registrant's officers and directors for liabilities arising under the
Securities Act of 1933.

   Reference is made to the following documents filed as exhibits to this
registration statement regarding relevant indemnification provisions described
above and elsewhere herein:

<TABLE>
<CAPTION>
                                                                       Exhibit
Document                                                               Number
- --------                                                               -------
<S>                                                                    <C>
Form of Underwriting Agreement........................................   1.1
Certificate of Incorporation of the registrant........................   3.1
Form of Amended and Restated Certificate of Incorporation of the
 registrant to be filed upon closing of the offering..................   3.2
Bylaws of registrant..................................................   3.3
Form of Indemnification Agreement entered into by the registrant with
 each of its directors and executive officers.........................  10.1
</TABLE>

Item 15. Recent Sales of Unregistered Securities

   Since January 1, 1997, the registrant has issued and sold the securities
described below.

   (a) From January 1, 1997 to February 15, 2000, the registrant issued and
sold an aggregate of 4,217,465 shares of unregistered common stock to 94
directors, officers, employees, former employees and consultants at prices
ranging from $0.03 to $2.67 per share, for aggregate cash consideration of
approximately $1,964,652, of which approximately $553,000 is subject to
outstanding promissory notes payable to the registrant. These shares were sold
pursuant to the exercise of options granted by the board. As to each director,
officer, employee, former employee and consultant of the registrant who was
issued such securities, the registrant relied upon Rule 701 of the Securities
Act of 1933. Each such person purchased securities of the registrant pursuant
to a written contract between such person and the registrant. In addition, the
registrant met the conditions imposed under Rule 701(b).

                                      II-2
<PAGE>

   (b) On June 27, 1997 and August 26, 1997, the registrant issued and sold (1)
in the aggregate 1,050,000 shares of unregistered Series B preferred stock at a
price per share of $0.67, and (2) an unregistered warrant to purchase 195,000
shares of unregistered Series B preferred stock, with an exercise price per
share of $0.67, to certain investors for an aggregate cash consideration of
$700,000. These shares and warrant were sold pursuant to a Series B preferred
stock and warrant purchase agreement between the registrant and such investors.
The warrant expired, unexercised, on June 27, 1999. The registrant relied upon
Section 4(2) of the Securities Act of 1933 and Regulation D, Rule 506, in
connection with the sale of these securities. The sale of Series B preferred
stock and warrant were made in compliance with all of the terms of Rules 501
and 502 of Regulation D, there were no more than 35 investors, as calculated
pursuant to Rule 501(e) of Regulation D, and each investor who was not an
accredited investor represented to the registrant that it had such knowledge
and experience in financial and business matters that it was capable of
evaluating the merits and risks of the investment.

   (c) On June 5, 1998 and August 4, 1998, the registrant issued and sold (1)
in the aggregate 2,445,089 shares of unregistered Series C preferred stock at a
price per share of $3.26, and (2) unregistered warrants to purchase 150,000
shares of unregistered Series C preferred stock, with an exercise price per
share of $3.26, to certain investors for aggregate cash consideration of
approximately $7,970,998. The shares and warrants were sold pursuant to a
Series C preferred stock and warrant purchase agreement between the registrant
and such investors. The warrants may be exercised in whole or in part at any
time prior to the completion of this offering, at which time they expire. The
warrants may be exercised for cash or pursuant to a net exercise provision
contained therein. The registrant relied upon Section 4(2) of the Securities
Act of 1933 and Regulation D, Rule 506, in connection with the sale of these
securities. The sale of Series C preferred stock and warrants were made in
compliance with all of the terms of Rules 501 and 502 of Regulation D, there
were no more than 35 investors, as calculated pursuant to Rule 501(e) of
Regulation D, and each investor who was not an accredited investor represented
to the registrant that it had such knowledge and experience in financial and
business matters that it was capable of evaluating the merits and risks of the
investment.

   (d) On June 24, 1999 and August 31, 1999, the registrant sold in the
aggregate 2,357,906 shares of unregistered Series D preferred stock at a price
per share of $5.89 to certain investors for aggregate cash consideration of
approximately $13,880,230. The shares were sold pursuant to a Series D
preferred stock purchase agreement between the registrant and such investors.
The registrant relied upon Section 4(2) of the Securities Act of 1933 and
Regulation D, Rule 506, in connection with the sale of these shares. The sale
of Series D preferred stock was made in compliance with all of the terms of
Rules 501 and 502 of Regulation D, there were no more than 35 investors, as
calculated pursuant to Rule 501(e) of Regulation D, and each investor who was
not an accredited investor represented to the registrant that it had such
knowledge and experience in financial and business matters that it was capable
of evaluating the merits and risks of the investment.

   (e) On January 1, 2000, the registrant issued and sold to the shareholders
of Transcription Enterprises Limited (1) 3,809,994 shares of unregistered
Series E preferred stock valued at $10.67 per share, and (2) unregistered
promissory notes in the aggregate principal amount of $40,000,000, in exchange
for all outstanding stock of Transcription Enterprises Limited. These
securities were issued pursuant to an agreement and plan of reorganization. The
registrant relied upon Section 3(a)(11) of the Securities Act of 1933 and Rule
147 in connection with the sale and issuance of these securities.

   (f) In February 2000, the registrant issued and sold an aggregate of
1,549,999 shares of unregistered common stock to Kevin MacLean, Y.C. (Buno)
Pati, Roger Sturgeon and Yao-Ting Wang at a price per share of $2.67 for
aggregate cash consideration of approximately $4,133,332, of which
approximately $3,533,332 is subject to outstanding promissory notes payable to
the registrant. These shares were sold pursuant to the exercise of stock
options granted by the board of directors. The registrant relied upon Section
4(2) of the Securities Act of 1933 in connection with the issuance of these
securities.

   Appropriate legends were affixed to the share certificates issued in the
transactions described above. All recipients had adequate access, through their
relationships with the registrant, to information about the registrant.

                                      II-3
<PAGE>

Item 16. Exhibits and Financial Statement Schedules

   (a) Exhibits

<TABLE>
 <C>   <S>
  1.1  Form of Underwriting Agreement.
  2.1  Agreement and Plan of Reorganization, dated as of December 21, 1999,
       between the registrant, Transcription Enterprises Limited, Transcription
       Enterprises, Inc., Kevin MacLean and Roger Sturgeon.*
  2.2  Agreement and Plan of Merger between the registrant and Numerical
       Technologies, Inc., a Delaware corporation.**
  3.1  Certificate of Incorporation of registrant.*
  3.2  Form of Amended and Restated Certificate of Incorporation of registrant
       to be filed upon the closing of the offering made under the registration
       statement.*
  3.3  Bylaws of registrant.*
  4.1  Form of registrant's common stock certificate.
  4.2  1999 Second Amended and Restated Shareholders Rights Agreement, dated
       January 1, 2000, between the registrant and the parties named therein,
       as amended on January 14, 2000.*
  5.1  Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.*
 10.1  Form of Indemnification Agreement entered into by registrant with each
       of its directors and executive officers.*
 10.2  2000 Stock Plan and related agreements.
 10.3  1997 Stock Plan and related agreements.
 10.4  2000 Employee Stock Purchase Plan and related agreements.*
 10.7  Lease Agreement, dated June 15, 1999, by and between the registrant and
       CarrAmerica Realty Corporation.*
 10.6  Lease Agreement, dated May 10, 1990, between Transcription Enterprises,
       Inc. and Los Gatos Business Park.*
 10.7  Employment Agreement, dated January 1, 2000, by and between
       Transcription Enterprises, Inc. and Roger Sturgeon.*
 10.8  Employment Agreement, dated January 1, 2000, by and between
       Transcription Enterprises, Inc. and Kevin MacLean.*
 10.9  Non-Competition Agreement, dated January 1, 2000, by and between
       Numerical Technologies, Inc., Transcription Enterprises, Inc.,
       Transcription Enterprises Limited and Roger Sturgeon.*
 10.10 Non-Competition Agreement, dated January 1, 2000, by and between
       Numerical Technologies, Inc., Transcription Enterprises, Inc.,
       Transcription Enterprises Limited and Kevin MacLean.*
 10.11 Stock Option Agreement--Early Exercise, dated November 2, 1999, by and
       between the registrant and William Davidow.*
 10.12 Stock Option Agreement--Early Exercise, dated May 26, 1999, by and
       between the registrant and Richard Mora.*
 10.13 Stock Option Agreement--Early Exercise, dated December 27, 1999, by and
       between the registrant and Richard Mora.*
 10.14 Stock Option Agreement--Early Exercise, dated March 31, 1999, by and
       between the registrant and Atul Sharan.*
 10.15 Stock Option Agreement--Early Exercise, dated December 27, 1999, by and
       between the registrant and Atul Sharan.*
 10.16 Stock Option Agreement--Early Exercise, dated February 3, 1999, by and
       between the registrant and Lars Herlitz.*
 10.17 Stock Option Agreement--Early Exercise, dated December 27, 1999, by and
       between the registrant and Lars Herlitz.*
 10.18 Stock Option Agreement--Early Exercise, dated November 17, 1999, by and
       between the registrant and John Traub.*
 10.19 Stock Option Agreement--Early Exercise, dated December 27, 1999, by and
       between the registrant and John Traub.*
 10.20 Stock Option Agreement--Early Exercise, dated July 15, 1998, between the
       registrant and Harvey Jones.*
</TABLE>

                                      II-4
<PAGE>

<TABLE>
 <C>   <S>
 10.21 License Agreement, dated as of October 1, 1999, between registrant and
       Cadence Design Systems, Inc.*+
 10.22 OEM Software License Agreement, dated December 31, 1997, between
       registrant and Zygo Corporation (fka Technical Instrument Company).*+
 10.23 Addendum to OEM Software License Agreement, dated March 25, 1999,
       between registrant and Zygo Corporation.*+
 10.24 Software Production and Distribution Agreement, dated January 9, 1998,
       between registrant and KLA-Tencor Corporation.*+
 10.25 License Agreement, dated December 23, 1999, between registrant and Seiko
       Instruments, Inc.*+
 10.26 Development and Distribution Agreement, dated October 1, 1991, between
       Transcription Enterprises Limited and KLA Instruments Corporation.*+
 10.27 Addendum Number One to Development and Distribution Agreement, dated
       December 27, 1999, between Transcription Enterprises Limited and KLA
       Instruments Corporation.*+
 10.28 Stock Option Agreement--Early Exercise, dated February 1, 2000, by and
       between the registrant and Roger Sturgeon.
 10.29 Stock Option Agreement--Early Exercise, dated February 1, 2000, by and
       between the registrant and Kevin MacLean.
 10.30 Stock Option Agreement--Early Exercise, dated February 10, 2000, by and
       between the registrant and Y.C. (Buno) Pati.
 10.31 Stock Option Agreement--Early Exercise, dated February 10, 2000, by and
       between the registrant and Yao-Ting Wang.
 10.32 Stock Option Agreement--Early Exercise, dated October 23, 1998, by and
       between the registrant and Atul Sharan.
 10.33 Amendment No. 1 to Lars Herlitz' Stock Option Agreements dated February
       3, 1999 and December 27, 1999, dated as of January 24, 2000, by and
       between the registrant and Lars Herlitz.
 10.34 Amendment No. 1 to Atul Sharan's Stock Option Agreements dated October
       23, 1998, March 31, 1999 and December 27, 1999, dated as of January 24,
       2000, by and between the registrant and Atul Sharan.
 10.35 Amendment No. 1 to John Traub's Stock Option Agreements dated November
       17, 1999 and December 27, 1999, dated as of January 24, 2000, by and
       between the registrant and John Traub.
 10.36 Stock Option Agreement--Early Exercise, dated February 10, 2000, by and
       between the registrant and Naren Gupta.
 10.37 Software Development and License Agreement, dated as of March 10, 2000,
       by and between registrant and Cadence Design Systems, Inc.+
 21.1  Subsidiaries of the registrant.*
 23.1  Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
       (included in Exhibit 5.1).*
 23.2  Consent of PricewaterhouseCoopers LLP, Independent Accountants.
 24.1  Power of Attorney (See page II-6).*
 27.1  Financial Data Schedule.*
</TABLE>
- --------
*  Previously filed.
** To be filed by amendment.
+  Confidential treatment has been requested with respect to certain portions
   of this exhibit. Omitted portions have been filed separately with the
   Securities and Exchange Commission.

   (b) Financial Statement Schedules

   Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

Item 17. Undertakings

   The undersigned hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

                                      II-5
<PAGE>

   Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions referenced in Item 14 of this
registration statement or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities, other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding, is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.

   The undersigned registrant hereby undertakes that:

   (1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.

   (2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

                                      II-6
<PAGE>

                                   SIGNATURES

   Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Jose, State of California, on this 17th day of March 2000.

                                          NUMERICAL TECHNOLOGIES, INC.

                                                   /s/ Yagyensh C. Pati
                                          By: _________________________________
                                                      Yagyensh C. Pati
                                               President and Chief Executive
                                                          Officer

   Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
              Signatures                         Title                   Date
              ----------                         -----                   ----

<S>                                    <C>                        <C>
        /s/ Yagyensh C. Pati           President and Chief          March 17, 2000
______________________________________  Executive Officer and
           Yagyensh C. Pati             Director (Principal
                                        Executive Officer)

          /s/ Richard Mora             Chief Financial Officer      March 17, 2000
______________________________________  and Vice President,
             Richard Mora               Operations (Principal
                                        Financial and Accounting
                                        Officer)

                  *                    Chairman of the Board        March 17, 2000
______________________________________
           William Davidow

                  *                    Director and Chief           March 17, 2000
______________________________________  Technology Officer
            Yao-Ting Wang

                  *                    Director                     March 17, 2000
______________________________________
            Thomas Kailath
                  *                    Director                     March 17, 2000
______________________________________
            Narendra Gupta

                  *                    Director                     March 17, 2000
______________________________________
            Abbas El Gamal

                  *                    Director                     March 17, 2000
______________________________________
             Harvey Jones

                  *                    Director and Fellow           March 17,2000
______________________________________
            Roger Sturgeon

           /s/ Richard Mora                                         March 17, 2000
*By: _________________________________
             Richard Mora
           attorney-in-fact
</TABLE>

                                      II-7
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
 <C>   <S>
  1.1  Form of Underwriting Agreement.

  2.1  Agreement and Plan of Reorganization, dated as of December 21, 1999,
       between the registrant, Transcription Enterprises Limited, Transcription
       Enterprises, Inc., Kevin MacLean and Roger Sturgeon.*

  2.2  Agreement and Plan of Merger between the registrant and Numerical
       Technologies, Inc., a Delaware corporation.**

  3.1  Certificate of Incorporation of registrant.*

  3.2  Form of Amended and Restated Certificate of Incorporation of registrant
       to be filed upon the closing of the offering made under the registration
       statement.*

  3.3  Bylaws of registrant.*

  4.1  Form of registrant's common stock certificate.

  4.2  1999 Second Amended and Restated Shareholders Rights Agreement, dated
       January 1, 2000, between the registrant and the parties named therein,
       as amended on January 14, 2000.*

  5.1  Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.*

 10.1  Form of Indemnification Agreement entered into by registrant with each
       of its directors and executive officers.*

 10.2  2000 Stock Plan and related agreements.

 10.3  1997 Stock Plan and related agreements.

 10.4  2000 Employee Stock Purchase Plan and related agreements.*

 10.5  Lease Agreement, dated June 15, 1999, by and between the registrant and
       CarrAmerica Realty Corporation.*
 10.6  Lease Agreement, dated May 10, 1999, between Transcription Enterprises,
       Inc. and Los Gatos Business Park.*

 10.7  Employment Agreement, dated January 1, 2000, by and between
       Transcription Enterprises, Inc. and Roger Sturgeon.*

 10.8  Employment Agreement, dated January 1, 2000, by and between
       Transcription Enterprises, Inc. and Kevin MacLean.*

 10.9  Non-Competition Agreement, dated January 1, 2000, by and between
       Numerical Technologies, Inc., Transcription Enterprises, Inc.,
       Transcription Enterprises Limited and Roger Sturgeon.*

 10.10 Non-Competition Agreement, dated January 1, 2000, by and between
       Numerical Technologies, Inc., Transcription Enterprises, Inc.,
       Transcription Enterprises Limited and Kevin MacLean.*

 10.11 Stock Option Agreement--Early Exercise, dated November 2, 1999, by and
       between the registrant and William Davidow.*

 10.12 Stock Option Agreement--Early Exercise, dated May 26, 1999, by and
       between the registrant and Richard Mora.*

 10.13 Stock Option Agreement--Early Exercise, dated December 27, 1999, by and
       between the registrant and Richard Mora.*

 10.14 Stock Option Agreement--Early Exercise, dated March 31, 1999, by and
       between the registrant and Atul Sharan.*

 10.15 Stock Option Agreement--Early Exercise, dated December 27, 1999, by and
       between the registrant and Atul Sharan.*

 10.16 Stock Option Agreement--Early Exercise, dated February 3, 1999, by and
       between the registrant and Lars Herlitz.*
</TABLE>
<PAGE>



<TABLE>
 <C>   <S>
 10.17 Stock Option Agreement--Early Exercise, dated December 27, 1999, by and
       between the registrant and Lars Herlitz.*

 10.18 Stock Option Agreement--Early Exercise, dated November 17, 1999, by and
       between the registrant and John Traub.*

 10.19 Stock Option Agreement--Early Exercise, dated December 27, 1999, by and
       between the registrant and John Traub.*

 10.20 Stock Option Agreement--Early Exercise, dated July 15, 1998, between the
       registrant and Harvey Jones.*

 10.21 License Agreement, dated as of October 1, 1999, between registrant and
       Cadence Design Systems, Inc.*+

 10.22 OEM Software License Agreement, dated December 31, 1997, between
       registrant and Zygo Corporation (fka Technical Instrument Company).*+

 10.23 Addendum to OEM Software License Agreement, dated March 25, 1999,
       between registrant and Zygo Corporation.*+
 10.24 Software Production and Distribution Agreement, dated January 9, 1998,
       between registrant and KLA-Tencor Corporation.*+

 10.25 License Agreement, dated December 23, 1999, between registrant and Seiko
       Instruments, Inc.*+

 10.26 Development and Distribution Agreement, dated October 1, 1991, between
       Transcription Enterprises Limited and KLA Instruments Corporation.*+

 10.27 Addendum Number One to Development and Distribution Agreement, dated
       December 27, 1999, between Transcription Enterprises Limited and KLA
       Instruments Corporation.*+

 10.28 Stock Option Agreement--Early Exercise, dated February 1, 2000, by and
       between the registrant and Roger Sturgeon.

 10.29 Stock Option Agreement--Early Exercise, dated February 1, 2000, by and
       between the registrant and Kevin MacLean.

 10.30 Stock Option Agreement--Early Exercise, dated February 10, 2000, by and
       between the registrant and Y.C. (Buno) Pati.

 10.31 Stock Option Agreement--Early Exercise, dated February 10, 2000, by and
       between the registrant and Yao-Ting Wang.

 10.32 Stock Option Agreement--Early Exercise, dated October 23, 1998, by and
       between the registrant and Atul Sharan.

 10.33 Amendment No. 1 to Lars Herlitz' Stock Option Agreements dated February
       3, 1999 and December 27, 1999, dated as of January 24, 2000, by and
       between the registrant and Lars Herlitz.

 10.34 Amendment No. 1 to Atul Sharan's Stock Option Agreements dated October
       23, 1998, March 31, 1999 and December 27, 1999, dated as of January 24,
       2000, by and between the registrant and Atul Sharan.

 10.35 Amendment No. 1 to John Traub's Stock Option Agreements dated November
       17, 1999 and December 27, 1999, dated as of January 24, 2000, by and
       between the registrant and John Traub.

 10.36 Stock Option Agreement--Early Exercise, dated February 10, 2000, by and
       between the registrant and Naren Gupta.

 10.37 Software Development and License Agreement, dated as of March 10, 2000,
       by and between registrant and Cadence Design Systems, Inc.+

 21.1  Subsidiaries of the registrant.*

 23.1  Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
       (included in Exhibit 5.1).*

 23.2  Consent of PricewaterhouseCoopers LLP, Independent Accountants.
</TABLE>
<PAGE>



<TABLE>
<S>   <C>
24.1  Power of Attorney (See page II-6).*

27.1  Financial Data Schedule.*
</TABLE>
- --------
*  Previously filed.
** To be filed by amendment.
+  Confidential treatment has been requested with respect to certain portions
   of this exhibit. Omitted portions have been filed separately with the
   Securities and Exchange Commission.

<PAGE>

                                                                     Exhibit 1.1

                                   5,534,000

                          NUMERICAL TECHNOLOGIES, INC.

                                  Common Stock


                             UNDERWRITING AGREEMENT
                             ----------------------


                                                               February __, 2000


CREDIT SUISSE FIRST BOSTON CORPORATION
CHASE SECURITIES, INC.
SG COWEN SECURITIES CORPORATION,
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629

Dear Sirs:

     1.  Introductory. Numerical Technologies, Inc., a Delaware corporation
("Company"), proposes to issue and sell 5,534,000 shares ("Firm Securities") of
its Common Stock, par value $0.001 per share, ("Securities") and also proposes
to issue and sell to the Underwriters, at the option of the Underwriters, an
aggregate of not more than 830,000 additional shares ("Optional Securities") of
its Securities as set forth below. The Firm Securities and the Optional
Securities are herein collectively called the "Offered Securities."  As part of
the offering contemplated by this Agreement, Credit Suisse First Boston
Corporation ("CSFBC") (the "Designated Underwriter") has agreed to reserve out
of the Firm Securities purchased by it under this Agreement, up to * shares, for
sale to the Company's directors, officers, employees and other parties
associated with the Company (collectively, "Participants"), as set forth in the
Prospectus (as defined herein) under the heading "Underwriters" (the "Directed
Share Program"). The Firm Securities to be sold by the Designated Underwriter
pursuant to the Directed Share Program (the "Directed Shares") will be sold by
the Designated Underwriter pursuant to this Agreement at the public offering
price. Any Directed Shares not subscribed for by the end of the business day on
which this Agreement is executed will be offered to the public by the
Underwriters as set forth in the Prospectus. The Company hereby agrees with the
several Underwriters named in Schedule A hereto ("Underwriters") as follows:

     2.  Representations and Warranties of the Company.  The Company represents
and warrants to, and agrees with, the several Underwriters that:

          (a)  A registration statement (No. 333-95695) relating to the Offered
     Securities, including a form of prospectus, has been filed with the
     Securities and Exchange Commission ("Commission") and either (i) has been
     declared effective under the Securities Act of 1933 ("Act")

                                       1
<PAGE>

     and is not proposed to be amended or (ii) is proposed to be amended by
     amendment or post-effective amendment. If such registration statement
     ("initial registration statement") has been declared effective, either (i)
     an additional registration statement ("additional registration statement")
     relating to the Offered Securities may have been filed with the Commission
     pursuant to Rule 462(b) ("Rule 462(b)") under the Act and, if so filed, has
     become effective upon filing pursuant to such Rule and the Offered
     Securities all have been duly registered under the Act pursuant to the
     initial registration statement and, if applicable, the additional
     registration statement or (ii) such an additional registration statement is
     proposed to be filed with the Commission pursuant to Rule 462(b) and will
     become effective upon filing pursuant to such Rule and upon such filing the
     Offered Securities will all have been duly registered under the Act
     pursuant to the initial registration statement and such additional
     registration statement. If the Company does not propose to amend the
     initial registration statement or if an additional registration statement
     has been filed and the Company does not propose to amend it, and if any
     post-effective amendment to either such registration statement has been
     filed with the Commission prior to the execution and delivery of this
     Agreement, the most recent amendment (if any) to each such registration
     statement has been declared effective by the Commission or has become
     effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act
     or, in the case of the additional registration statement, Rule 462(b). For
     purposes of this Agreement, "Effective Time" with respect to the initial
     registration statement or, if filed prior to the execution and delivery of
     this Agreement, the additional registration statement means (i) if the
     Company has advised the Representatives that it does not propose to amend
     such registration statement, the date and time as of which such
     registration statement, or the most recent post-effective amendment thereto
     (if any) filed prior to the execution and delivery of this Agreement, was
     declared effective by the Commission or has become effective upon filing
     pursuant to Rule 462(c), or (ii) if the Company has advised the
     Representatives that it proposes to file an amendment or post-effective
     amendment to such registration statement, the date and time as of which
     such registration statement, as amended by such amendment or post-effective
     amendment, as the case may be, is declared effective by the Commission. If
     an additional registration statement has not been filed prior to the
     execution and delivery of this Agreement but the Company has advised the
     Representatives that it proposes to file one, "Effective Time" with respect
     to such additional registration statement means the date and time as of
     which such registration statement is filed and becomes effective pursuant
     to Rule 462(b). "Effective Date" with respect to the initial registration
     statement or the additional registration statement (if any) means the date
     of the Effective Time thereof. The initial registration statement, as
     amended at its Effective Time, including all information contained in the
     additional registration statement (if any) and deemed to be a part of the
     initial registration statement as of the Effective Time of the additional
     registration statement pursuant to the General Instructions of the Form on
     which it is filed and including all information (if any) deemed to be a
     part of the initial registration statement as of its Effective Time
     pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is hereinafter
     referred to as the "Initial Registration Statement." The additional
     registration statement, as amended at its Effective Time, including the
     contents of the initial registration statement incorporated by reference
     therein and including all information (if any) deemed to be a part of the
     additional registration statement as of its Effective Time pursuant to Rule
     430A(b), is hereinafter referred to as the "Additional Registration
     Statement." The Initial Registration Statement and the Additional
     Registration Statement are herein referred to collectively as the
     "Registration Statements" and individually as a "Registration Statement."
     The form of prospectus relating to the Offered Securities, as first filed
     with the Commission pursuant to and in accordance with Rule 424(b) ("Rule
     424(b)") under the Act or (if no

                                       2
<PAGE>

     such filing is required) as included in a Registration Statement, is
     hereinafter referred to as the "Prospectus." No document has been or will
     be prepared or distributed in reliance on Rule 434 under the Act.

     (b)  If the Effective Time of the Initial Registration Statement is prior
     to the execution and delivery of this Agreement: (i) on the Effective Date
     of the Initial Registration Statement, the Initial Registration Statement
     conformed in all respects to the requirements of the Act and the rules and
     regulations of the Commission ("Rules and Regulations") and did not include
     any untrue statement of a material fact or omit to state any material fact
     required to be stated therein or necessary to make the statements therein
     not misleading, (ii) on the Effective Date of the Additional Registration
     Statement (if any), each Registration Statement conformed, or will conform,
     in all respects to the requirements of the Act and the Rules and
     Regulations and did not include, or will not include, any untrue statement
     of a material fact and did not omit, or will not omit, to state any
     material fact required to be stated therein or necessary to make the
     statements therein not misleading and (iii) on the date of this Agreement,
     the Initial Registration Statement and, if the Effective Time of the
     Additional Registration Statement is prior to the execution and delivery of
     this Agreement, the Additional Registration Statement each conforms, and at
     the time of filing of the Prospectus pursuant to Rule 424(b) or (if no such
     filing is required) at the Effective Date of the Additional Registration
     Statement in which the Prospectus is included, each Registration Statement
     and the Prospectus will conform, in all respects to the requirements of the
     Act and the Rules and Regulations, and neither of such documents includes,
     or will include, any untrue statement of a material fact or omits, or will
     omit, to state any material fact required to be stated therein or necessary
     to make the statements therein not misleading. If the Effective Time of the
     Initial Registration Statement is subsequent to the execution and delivery
     of this Agreement: on the Effective Date of the Initial Registration
     Statement, the Initial Registration Statement and the Prospectus will
     conform in all respects to the requirements of the Act and the Rules and
     Regulations, neither of such documents will include any untrue statement of
     a material fact or will omit to state any material fact required to be
     stated therein or necessary to make the statements therein not misleading,
     and no Additional Registration Statement has been or will be filed. The two
     preceding sentences do not apply to statements in or omissions from a
     Registration Statement or the Prospectus based upon written information
     furnished to the Company by any Underwriter through the Representatives
     specifically for use therein, it being understood and agreed that the only
     such information is that described as such in Section 7(b) hereof.

          (c)  The Company has been duly incorporated and is an existing
     corporation in good standing under the laws of the State of Delaware, with
     power and authority (corporate and other) to own its properties and conduct
     its business as described in the Prospectus; the Company is duly qualified
     to do business as a foreign corporation in good standing in all other
     jurisdictions in which its ownership or lease of property or the conduct of
     its business requires such qualification; and the Company has no
     subsidiaries.

          (d)  The Offered Securities and all other outstanding shares of
     capital stock of the Company have been duly authorized; all outstanding
     shares of capital stock of the Company are, and, when the Offered
     Securities have been delivered and paid for in accordance with this
     Agreement on each Closing Date (as defined below), such Offered Securities
     will have been, validly issued, fully paid and nonassessable and will
     conform to the description thereof contained in the

                                       3
<PAGE>

     Prospectus; none of the outstanding shares of capital stock of the Company
     was issued in violation of the preemptive or other similar rights of any
     securityholder of the Company; and the stockholders of the Company have no
     preemptive rights with respect to the Securities.

          (e)  There are no contracts, agreements or understandings between the
     Company and any person that would give rise to a valid claim against the
     Company or any Underwriter for a brokerage commission, finder's fee or
     other like payment in connection with this offering.

          (f)   There are no contracts, agreements or understandings between
     the Company and any person granting such person the right to require the
     Company to file a registration statement under the Act with respect to any
     securities of the Company owned or to be owned by such person or to require
     the Company to include such securities in the securities registered
     pursuant to a Registration Statement or in any securities being registered
     pursuant to any other registration statement filed by the Company under the
     Act.

          (g)  The Offered Securities have been approved for listing on the
     Nasdaq Stock Market's National Market subject to notice of issuance.

          (h)  No consent, approval, authorization, or order of, or filing
     with, any governmental agency or body or any court is required for the
     consummation of the transactions contemplated by this Agreement in
     connection with the issuance and sale of the Offered Securities by the
     Company, except such as have been obtained and made under the Act and such
     as may be required under state securities laws.

          (i)  The execution, delivery and performance of this Agreement, and
     the issuance and sale of the Offered Securities will not result in a breach
     or violation of any of the terms and provisions of, or constitute a default
     under, any statute, any rule, regulation or order of any governmental
     agency or body or any court, domestic or foreign, having jurisdiction over
     the Company or any of its properties, or any agreement or instrument to
     which the Company is a party or by which the Company is bound or to which
     any of the properties of the Company is subject, or the charter or by-laws
     of the Company, and the Company has full power and authority to authorize,
     issue and sell the Offered Securities as contemplated by this Agreement.

          (j)  This Agreement has been duly authorized, executed and delivered
     by the Company.

          (k)  Except as disclosed in the Prospectus, the Company has good and
     marketable title to all real properties and all other properties and assets
     owned by it, in each case free from liens, encumbrances and defects that
     would materially affect the value thereof or materially interfere with the
     use made or to be made thereof by them; and except as disclosed in the
     Prospectus, the Company holds any leased real or personal property under
     valid and enforceable leases with no exceptions that would materially
     interfere with the use made or to be made thereof by the Company.

          (l)  The Company possesses adequate certificates, authorities or
     permits issued by appropriate governmental agencies or bodies necessary to
     conduct the business now operated by it and has not received any notice of
     proceedings relating to the revocation or modification of any

                                       4
<PAGE>

     such certificate, authority or permit that, if determined adversely to the
     Company or any of its subsidiaries, would individually or in the aggregate
     have a material adverse effect on the condition (financial or other),
     business, properties or results of operations of the Company and its
     subsidiaries taken as a whole ("Material Adverse Effect").

          (m)  No labor dispute with the employees of the Company exists or, to
     the knowledge of the Company, is imminent that might have a Material
     Adverse Effect.

          (n)  The Company owns, possesses or can acquire on reasonable terms,
     adequate trademarks, trade names and other rights to inventions, know-how,
     patents, copyrights, confidential information and other intellectual
     property (collectively, "intellectual property rights") necessary to
     conduct the business now operated by it, or presently employed by it, and
     has not received any notice of infringement of or conflict with asserted
     rights of others with respect to any intellectual property rights that, if
     determined adversely to the Company, would individually or in the aggregate
     have a Material Adverse Effect.

          (o)  The Company (i) is not in violation of any statute, any rule,
     regulation, decision or order of any governmental agency or body or any
     court, domestic or foreign, relating to the use, disposal or release of
     hazardous or toxic substances or relating to the protection or restoration
     of the environment or human exposure to hazardous or toxic substances
     (collectively, "environmental laws"), (ii) does not own or operate any real
     property contaminated with any substance that is subject to any
     environmental laws, (iii) is not liable for any off-site disposal or
     contamination pursuant to any environmental laws, (iv) and is not subject
     to any claim relating to any environmental laws, which violation,
     contamination, liability or claim would individually or in the aggregate
     have a Material Adverse Effect; and the Company is not aware of any pending
     investigation which might lead to such a claim.

          (p)  There are no pending actions, suits or proceedings against or
     affecting the Company, or any of its properties that, if determined
     adversely to the Company, would individually or in the aggregate have a
     Material Adverse Effect, or would materially and adversely affect the
     ability of the Company to perform its obligations under this Agreement, or
     which are otherwise material in the context of the sale of the Offered
     Securities; and no such actions, suits or proceedings are threatened or, to
     the Company's knowledge, contemplated.

          (q)  The Company has filed all foreign, federal, state and local tax
     returns that are required to be filed or has requested extensions thereof
     (except in any case in which the failure so to file would not have a
     Material Adverse Effect) and has paid all taxes required to be paid by it
     and any other assessment, fine or penalty levied against it, to the extent
     that any of the foregoing is due and payable, except for any such
     assessment, fine or penalty that is currently being contested in good faith
     or as described in or contemplated by the Prospectus.

          (r)  The Company is insured by insurers of recognized financial
     responsibility against such losses and risks and in such amounts as are
     prudent and customary in the businesses in which it is engaged; the Company
     has not been refused any insurance coverage sought or applied for; and the
     Company has no reason to believe that it will not be able to renew its
     existing insurance coverage as and when such coverage expires or to obtain
     similar coverage from similar insurers as

                                       5
<PAGE>

     may be necessary to continue its business at a cost that would not result
     in a material adverse change, in the condition (financial or otherwise),
     business, properties or results of operations of the Company.

          (s)  The Company is not in violation of its charter or bylaws or in
     default in the performance or observance of any obligation, agreement,
     covenant or condition contained in any contract, indenture, mortgage, deed
     of trust, loan or credit agreement, note, lease or other agreement or
     instrument to which the Company is a party or by which it may be bound, or
     to which any of the property or assets of the Company is subject.

          (t)  The financial statements included in each Registration Statement
     and the Prospectus present fairly the financial position of the Company as
     of the dates shown and their results of operations and cash flows for the
     periods shown, and such financial statements have been prepared in
     conformity with the generally accepted accounting principles in the United
     States applied on a consistent basis and the schedules included in each
     Registration Statement present fairly the information required to be stated
     therein; and the assumptions used in preparing the pro forma financial
     statements included in each Registration Statement and the Prospectus
     provide a reasonable basis for presenting the significant effects directly
     attributable to the transactions or events described therein, the related
     pro forma adjustments give appropriate effect to those assumptions, and the
     pro forma columns therein reflect the proper application of those
     adjustments to the corresponding historical financial statement amounts;
     and Pricewaterhouse Coopers LLP who certified the financial statements and
     supporting schedules included in the Registration Statement are independent
     public accountants as required by the 1933 Act and the 1933 Act
     Regulations.

          (u)  The Company maintains a system of internal accounting controls
     sufficient to provide the Company with reasonable assurance that (i)
     transactions are executed in accordance with management's general or
     specific authorizations; (ii) transactions are recorded as necessary to
     permit preparation of financial statements in conformity with GAAP and to
     maintain asset accountability; (iii) access to assets is permitted only in
     accordance with management's general or specific authorization; and (iv)
     the recorded accountability for assets is compared with the existing assets
     at reasonable intervals and appropriate action is taken with respect to any
     differences.

          (v)  Except as disclosed in the Prospectus, since the date of the
     latest audited financial statements included in the Prospectus there has
     been no material adverse change, nor any development or event involving a
     prospective material adverse change, in the condition (financial or other),
     business, properties or results of operations of the Company, and, except
     as disclosed in or contemplated by the Prospectus, there has been no
     dividend or distribution of any kind declared, paid or made by the Company
     on any class of its capital stock.

          (w)  The Company is not and, after giving effect to the offering and
     sale of the Offered Securities and the application of the proceeds thereof
     as described in the Prospectus, will not be an "investment company" as
     defined in the Investment Company Act of 1940.

          (x)  Furthermore, the Company represents and warrants to the
     Underwriters that (i) the Registration Statement, the Prospectus and any
     preliminary prospectus comply, and any further amendments or supplements
     thereto will comply, with any applicable laws or regulations of foreign

                                       6
<PAGE>

     jurisdictions in which the Prospectus or any preliminary prospectus, as
     amended or supplemented, if applicable, are distributed in connection with
     the Directed Share Program, and that (ii) no authorization, approval,
     consent, license, order, registration or qualification of or with any
     government, governmental instrumentality or court, other than such as have
     been obtained, is necessary under the securities law and regulations of
     foreign jurisdictions in which the Directed Shares are offered outside the
     United States.

          (y)  The Company has not offered, or caused the Underwriters to
     offer, any Offered Securities to any person pursuant to the Directed Share
     Program with the specific intent to unlawfully influence (i) a customer or
     supplier of the Company to alter the customer's or supplier's level or type
     of business with the Company or (ii) a trade journalist or publication to
     write or publish favorable information about the Company or its products.

     3.     Purchase, Sale and Delivery of Offered Securities.  On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to purchase
from the Company, at a purchase price of $* per share, the respective Firm
Securities set forth opposite the names of the Underwriters in Schedule A
hereto.

          (a)  The Company will deliver the Firm Securities to the
     Representatives for the accounts of the Underwriters, against payment of
     the purchase price in Federal (same day) funds by official bank check or
     checks or wire transfer to an account at a bank acceptable to Credit Suisse
     First Boston Corporation ("CSFBC") drawn to the order of the Company at the
     office of Wilson Sonsini Goodrich & Rosati Professional Corporation,
     ("WSGR") 650 Page Mill Road, Palo Alto, California, 94304 at 6:30 A.M.,
     local time, on *, 2000, or at such other time not later than seven full
     business days thereafter as CSFBC and the Company determine, such time
     being herein referred to as the "First Closing Date." For purposes of Rule
     15c6-1 under the Securities Exchange Act of 1934, the First Closing Date
     (if later than the otherwise applicable settlement date) shall be the
     settlement date for payment of funds and delivery of securities for all the
     Offered Securities sold pursuant to the offering. The certificates for the
     Firm Securities so to be delivered will be in definitive form, in such
     denominations and registered in such names as CSFBC requests and will be
     made available for checking and packaging at the above office of WSGR at
     least 24 hours prior to the First Closing Date.

          (b)  In addition, upon written notice from CSFBC given to the Company
     from time to time not more than 30 days subsequent to the date of the
     Prospectus, the Underwriters may purchase all or less than all of the
     Optional Securities at the purchase price per Security to be paid for the
     Firm Securities. The Company agrees to sell to the Underwriters the
     Optional Securities specified in such notice and the Underwriters agree,
     severally and not jointly, to purchase such Optional Securities. Such
     Optional Securities shall be purchased for the account of each Underwriter
     in the same proportion as the Firm Securities set forth opposite such
     Underwriter's name bears to the total number of shares of Firm Securities
     (subject to adjustment by CSFBC to eliminate fractions) and may be
     purchased by the Underwriters only for the purpose of covering over-
     allotments made in connection with the sale of the Firm Securities. No
     Optional Securities shall be sold or delivered unless the Firm Securities
     previously have been, or simultaneously are, sold and delivered. The right
     to purchase the Optional Securities or any portion thereof may be exercised
     from time to time and to

                                       7
<PAGE>

     the extent not previously exercised may be surrendered and terminated at
     any time upon notice by CSFBC to the Company.

          (c)  Each time for the delivery of and payment for the Optional
     Securities, being herein referred to as an "Optional Closing Date", which
     may be the First Closing Date (the First Closing Date and each Optional
     Closing Date, if any, being sometimes referred to as a "Closing Date"),
     shall be determined by CSFBC but shall be not later than five full business
     days after written notice of election to purchase Optional Securities is
     given. The Company will deliver the Optional Securities being purchased on
     each Optional Closing Date to the Representatives for the accounts of the
     several Underwriters against payment of the purchase price therefor in
     Federal (same day) funds by official bank check or checks or wire transfer
     to an account at a bank acceptable to CSFBC drawn to the order of the
     Company, at the above office of WSGR. The certificates for the Optional
     Securities being purchased on each Optional Closing Date will be in
     definitive form, in such denominations and registered in such names as
     CSFBC requests upon reasonable notice prior to such Optional Closing Date
     and will be made available for checking and packaging at the above office
     of WSGR at a reasonable time in advance of such Optional Closing Date.

     4.   Offering by Underwriters.  It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.

     5.   Certain Agreements of the Company. The Company agrees with the several
Underwriters that:

          (a)  If the Effective Time of the Initial Registration Statement is
     prior to the execution and delivery of this Agreement, the Company will
     file the Prospectus with the Commission pursuant to and in accordance with
     subparagraph (1) (or, if applicable and if consented to by CSFBC,
     subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the
     second business day following the execution and delivery of this Agreement
     or (B) the fifteenth business day after the Effective Date of the Initial
     Registration Statement. The Company will advise CSFBC promptly of any such
     filing pursuant to Rule 424(b). If the Effective Time of the Initial
     Registration Statement is prior to the execution and delivery of this
     Agreement and an additional registration statement is necessary to register
     a portion of the Offered Securities under the Act but the Effective Time
     thereof has not occurred as of such execution and delivery, the Company
     will file the additional registration statement or, if filed, will file a
     post-effective amendment thereto with the Commission pursuant to and in
     accordance with Rule 462(b) on or prior to 10:00 P.M., New York time, on
     the date of this Agreement or, if earlier, on or prior to the time the
     Prospectus is printed and distributed to any Underwriter, or will make such
     filing at such later date as shall have been consented to by CSFBC.

          (b)  The Company will advise CSFBC promptly of any proposal to amend
     or supplement the initial or any additional registration statement as filed
     or the related prospectus or the Initial Registration Statement, the
     Additional Registration Statement (if any) or the Prospectus and will not
     effect such amendment or supplementation without CSFBC's consent; and the
     Company will also advise CSFBC promptly of the effectiveness of each
     Registration Statement (if its Effective Time is subsequent to the
     execution and delivery of this Agreement) and of any amendment or

                                       8
<PAGE>

     supplementation of a Registration Statement or the Prospectus and of the
     institution by the Commission of any stop order proceedings in respect of a
     Registration Statement and will use its best efforts to prevent the
     issuance of any such stop order and to obtain as soon as possible its
     lifting, if issued.

          (c)  If, at any time when a prospectus relating to the Offered
     Securities is required to be delivered under the Act in connection with
     sales by any Underwriter or dealer, any event occurs as a result of which
     the Prospectus as then amended or supplemented would include an untrue
     statement of a material fact or omit to state any material fact necessary
     to make the statements therein, in the light of the circumstances under
     which they were made, not misleading, or if it is necessary at any time to
     amend the Prospectus to comply with the Act, the Company will promptly
     notify CSFBC of such event and will promptly prepare and file with the
     Commission, at its own expense, an amendment or supplement which will
     correct such statement or omission or an amendment which will effect such
     compliance. Neither CSFBC's consent to, nor the Underwriters' delivery of,
     any such amendment or supplement shall constitute a waiver of any of the
     conditions set forth in Section 6.

          (d)  As soon as practicable, but not later than the Availability Date
     (as defined below), the Company will make generally available to its
     securityholders an earnings statement covering a period of at least 12
     months beginning after the Effective Date of the Initial Registration
     Statement (or, if later, the Effective Date of the Additional Registration
     Statement) which will satisfy the provisions of Section 11(a) of the Act.
     For the purpose of the preceding sentence, "Availability Date" means the
     45th day after the end of the fourth fiscal quarter following the fiscal
     quarter that includes such Effective Date, except that, if such fourth
     fiscal quarter is the last quarter of the Company's fiscal year,
     "Availability Date" means the 90th day after the end of such fourth fiscal
     quarter.

          (e)  The Company will furnish to the Representatives copies of each
     Registration Statement (four of which will be signed and will include all
     exhibits), each related preliminary prospectus, and, so long as a
     prospectus relating to the Offered Securities is required to be delivered
     under the Act in connection with sales by any Underwriter or dealer, the
     Prospectus and all amendments and supplements to such documents, in each
     case in such quantities as CSFBC requests. The Prospectus shall be so
     furnished on or prior to 3:00 P.M., New York time, on the business day
     following the later of the execution and delivery of this Agreement or the
     Effective Time of the Initial Registration Statement. All other documents
     shall be so furnished as soon as available. The Company will pay the
     expenses of printing and distributing to the Underwriters all such
     documents.

          (f)  The Company will arrange for the qualification of the Offered
     Securities for sale under the laws of such jurisdictions as CSFBC
     designates and will continue such qualifications in effect so long as
     required for the distribution.

          (g)  During the period of 10 years hereafter, the Company will
     furnish to the Representatives and, upon request, to each of the other
     Underwriters, as soon as practicable after the end of each fiscal year, a
     copy of its annual report to stockholders for such year; and the Company
     will furnish to the Representatives (i) as soon as available, a copy of
     each report and any definitive

                                       9
<PAGE>

     proxy statement of the Company filed with the Commission under the
     Securities Exchange Act of 1934 or mailed to stockholders, and (ii) from
     time to time, such other information concerning the Company as CSFBC may
     reasonably request.

          (h)  The Company will pay all expenses incident to the performance of
     its obligations under this Agreement, for any filing fees and other
     expenses (including fees and disbursements of counsel) incurred in
     connection with qualification of the Offered Securities for sale under the
     laws of such jurisdictions as CSFBC designates and the printing of
     memoranda relating thereto for the filing fee incident to, and the
     reasonable fees and disbursements of counsel to the Underwriters in
     connection with, the review by the National Association of Securities
     Dealers, Inc. of the Offered Securities, for any travel expenses of the
     Company's officers and employees and any other expenses of the Company in
     connection with attending or hosting meetings with prospective purchasers
     of the Offered Securities and for expenses incurred in distributing
     preliminary prospectuses and the Prospectus (including any amendments and
     supplements thereto) to the Underwriters.

          (i)  For a period of 180 days after the date of the initial public
     offering of the Offered Securities, the Company will not offer, sell,
     contract to sell, pledge or otherwise dispose of, directly or indirectly,
     or file with the Commission a registration statement under the Act relating
     to, any additional shares of its Securities or securities convertible into
     or exchangeable or exercisable for any shares of its Securities, or
     publicly disclose the intention to make any such offer, sale, pledge,
     disposition or filing, without the prior written consent of CSFBC except
     issuances of Securities pursuant to the conversion or exchange of
     convertible or exchangeable securities or the exercise of warrants or
     options, in each case outstanding on the date hereof, grants of employee
     stock options pursuant to the terms of a plan in effect on the date hereof,
     or issuances of Securities pursuant to the exercise of such options.

          (j)  In connection with the Directed Share Program, the Company will
     ensure that the Directed Shares will be restricted to the extent required
     by the National Association of Securities Dealers, Inc. (the "NASD") or the
     NASD rules from sale, transfer, assignment, pledge or hypothecation for a
     period of three months following the date of the effectiveness of the
     Registration Statement. The Designated Underwriter will notify the Company
     as to which Participants will need to be so restricted. The Company will
     direct the transfer agent to place stop transfer restrictions upon such
     securities for such period of time.

          (k)  The Company will pay all fees and disbursements of counsel
     incurred by the Underwriters in connection with the Directed Shares Program
     and stamp duties, similar taxes or duties or other taxes, if any, incurred
     by the Underwriters in connection with the Directed Share Program.
     Furthermore, the Company covenants with the Underwriters that the Company
     will comply with all applicable securities and other applicable laws, rules
     and regulations in each foreign jurisdiction in which the Directed Shares
     are offered in connection with the Directed Share Program.

     6.     Conditions of the Obligations of the Underwriters. The obligations
of the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the statements
of

                                       10
<PAGE>

Company officers made pursuant to the provisions hereof, to the performance by
the Company of its obligations hereunder and to the following additional
conditions precedent:

          (a)  The Representatives shall have received a letter, dated the date
     of delivery thereof (which, if the Effective Time of the Initial
     Registration Statement is prior to the execution and delivery of this
     Agreement, shall be on or prior to the date of this Agreement or, if the
     Effective Time of the Initial Registration Statement is subsequent to the
     execution and delivery of this Agreement, shall be prior to the filing of
     the amendment or post-effective amendment to the registration statement to
     be filed shortly prior to such Effective Time), of Pricewaterhouse Coopers
     LLP that they are independent public accountants within the meaning of the
     Act and the applicable published Rules and Regulations thereunder and
     stating to the effect that:

               (i)  in their opinion the financial statements and schedules
          examined by them and included in the Registration Statements comply as
          to form in all material respects with the applicable accounting
          requirements of the Act and the related published Rules and
          Regulations;

               (ii)  they have performed the procedures specified by the
          American Institute of Certified Public Accountants for a review of
          interim financial information as described in Statement of Auditing
          Standards No. 71, Interim Financial Information, on the unaudited
          financial statements included in the Registration Statements;

               (iii)  on the basis of the review referred to in clause (ii)
          above, a reading of the latest available interim financial statements
          of the Company, inquiries of officials of the Company who have
          responsibility for financial and accounting matters and other
          specified procedures, nothing came to their attention that caused them
          to believe that:

                    (A)  the unaudited financial statements included in the
               Registration Statements do not comply as to form in all material
               respects with the applicable accounting requirements of the Act
               and the related published Rules and Regulations or any material
               modifications should be made to such unaudited financial
               statements for them to be in conformity with generally accepted
               accounting principles;

                    (B)  at the date of the latest available balance sheet
               read by such accountants, or at a subsequent specified date not
               more than three business days prior to the date of such letter,
               there was any change in the capital stock or any increase in
               short-term indebtedness or long-term debt of the Company or, at
               the date of the latest available balance sheet read by such
               accountants, there was any decrease in net assets, as compared
               with amounts shown on the latest balance sheet included in the
               Prospectus; or

                    (C)  for the period from the closing date of the latest
               income statement included in the Prospectus to the closing date
               of the latest available income statement read by such accountants
               there were any decreases, as compared with the corresponding
               period of the previous year and with the period of

                                       11
<PAGE>

               corresponding length ended the date of the latest income
               statement included in the Prospectus, in net sales or net
               operating income (loss) or in the total or per share amounts of
               net income,

          except in all cases set forth in clauses (B) and (C) above for
          changes, increases or decreases which the Prospectus discloses have
          occurred or may occur or which are described in such letter; and

               (iv) they have compared specified dollar amounts (or percentages
          derived from such dollar amounts) and other financial information
          contained in the Registration Statements (in each case to the extent
          that such dollar amounts, percentages and other financial information
          are derived from the general accounting records of the Company subject
          to the internal controls of the Company's accounting system or are
          derived directly from such records by analysis or computation) with
          the results obtained from inquiries, a reading of such general
          accounting records and other procedures specified in such letter and
          have found such dollar amounts, percentages and other financial
          information to be in agreement with such results, except as otherwise
          specified in such letter.

          For purposes of this subsection 6(a), (i) if the Effective Time of the
          Initial Registration Statement is subsequent to the execution and
          delivery of this Agreement, "Registration Statements" shall mean the
          initial registration statement as proposed to be amended by the
          amendment or post-effective amendment to be filed shortly prior to its
          Effective Time, (ii) if the Effective Time of the Initial Registration
          Statement is prior to the execution and delivery of this Agreement but
          the Effective Time of the Additional Registration is subsequent to
          such execution and delivery, "Registration Statements" shall mean the
          Initial Registration Statement and the additional registration
          statement as proposed to be filed or as proposed to be amended by the
          post-effective amendment to be filed shortly prior to its Effective
          Time, and (iii) "Prospectus" shall mean the prospectus included in the
          Registration Statements.

          (b)  If the Effective Time of the Initial Registration Statement is
     not prior to the execution and delivery of this Agreement, such Effective
     Time shall have occurred not later than 10:00 P.M., New York time, on the
     date of this Agreement or such later date as shall have been consented to
     by CSFBC. If the Effective Time of the Additional Registration Statement
     (if any) is not prior to the execution and delivery of this Agreement, such
     Effective Time shall have occurred not later than 10:00 P.M., New York
     time, on the date of this Agreement or, if earlier, the time the Prospectus
     is printed and distributed to any Underwriter, or shall have occurred at
     such later date as shall have been consented to by CSFBC. If the Effective
     Time of the Initial Registration Statement is prior to the execution and
     delivery of this Agreement, the Prospectus shall have been filed with the
     Commission in accordance with the Rules and Regulations and Section 5(a) of
     this Agreement. Prior to such Closing Date, no stop order suspending the
     effectiveness of a Registration Statement shall have been issued, and no
     proceedings for that purpose shall have been instituted or, to the
     knowledge of the Company or the Representatives, shall be contemplated by
     the Commission.

          (c)  Subsequent to the execution and delivery of this Agreement,
     there shall not have occurred (i) any change, or any development or event
     involving a prospective change, in the

                                       12
<PAGE>

     condition (financial or other), business, properties or results of
     operations of the Company which, in the judgment of a majority in interest
     of the Underwriters including the Representatives, is material and adverse
     and makes it impractical or inadvisable to proceed with completion of the
     public offering or the sale of and payment for the Offered Securities; (ii)
     any material suspension or material limitation of trading in securities
     generally on the New York Stock Exchange, or any setting of minimum prices
     for trading on such exchange, or any suspension of trading of any
     securities of the Company on any exchange or in the over-the-counter
     market; (iii) any banking moratorium declared by U.S. Federal or New York
     authorities; or (iv) any outbreak or escalation of major hostilities in
     which the United States is involved, any declaration of war by Congress or
     any other substantial national or international calamity or emergency if,
     in the judgment of a majority in interest of the Underwriters including the
     Representatives, the effect of any such outbreak, escalation, declaration,
     calamity or emergency makes it impractical or inadvisable to proceed with
     completion of the public offering or the sale of and payment for the
     Offered Securities.

          (d)  The Representatives shall have received an opinion, dated such
     Closing Date, of WSGR, counsel for the Company, to the effect that:

               (i)  The Company has been duly incorporated and is an existing
          corporation in good standing under the laws of the State of Delaware,
          with corporate power and authority to own its properties and conduct
          its business as described in the Prospectus; the Company is duly
          qualified to do business as a foreign corporation in good standing in
          all other jurisdictions in which its ownership or lease of property or
          the conduct of its business requires such qualification;

               (ii) The Offered Securities delivered on such Closing Date and
         all other outstanding shares of the Common Stock of the Company have
         been duly authorized and validly issued, are fully paid and
         nonassessable and conform to the description thereof contained in the
         Prospectus; and the stockholders of the Company have no preemptive
         rights with respect to the Offered Securities;

               (iii)  There are no contracts, agreements or understandings
          known to such counsel between the Company and any person granting such
          person the right to require the Company to file a registration
          statement under the Act with respect to any securities of the Company
          owned or to be owned by such person or to require the Company to
          include such securities in the securities registered pursuant to the
          Registration Statement or in any securities being registered pursuant
          to any other registration statement filed by the Company under the
          Act;

               (iv) The Company is not and, after giving effect to the offering
          and sale of the Offered Securities and the application of the proceeds
          thereof as described in the Prospectus, will not be an "investment
          company" as defined in the Investment Company Act of 1940;

               (v)  No consent, approval, authorization or order of, or filing
          with, any governmental agency or body or any court is required for the
          consummation of the transactions contemplated by this Agreement in
          connection with the issuance or sale of the

                                       13
<PAGE>

          Offered Securities by the Company, except such as have been obtained
          and made under the Act and such as may be required under state
          securities laws;

               (vi) The execution, delivery and performance of this Agreement
          and the issuance and sale of the Offered Securities will not result in
          a breach or violation of any of the terms and provisions of, or
          constitute a default under, any statute, any rule, regulation or order
          of any governmental agency or body or any court having jurisdiction
          over the Company or any of its properties, or any agreement or
          instrument to which the Company is a party or by which the Company is
          bound or to which any of the properties of the Company is subject, or
          the charter or bylaws of the Company, and the Company has full power
          and authority to authorize, issue and sell the Offered Securities as
          contemplated by this Agreement;

               (vii)  To the knowledge of such counsel, there is not pending or
          threatened any action, suit, proceeding, inquiry or investigation, to
          which the Company is a party, or to which the property of the Company
          is subject, before or brought by any court or governmental agency or
          body, domestic or foreign, which might reasonably be expected to
          result in a Material Adverse Effect which is of a character required
          to be disclosed in the Registration Statement or Prospectus by the Act
          or the rules and regulations of the Commission thereunder other than
          those described in the Registration Statement or Prospectus, or which
          might reasonably be expected to materially and adversely affect the
          consummation of the transactions contemplated in the Agreement or the
          performance by the Company of its obligations thereunder;

               (viii)  To the knowledge of such counsel, the Company is not in
          violation of its charter or bylaws;

               (ix) The Initial Registration Statement was declared effective
          under the Act as of the date and time specified in such opinion, the
          Additional Registration Statement (if any) was filed and became
          effective under the Act as of the date and time (if determinable)
          specified in such opinion, the Prospectus either was filed with the
          Commission pursuant to the subparagraph of Rule 424(b) specified in
          such opinion on the date specified therein or was included in the
          Initial Registration Statement or the Additional Registration
          Statement (as the case may be), and, to the best of the knowledge of
          such counsel, no stop order suspending the effectiveness of a
          Registration Statement or any part thereof has been issued and no
          proceedings for that purpose have been instituted or are pending or
          contemplated under the Act, and each Registration Statement and the
          Prospectus, and each amendment or supplement thereto, as of their
          respective effective or issue dates, complied as to form in all
          material respects with the requirements of the Act and the Rules and
          Regulations; such counsel have no reason to believe that any part of a
          Registration Statement or any amendment thereto, as of its effective
          date or as of such Closing Date, contained any untrue statement of a
          material fact or omitted to state any material fact required to be
          stated therein or necessary to make the statements therein not
          misleading or that the Prospectus or any amendment or supplement
          thereto, as of its issue date or as of such Closing Date, contained
          any untrue statement of a material fact or omitted to state any
          material fact necessary in order to make the statements therein, in
          the light of the circumstances under which they were made, not
          misleading; the descriptions in the Registration Statements and
          Prospectus of statutes, legal and governmental

                                       14
<PAGE>

          proceedings and contracts and other documents are accurate and fairly
          present the information required to be shown; and such counsel do not
          know of any legal or governmental proceedings required to be described
          in a Registration Statement or the Prospectus which are not described
          as required or of any contracts or documents of a character required
          to be described in a Registration Statement or the Prospectus or to be
          filed as exhibits to a Registration Statement which are not described
          and filed as required; it being understood that such counsel need
          express no opinion as to the financial statements or other financial
          data contained in the Registration Statements or the Prospectus; and

                (x)  This Agreement has been duly authorized, executed and
          delivered by the Company.

          (e)  The Representatives shall have received from Morrison & Foerster
     LLP, counsel for the Underwriters, such opinion or opinions, dated such
     Closing Date, with respect to the incorporation of the Company, the
     validity of the Offered Securities delivered on such Closing Date, the
     Registration Statements, the Prospectus and other related matters as the
     Representatives may require, and the Company shall have furnished to such
     counsel such documents as they request for the purpose of enabling them to
     pass upon such matters.

          (f)  The Representatives shall have received a certificate, dated
     such Closing Date, of the President or any Vice President and a principal
     financial or accounting officer of the Company in which such officers, to
     the best of their knowledge after reasonable investigation, shall state
     that: the representations and warranties of the Company in this Agreement
     are true and correct; the Company has complied with all agreements and
     satisfied all conditions on its part to be performed or satisfied hereunder
     at or prior to such Closing Date; no stop order suspending the
     effectiveness of any Registration Statement has been issued and no
     proceedings for that purpose have been instituted or are contemplated by
     the Commission; the Additional Registration Statement (if any) satisfying
     the requirements of subparagraphs (1) and (3) of Rule 462(b) was filed
     pursuant to Rule 462(b), including payment of the applicable filing fee in
     accordance with Rule 111(a) or (b) under the Act, prior to the time the
     Prospectus was printed and distributed to any Underwriter; and, subsequent
     to the date of the most recent financial statements in the Prospectus,
     there has been no material adverse change, nor any development or event
     involving a prospective material adverse change, in the condition
     (financial or other), business, properties or results of operations of the
     Company taken as a whole except as set forth in or contemplated by the
     Prospectus or as described in such certificate.

          (g)  The Representatives shall have received a letter, dated such
     Closing Date, of Pricewaterhouse Coopers LLP which meets the requirements
     of subsection (a) of this Section, except that the specified date referred
     to in such subsection will be a date not more than three days prior to such
     Closing Date for the purposes of this subsection.

          (h)  On or prior to the date of this Agreement, the Representatives
     shall have received lock-up letters from each of the executive officers and
     directors of the Company, Mohr, Davidow Ventures V, L.P., MDV
     Entrepreneur's Network Fund II (A), L.P. and MDV Entrepreneur's Network
     Fund II (B), L.P., and all holders of 1% or more of the Company's
     outstanding securities prior to the issuance of the Offered Securities.

                                       15
<PAGE>

The Company will furnish the Representatives with such conformed copies of such
opinions, certificates, letters and documents as the Representatives reasonably
requests.  CSFBC may in its sole discretion waive on behalf of the Underwriters
compliance with any conditions to the obligations of the Underwriters hereunder,
whether in respect of an Optional Closing Date or otherwise.

     7.  Indemnification and Contribution.

          (a)  The Company will indemnify and hold harmless each Underwriter,
     its partners, directors and officers and each person, if any, who controls
     such Underwriter within the meaning of Section 15 of the Act, against any
     losses, claims, damages or liabilities, joint or several, to which such
     Underwriter may become subject, under the Act or otherwise, insofar as such
     losses, claims, damages or liabilities (or actions in respect thereof)
     arise out of or are based upon any untrue statement or alleged untrue
     statement of any material fact contained in any Registration Statement, the
     Prospectus, or any amendment or supplement thereto, or any related
     preliminary prospectus, or arise out of or are based upon the omission or
     alleged omission to state therein a material fact required to be stated
     therein or necessary to make the statements therein not misleading, and
     will reimburse each Underwriter for any legal or other expenses reasonably
     incurred by such Underwriter in connection with investigating or defending
     any such loss, claim, damage, liability or action as such expenses are
     incurred; provided, however, that the Company will not be liable in any
     such case to the extent that any such loss, claim, damage or liability
     arises out of or is based upon an untrue statement or alleged untrue
     statement in or omission or alleged omission from any of such documents in
     reliance upon and in conformity with written information furnished to the
     Company by any Underwriter through the Representatives specifically for use
     therein, it being understood and agreed that the only such information
     furnished by any Underwriter consists of the information described as such
     in subsection (b) below.

     The Company agrees to indemnify and hold harmless the Designated
     Underwriter and each person, if any, who controls the Designated
     Underwriter within the meaning of either Section 15 of the Securities Act
     or Section 20 of the Exchange Act (the "Designated Entities"), from and
     against any and all losses, claims, damages and liabilities (including,
     without limitation, any legal or other expenses reasonably incurred in
     connection with defending or investigating any such action or claim) (i)
     caused by any untrue statement or alleged untrue statement of a material
     fact contained in any material prepared by or with the consent of the
     Company for distribution to Participants in connection with the Directed
     Share Program or caused by any omission or alleged omission to state
     therein a material fact required to be stated therein or necessary to make
     the statements therein not misleading; (ii) caused by the failure of any
     Participant to pay for and accept delivery of Directed Shares that the
     Participant agreed to purchase; or (iii) related to, arising out of, or in
     connection with the Directed Share Program, other than losses, claims,
     damages or liabilities (or expenses relating thereto) that are finally
     judicially determined to have resulted from the bad faith or gross
     negligence of the Designated Entities.

          (b)  Each Underwriter will severally and not jointly indemnify and
     hold harmless the Company, its directors and officers and each person, if
     any who controls the Company within the meaning of Section 15 of the Act,
     against any losses, claims, damages or liabilities to which the Company may
     become subject, under the Act or otherwise, insofar as such losses, claims,
     damages or liabilities (or actions in respect thereof) arise out of or are
     based upon any untrue statement or

                                       16
<PAGE>

     alleged untrue statement of any material fact contained in any Registration
     Statement, the Prospectus, or any amendment or supplement thereto, or any
     related preliminary prospectus, or arise out of or are based upon the
     omission or the alleged omission to state therein a material fact required
     to be stated therein or necessary to make the statements therein not
     misleading, in each case to the extent, but only to the extent, that such
     untrue statement or alleged untrue statement or omission or alleged
     omission was made in reliance upon and in conformity with written
     information furnished to the Company by such Underwriter through the
     Representatives specifically for use therein, and will reimburse any legal
     or other expenses reasonably incurred by the Company in connection with
     investigating or defending any such loss, claim, damage, liability or
     action as such expenses are incurred, it being understood and agreed that
     the only such information furnished by any Underwriter consists of the
     following information in the Prospectus furnished on behalf of each
     Underwriter: the concession and reallowance figures appearing in the fourth
     paragraph under the caption "Underwriting."

          (c)  Promptly after receipt by an indemnified party under this
     Section of notice of the commencement of any action, such indemnified party
     will, if a claim in respect thereof is to be made against the indemnifying
     party under subsection (a) or (b) above, notify the indemnifying party of
     the commencement thereof; but the omission so to notify the indemnifying
     party will not relieve it from any liability which it may have to any
     indemnified party otherwise than under subsection (a) or (b) above. In case
     any such action is brought against any indemnified party and it notifies
     the indemnifying party of the commencement thereof, the indemnifying party
     will be entitled to participate therein and, to the extent that it may
     wish, jointly with any other indemnifying party similarly notified, to
     assume the defense thereof, with counsel satisfactory to such indemnified
     party (who shall not, except with the consent of the indemnified party, be
     counsel to the indemnifying party), and after notice from the indemnifying
     party to such indemnified party of its election so to assume the defense
     thereof, the indemnifying party will not be liable to such indemnified
     party under this Section for any legal or other expenses subsequently
     incurred by such indemnified party in connection with the defense thereof
     other than reasonable costs of investigation.

     Notwithstanding anything contained herein to the contrary, if indemnity may
     be sought pursuant to the last paragraph in Section 7 (a) hereof in respect
     of such action or proceeding, then in addition to such separate firm for
     the indemnified parties, the indemnifying party shall be liable for the
     reasonable fees and expenses of not more than one separate firm (in
     addition to any local counsel) for the Designated Underwriter for the
     defense of any losses, claims, damages and liabilities arising out of the
     Directed Share Program, and all persons, if any, who control the Designated
     Underwriter within the meaning of either Section 15 of the Act or Section
     20 of the Exchange Act. No indemnifying party shall, without the prior
     written consent of the indemnified party, effect any settlement of any
     pending or threatened action in respect of which any indemnified party is
     or could have been a party and indemnity could have been sought hereunder
     by such indemnified party unless such settlement (i) includes an
     unconditional release of such indemnified party from all liability on any
     claims that are the subject matter of such action and (ii) does not include
     a statement as to, or an admission of, fault, culpability or a failure to
     act by or on behalf of an indemnified party.

          (d)  If the indemnification provided for in this Section is
     unavailable or insufficient to hold harmless an indemnified party under
     subsection (a) or (b) above, then each indemnifying

                                       17
<PAGE>

     party shall contribute to the amount paid or payable by such indemnified
     party as a result of the losses, claims, damages or liabilities referred to
     in subsection (a) or (b) above (i) in such proportion as is appropriate to
     reflect the relative benefits received by the Company on the one hand and
     the Underwriters on the other from the offering of the Securities or (ii)
     if the allocation provided by clause (i) above is not permitted by
     applicable law, in such proportion as is appropriate to reflect not only
     the relative benefits referred to in clause (i) above but also the relative
     fault of the Company on the one hand and the Underwriters on the other in
     connection with the statements or omissions which resulted in such losses,
     claims, damages or liabilities as well as any other relevant equitable
     considerations. The relative benefits received by the Company on the one
     hand and the Underwriters on the other shall be deemed to be in the same
     proportion as the total net proceeds from the offering (before deducting
     expenses) received by the Company bear to the total underwriting discounts
     and commissions received by the Underwriters. The relative fault shall be
     determined by reference to, among other things, whether the untrue or
     alleged untrue statement of a material fact or the omission or alleged
     omission to state a material fact relates to information supplied by the
     Company or the Underwriters and the parties' relative intent, knowledge,
     access to information and opportunity to correct or prevent such untrue
     statement or omission. The amount paid by an indemnified party as a result
     of the losses, claims, damages or liabilities referred to in the first
     sentence of this subsection (d) shall be deemed to include any legal or
     other expenses reasonably incurred by such indemnified party in connection
     with investigating or defending any action or claim which is the subject of
     this subsection (d). Notwithstanding the provisions of this subsection (d),
     no Underwriter shall be required to contribute any amount in excess of the
     amount by which the total price at which the Securities underwritten by it
     and distributed to the public were offered to the public exceeds the amount
     of any damages which such Underwriter has otherwise been required to pay by
     reason of such untrue or alleged untrue statement or omission or alleged
     omission. No person guilty of fraudulent misrepresentation (within the
     meaning of Section 11(f) of the Act) shall be entitled to contribution from
     any person who was not guilty of such fraudulent misrepresentation. The
     Underwriters' obligations in this subsection (d) to contribute are several
     in proportion to their respective underwriting obligations and not joint.

          (e)  The obligations of the Company under this Section shall be in
     addition to any liability which the Company may otherwise have and shall
     extend, upon the same terms and conditions, to each person, if any, who
     controls any Underwriter within the meaning of the Act; and the obligations
     of the Underwriters under this Section shall be in addition to any
     liability which the respective Underwriters may otherwise have and shall
     extend, upon the same terms and conditions, to each director of the
     Company, to each officer of the Company who has signed a Registration
     Statement and to each person, if any, who controls the Company within the
     meaning of the Act.

     8.  Default of Underwriters.  If any Underwriter or Underwriters default in
their obligations to purchase Offered Securities hereunder on either the First
or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, CSFBC may
make arrangements satisfactory to the Company for the purchase of such Offered
Securities by other persons, including any of the Underwriters, but if no such
arrangements are made by such Closing Date, the non-defaulting Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Offered Securities that such defaulting Underwriters
agreed but failed to purchase on such Closing Date. If any

                                       18
<PAGE>

Underwriter or Underwriters so default and the aggregate number of shares of
Offered Securities with respect to which such default or defaults occur exceeds
10% of the total number of shares of Offered Securities that the Underwriters
are obligated to purchase on such Closing Date and arrangements satisfactory to
CSFBC and the Company for the purchase of such Offered Securities by other
persons are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company, except as provided in Section 9 (provided that if such default occurs
with respect to Optional Securities after the First Closing Date, this Agreement
will not terminate as to the Firm Securities or any Optional Securities
purchased prior to such termination). As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section. Nothing herein will relieve a defaulting Underwriter from liability for
its default.

     9.  Survival of Certain Representations and Obligations.  The respective
indemnities, agreements, representations, warranties and other statements of the
Company or its officers and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation, or statement as to the results thereof, made by or on behalf
of any Underwriter, the Company or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Offered Securities. If this Agreement is terminated pursuant
to Section 8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company shall remain responsible for the
expenses to be paid or reimbursed by it pursuant to Section 5 and the respective
obligations of the Company and the Underwriters pursuant to Section 7 shall
remain in effect, and if any Offered Securities have been purchased hereunder
the representations and warranties in Section 2 and all obligations under
Section 5 shall also remain in effect. If the purchase of the Offered Securities
by the Underwriters is not consummated for any reason other than solely because
of the termination of this Agreement pursuant to Section 8 or the occurrence of
any event specified in clause (ii), (iii) or (iv) of Section 6(c), the Company
will reimburse the Underwriters for all out-of-pocket expenses (including fees
and disbursements of counsel) reasonably incurred by them in connection with the
offering of the Offered Securities.

     10.  Notices. All communications hereunder will be in writing and, if sent
to the Underwriters, will be mailed, delivered or telegraphed and confirmed to
the Representatives, at c/o Credit Suisse First Boston Corporation, Eleven
Madison Avenue, New York, N.Y. 10010-3629, Attention:  Investment Banking
Department--Transactions Advisory Group, with a copy to Morrison & Foerster LLP,
755 Page Mill Road, Palo Alto, CA 94304, Attention:  Justin L. Bastian or, if
sent to the Company, will be mailed, delivered or telegraphed and confirmed to
it at  Wilson Sonsini Goodrich & Rosati Professional Corporation, 650 Page Mill
Road, Palo Alto, California, 94304; provided, however, that any notice to an
Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed and
confirmed to such Underwriter.

     11.  Successors. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective successors and the officers and
directors and controlling persons referred to in Section 7, and no other person
will have any right or obligation hereunder.

     12.  Representation of Underwriters.  The Representatives will act for the
several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives, jointly or by CSFBC will be binding
upon all the Underwriters.

                                       19
<PAGE>

     13.  Counterparts.  This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.

     14.  Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York, without regard to principles
of conflicts of laws.

     The Company hereby submits to the non-exclusive jurisdiction of the Federal
and state courts in the Borough of Manhattan in The City of New York in any suit
or proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby.

                                       20
<PAGE>

     If the foregoing is in accordance with the Representatives' understanding
of our agreement, kindly sign and return to the Company one of the counterparts
hereof, whereupon it will become a binding agreement between the Company and the
several Underwriters in accordance with its terms.

                         Very truly yours,

                         NUMERICAL TECHNOLOGIES, INC.


                         By: _____________________________________
                             Yagyensh C. Pati
                             President and Chief Executive Officer

The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.


CREDIT SUISSE FIRST BOSTON CORPORATION
CHASE SECURITIES, INC.
SG COWEN SECURITIES CORPORATION



Acting on behalf of themselves and as the  Representatives of the several
Underwriters

By  CREDIT SUISSE FIRST BOSTON CORPORATION



By __________________________________

                                       21
<PAGE>

                                   SCHEDULE A

<TABLE>
<CAPTION>
                                                                                        Number of
                      Underwriter                                                    Firm Securities
                      -----------                                                    ---------------
<S>                                                                           <C>
Credit Suisse First Boston Corporation......................................
Chase Securities, Inc.......................................................
SG Cowen Securities Corporation.............................................
          Total.............................................................
                                                                                     ===============
</TABLE>

                                       22

<PAGE>

<TABLE>
<S>                                                     <C>                                  <C>
                 [SEAL]                                            [LOGO]                             [SEAL]

 THIS CERTIFICATE IS TRANSFERABLE IN THE CITY OF        NUMERICAL TECHNOLOGIES, INC.             CUSIP 67053T 10 1
RIDGEFIELD, N.J. OR THE CITY OF NEW YORK, N.Y.
                                                                                             SEE REVERSE FOR CERTAIN DEFINITIONS
</TABLE>

             INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE

                            [GRAPHIC APPEARS HERE]

FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $0.0001 PAR VALUE PER
                                   SHARE, OF

     _____________________                               _________________
__________________________  NUMERICAL TECHNOLOGIES, INC. _______________________
     _____________________                               _________________

transferable only on the books of the Corporation by the holder hereof in person
or by duly authorized Attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and Registrar.

     WITNESS the facsimile signatures of its duly authorized officers.

Dated:


                                    [SEAL]
        /s/ Yao-Ting Wang                           /s/ Yagyensh C. Pati

       ASSISTANT SECRETARY                 PRESIDENT AND CHIEF EXECUTIVE OFFICER


COUNTERSIGNED AND REGISTERED:
          CHASEMELLON SHAREHOLDER SERVICES, LLC.
                              TRANSFER AGENT AND REGISTRAR


                                                            AUTHORIZED SIGNATURE

<PAGE>

                         NUMERICAL TECHNOLOGIES, INC.

     A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications or restrictions of such preferences and/or rights
as established, from time to time, by the Certificate of Incorporation of the
Corporation and by any certificate of determination, and the number of shares
constituting each class or series and the designations thereof, may be obtained
by any stockholder of the Corporation, upon written request and without charge
from the Secretary of the Corporation at the principal office of the
Corporation.
     KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED
THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE
OF A REPLACEMENT CERTIFICATE.

          The following abbreviations, when used in the inscription on the face
     of this certificate, shall be construed as though they were written out in
     full according to applicable laws or regulations.

<TABLE>
<S>                                                       <C>
     TEN COM -  as tenants in common                      UNIF GIFT MIN ACT -  _______________ Custodian _________________
     TEN ENT -  as tenants by the entireties                                         (Cust)                    (Minor)
     JT TEN  -  as joint tenants with right                                   under Uniform Gifts to Minors
                of survivorship and not as                                    Act _________________________________________
                tenants in common                                                                 (State)
     COM PROP - as community property                     UNIF TRF MIN ACT - _____________ Custodian (until age ___________)
                                                                                (Cust)
                                                                             ______________________ under Uniform Transfers
                                                                                    (Minor)
                                                                             to Minors Act ___________________________________
                                                                                                     (State)
</TABLE>

    Additional abbreviations may also be used though not in the above list.

     For value received, ____________________________hereby sell, assign and
transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER
      IDENTIFYING NUMBER OF ASSIGNEE
- -----------------------------------------------

- -----------------------------------------------

______________________________________________________________________________
   PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE

______________________________________________________________________________

______________________________________________________________________________

________________________________________________________________________ shares
of the common stock represented by the within Certificate, and do hereby
irrevocable constitute and appoint

_____________________________________________________________________ Attorney,
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.

Dated _________,____                      X _________________________________


                                          X _________________________________

Notice: The signature(s) to this assignment must correspond with the name(s)
written upon the face of this Certificate in every particular, without
alteration or enlargement or any change whatsoever.

Signature(s) Guaranteed


By _________________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.


<PAGE>
                                                                  Exhibit 10.2
                         NUMERICAL TECHNOLOGIES, INC.

                                2000 STOCK PLAN


     1.   Purposes of the Plan.  The purposes of this 2000 Stock Plan are:
          --------------------

          .    to attract and retain the best available personnel for positions
               of substantial responsibility,

          .    to provide additional incentive to Employees, Directors and
               Consultants, and

          .    to promote the success of the Company's business.

          Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.

     2.   Definitions.  As used herein, the following definitions shall apply:
          -----------

          (a)  "Administrator" means the Board or any of its Committees as
                -------------
shall be administering the Plan, in accordance with Section 4 of the Plan.

          (b)  "Applicable Laws" means the requirements relating to the
                ---------------
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.

          (c)  "Board" means the Board of Directors of the Company.
                -----

          (d)  "Cause" means (i) any act of personal dishonesty taken by the
                -----
Optionee in connection with his responsibilities as an Employee which is
intended to result in personal enrichment of the Optionee, (ii) the Optionee's
conviction of a felony, (iii) any act by the Optionee that constitutes
misconduct, and (iv) continued violations by the Optionee of the Optionee's
obligations to the Company.

          (e)  "Change of Control" means the occurrence of any of the following
                -----------------
events:

               (i)  Any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) becomes the "beneficial owner" (as defined in Rule
13d-3 of the Exchange Act), directly or indirectly, of securities of the Company
representing fifty percent (50%) or more of the total voting power represented
by the Company's then outstanding voting securities; or
<PAGE>

               (ii)  The consummation of the sale or disposition by the Company
of all or substantially all of the Company's assets; or

               (iii) The consummation of a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity or its parent) at
least seventy percent (70%) of the total voting power represented by the voting
securities of the Company or such surviving entity or its parent outstanding
immediately after such merger or consolidation.

          (f)  "Code" means the Internal Revenue Code of 1986, as amended.
                ----

          (g)  "Committee"  means a committee of Directors appointed by the
                ---------
Board in accordance with Section 4 of the Plan.

          (h)  "Common Stock" means the common stock of the Company.
                ------------

          (i)  "Company" means Numerical Technologies, Inc., a California
                -------
corporation.

          (j)  "Consultant" means any person, including an advisor, engaged by
                ----------
the Company or a Parent or Subsidiary to render services to such entity.

          (k)  "Director" means a member of the Board.
                --------

          (l)  "Disability" means total and permanent disability as defined in
                ----------
Section 22(e)(3) of the Code.

          (m)  "Employee" means any person, including Officers and Directors,
                --------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.

          (n)  "Exchange Act" means the Securities Exchange Act of 1934, as
                ------------
amended.

          (o)  "Fair Market Value" means, as of any date, the value of Common
                -----------------
Stock determined as follows:

                                      -2-
<PAGE>

               (i)   If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;

               (ii)  If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable; or

               (iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.

          (p)  "Incentive Stock Option" means an Option intended to qualify as
                ----------------------
an incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.

          (q)  "Inside Director" means a Director who is an Employee.
                ---------------

          (r)  "IPO Effective Date" means the date upon which the Securities and
                ------------------
Exchange Commission declares the initial public offering of the Company's Common
Stock as effective.

          (s)  "Nonstatutory Stock Option" means an Option not intended to
                -------------------------
qualify as an Incentive Stock Option.

          (t)  "Notice of Grant" means a written or electronic notice evidencing
                ---------------
certain times and conditions of an individual Option or Stock Purchase Right
grant.  The Notice of Grant is part of the Option Agreement.

          (u)  "Officer" means a person who is an officer of the Company
                -------
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.

          (v)  "Option" means a stock option granted pursuant to the Plan.
                ------

          (w)  "Option Agreement" means an agreement between the Company and an
                ----------------
Optionee evidencing the terms and conditions of an individual Option grant.  The
Option Agreement is subject to the terms and conditions of the Plan.

          (x)  "Option Exchange Program" means a program whereby outstanding
                -----------------------
Options are surrendered in exchange for Options with a lower exercise price.

          (y)  "Optioned Stock" means the Common Stock subject to an Option or
                --------------
Stock Purchase Right.

                                      -3-
<PAGE>

          (z)   "Optionee" means the holder of an outstanding Option or Stock
                 --------
Purchase Right granted under the Plan.

          (aa)  "Outside Director" means a Director who is not an Employee.
                 ----------------

          (bb)  "Plan" means this 2000 Stock Option Plan, as amended and
                 ----
restated.

          (cc)  "Restricted Stock" means shares of Common Stock acquired
                 ----------------
pursuant to a grant of Stock Purchase Rights under Section 11 of the Plan.

          (dd)  "Restricted Stock Purchase Agreement" means a written agreement
                 -----------------------------------
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right.  The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.

          (ee)  "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
                 ----------
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.

          (ff)  "Section 16(b)" means Section 16(b) of the Exchange Act.
                 -------------

          (gg)  "Service Provider" means an Employee, Director or Consultant.
                 ----------------

          (hh)  "Share" means a share of the Common Stock, as adjusted in
                 -----
accordance with Section 14 of the Plan.

          (ii)  "Stock Purchase Right" means the right to purchase Common Stock
                 --------------------
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.

          (jj)  "Subsidiary" means a "subsidiary corporation", whether now or
                 ----------
hereafter existing, as defined in Section 424(f) of the Code.

     3.   Stock Subject to the Plan.  Subject to the provisions of Section 14 of
          -------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 2,000,000 Shares, which includes the Shares available for
future issuance under the Numerical Technologies, Inc. 1997 Stock Plan (the
"1997 Stock Plan") on the date the Securities and Exchange Commission declares
the Company's registration statement effective and any Shares returned to the
1997 Stock Plan. The number of Shares reserved for issuance under the Plan shall
increase annually on the first day of the Company's fiscal year beginning in
2001 by an amount of Shares equal to the lesser of (i) 2,000,000 Shares, (ii) 5%
of the outstanding Shares on such date or (iii) an amount determined by the
Board.  The Shares may be authorized, but unissued, or reacquired Common Stock.

          If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan

                                      -4-
<PAGE>

and shall not become available for future distribution under the Plan, except
that if Shares of Restricted Stock are repurchased by the Company at their
original purchase price, such Shares shall become available for future grant
under the Plan.

     4.   Administration of the Plan.
          --------------------------

          (a)  Procedure.
               ---------

               (i)   Multiple Administrative Bodies.  The Plan may be
                     ------------------------------
administered by different Committees with respect to different groups of Service
Providers.

               (ii)  Section 162(m).  To the extent that the Administrator
                     --------------
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.

               (iii) Rule 16b-3.  To the extent desirable to qualify
                     ----------
transactions hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption under
Rule 16b-3.

               (iv)  Other Administration.  Other than as provided above, the
                     --------------------
Plan shall be administered by (A) the Board or (B) a Committee, which committee
shall be constituted to satisfy Applicable Laws.

          (b)  Powers of the Administrator.  Subject to the provisions of the
               ---------------------------
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:

               (i)   to determine the Fair Market Value;

               (ii)  to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;

               (iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;

               (iv)  to approve forms of agreement for use under the Plan;

               (v)   to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the time or times when Options or Stock Purchase Rights may be
exercised (which may be based on performance criteria), any vesting acceleration
or waiver of forfeiture restrictions, and any restriction or limitation
regarding any Option or Stock Purchase Right or the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;

                                      -5-
<PAGE>

               (vi)   to reduce the exercise price of any Option or Stock
Purchase Right to the then current Fair Market Value if the Fair Market Value of
the Common Stock covered by such Option or Stock Purchase Right shall have
declined since the date the Option or Stock Purchase Right was granted;

               (vii)  to institute an Option Exchange Program;

               (viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;

               (ix)   to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;

               (x)    to modify or amend each Option or Stock Purchase Right
(subject to Section 16(c) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;

               (xi)   to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair Market
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined. All elections by an Optionee
to have Shares withheld for this purpose shall be made in such form and under
such conditions as the Administrator may deem necessary or advisable;

               (xii)  to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;

               (xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.

          (c)  Effect of Administrator's Decision. The Administrator's
               ----------------------------------
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.

     5.   Eligibility.  Nonstatutory Stock Options and Stock Purchase Rights
          -----------
may be granted to Service Providers. Incentive Stock Options may be granted only
to Employees.

     6.   Limitations.
          -----------

          (a)  Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which

                                      -6-
<PAGE>

Incentive Stock Options are exercisable for the first time by the Optionee
during any calendar year (under all plans of the Company and any Parent or
Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory
Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall
be taken into account in the order in which they were granted. The Fair Market
Value of the Shares shall be determined as of the time the Option with respect
to such Shares is granted.

          (b)  Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without Cause.

          (c)  The following limitations shall apply to grants of Options:

               (i)    No Service Provider shall be granted, in any fiscal year
of the Company, Options to purchase more than 1,000,000 Shares.

               (ii)   In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional 2,000,000
Shares, which shall not count against the limit, set forth in subsection (i)
above.

               (iii)  The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 14.

               (iv)   If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 14), the cancelled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.

     7.   Term of Plan.  Subject to Section 20 of the Plan, the Plan shall
          ------------
become effective upon its adoption by the Board. It shall continue in effect for
a term of ten (10) years unless terminated earlier under Section 16 of the Plan.

     8.   Term of Option.  The term of each Option shall be stated in the Option
          --------------
Agreement.  In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement.  Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.

                                      -7-
<PAGE>

     9.   Option Exercise Price and Consideration.
          ---------------------------------------

          (a)  Exercise Price.  The per share exercise price for the Shares to
               --------------
be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:

               (i)   In the case of an Incentive Stock Option

                     (A)  granted to an Employee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.

                     (B)  granted to any Employee other than an Employee
described in paragraph (A) immediately above, the per Share exercise price shall
be no less than 100% of the Fair Market Value per Share on the date of grant.

               (ii)  In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator.  In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.

               (iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price of less than 100% of the Fair Market Value per Share
on the date of grant pursuant to a merger or other corporate transaction.

          (b)  Waiting Period and Exercise Dates.  At the time an Option is
               ---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions that must be satisfied before the
Option may be exercised.

          (c)  Form of Consideration.  The Administrator shall determine the
               ---------------------
acceptable form of consideration for exercising an Option, including the method
of payment.  In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant.  Such
consideration may consist entirely of:

               (i)   cash;

               (ii)  check;

               (iii) promissory note;

               (iv)  other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;

                                      -8-
<PAGE>

               (v)    consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;

               (vi)   a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;

               (vii)  any combination of the foregoing methods of payment; or

               (viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.

     10.  Exercise of Option.
          ------------------

          (a)  Procedure for Exercise; Rights as a Shareholder.  Any Option
               -----------------------------------------------
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. Unless the Administrator provides otherwise,
vesting of Options granted hereunder shall be tolled during any unpaid leave of
absence. An Option may not be exercised for a fraction of a Share.

               An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 14 of the Plan.

               Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.

          (b)  Termination of Relationship as a Service Provider.  Subject to
               -------------------------------------------------
Section 14, if an Optionee ceases to be a Service Provider (but not in the event
of an Optionee's change of status from Employee to Consultant (in which case an
Employee's Incentive Stock Option shall automatically convert to a Nonstatutory
Stock Option on the ninety-first (91/st/) day following such change of status)
or from Consultant to Employee), such Optionee may, but only within such period
of time as is specified in the Option Agreement (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise his or her Option to the extent

                                      -9-
<PAGE>

that Optionee was entitled to exercise it at the date of such termination. In
the absence of a specified time in the Option Agreement, the Option shall remain
exercisable for three (3) months following the Optionee's termination. If, on
the date of termination, the Optionee is not vested as to his or her entire
Option, the Shares covered by the unvested portion of the Option shall revert to
the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.

          (c)  Disability of Optionee.  If an Optionee ceases to be a Service
               ----------------------
Provider as a result of the Optionee's Disability, the Optionee may, but only
within twelve (12) months from the date of such termination (and in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise his or her Option to the extent that the Option is
vested on the date of termination. If, on the date of termination, the Optionee
is not vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified herein,
the Option shall terminate, and the Shares covered by such Option shall revert
to the Plan.

          (d)  Death of Optionee.  If an Optionee dies while a Service Provider,
               -----------------
the Option may be exercised at any time within twelve (12) months following the
date of death (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who acquires the right to exercise the Option by bequest or inheritance,
but only to the extent that the Option is vested on the date of death. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or administrator
of the Optionee's estate or, if none, by the person(s) entitled to exercise the
Option under the Optionee's will or the laws of descent or distribution. If the
Option is not so exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.

          (e)  Buyout Provisions.  The Administrator may at any time offer to
               -----------------
buy out for a payment in cash or Shares an Option previously granted based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.

     11.  Stock Purchase Rights.
          ---------------------

          (a)  Rights to Purchase.  Stock Purchase Rights may be issued either
               ------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically, by means of a Notice of Grant, of the
terms, conditions and restrictions related to the offer, including the number of
Shares that the offeree shall be entitled to purchase, the price to be paid, and
the time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.

                                      -10-
<PAGE>

          (b)  Repurchase Option.  Unless the Administrator determines
               -----------------
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.

          (c)  Other Provisions.  The Restricted Stock Purchase Agreement shall
               ----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.

          (d)  Rights as a Shareholder.  Once the Stock Purchase Right is
               -----------------------
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 14
of the Plan.

     12.  Non-Transferability of Options and Stock Purchase Rights.  Unless
          --------------------------------------------------------
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee.  If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.

     13.  Formula Option Grants to Outside Directors. Outside Directors shall be
          ------------------------------------------
granted Options in accordance with the following provisions:

          (a)  All Options granted pursuant to this Section shall be
Nonstatutory Stock Options and, except as otherwise provided herein, shall be
subject to the other terms and conditions of the Plan.

          (b)  Except as provided in subsection (d) below, each person who first
becomes an Outside Director on or after the IPO Effective Date, whether through
election by the stockholders of the Company or appointment by the Board to fill
a vacancy shall be automatically granted an Option to purchase up to 20,000
Shares (the "First Option") on the date he or she first becomes an Outside
Director; provided, however, that an Inside Director who ceases to be an Inside
Director but who remains a Director shall not receive a First Option.

          (c)  Except as provided in subsection (d) below, each Outside Director
shall be automatically granted an Option to purchase up to 5,000 Shares (a
"Subsequent Option") following each annual meeting of the stockholders of the
Company occurring after the end of the Company's fiscal year 2000, if
immediately after such meeting, he or she shall continue to serve on the Board
and shall have served on the Board for at least the preceding six (6) months.

                                      -11-
<PAGE>

          (d)  Notwithstanding the provisions of subsections (b) and (c) hereof,
any exercise of an Option granted before the Company has obtained stockholder
approval of the Plan in accordance with Section 20 hereof shall be conditioned
upon obtaining such stockholder approval of the Plan in accordance with Section
20 hereof.

          (e)  The terms of each First Option granted pursuant to this Section
shall be as follows:

               (i)   the term of the Option shall be ten (10) years.

               (ii)  the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the Option.

               (iii) 25% of the Shares subject to the Option shall vest twelve
months after the date of grant and 1/16 of the Shares subject to the Option
shall vest each quarter thereafter. provided that the Outside Director shall
continue to serve on the Board on such dates.

          (f)  The terms of each Subsequent Option granted pursuant to this
Section shall be as follows:

               (i)   the term of the Option shall be ten (10) years.

               (ii)  the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the Option.

               (iii) the Option shall vest and become exercisable in full on the
fourth anniversary after the date of grant provided that in each case the
Outside Director shall continue to serve on the Board on such date.

     14.  Adjustments Upon Changes in Capitalization, Merger or Asset Sale.
          ----------------------------------------------------------------

          (a)  Changes in Capitalization.  Subject to any required action by the
               -------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company.  The conversion of any convertible securities
of the Company shall not be deemed to have been "effected without receipt of
consideration."  Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive.  Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities

                                      -12-
<PAGE>

convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
of Common Stock subject to an Option or Stock Purchase Right.

     (b)  Dissolution or Liquidation.  In the event of the proposed dissolution
          --------------------------
or liquidation of the Company, the Administrator shall notify each Optionee as
soon as practicable prior to the effective date of such proposed transaction.
The Administrator in its discretion may provide for an Optionee to have the
right to exercise his or her Option or Stock Purchase Right until fifteen (15)
days prior to such transaction as to all of the Optioned Stock covered thereby,
including Shares as to which the Option or Stock Purchase Right would not
otherwise be exercisable.  In addition, the Administrator may provide that any
Company repurchase option applicable to any Shares purchased upon exercise of an
Option or Stock Purchase Right shall lapse as to all such Shares, provided the
proposed dissolution or liquidation takes place at the time and in the manner
contemplated.  To the extent it has not been previously exercised, an Option or
Stock Purchase Right will terminate immediately prior to the consummation of
such proposed action.

     (c)  Merger or Asset Sale. Subject to Section 15 below, in the event of a
          --------------------
merger of the Company with or into another corporation, or the sale of
substantially all of the assets of the Company (a "Merger"), each outstanding
Option and Stock Purchase Right shall be assumed or an equivalent option or
right substituted by the successor corporation or a Parent or Subsidiary of the
successor corporation (the "Successor Corporation").  In the event that the
Successor Corporation refuses to assume or substitute for the Option or Stock
Purchase Right, the Optionee shall fully vest in and have the right to exercise
the Option or Stock Purchase Right as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable.  If an
Option or Stock Purchase Right becomes fully vested and exercisable in lieu of
assumption or substitution in the event of a Merger, the Administrator shall
notify the Optionee in writing or electronically that the Option or Stock
Purchase Right shall be fully vested and exercisable for a period of fifteen
(15) days from the date of such notice, and the Option or Stock Purchase Right
shall terminate upon the expiration of such period.  For the purposes of this
Section 14(c), the Option or Stock Purchase Right shall be considered assumed
if, following the Merger, the option or right confers the right to purchase or
receive, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right immediately prior to the Merger, the consideration (whether
stock, cash, or other securities or property) received in the Merger by holders
of Common Stock for each Share held on the effective date of the transaction
(and if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the Merger is not
solely common stock of the Successor Corporation or its Parent, the
Administrator may, with the consent of the Successor Corporation, provide for
the consideration to be received upon the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right, to be solely common stock of the Successor Corporation or its
Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the Merger.

     15.  Change of Control.  In the event of a Change of Control, each
          -----------------
outstanding Option held by an Outside Director shall vest and become exercisable
in full as to all of the Optioned Stock,

                                      -13-
<PAGE>

including Shares as to which the Outside Director would not otherwise be vested
or exercisable. If an Option becomes fully vested and exercisable as provided in
this paragraph, the Administrator shall notify the Optionee in writing or
electronically that the Option shall be fully vested and exercisable for a
period of fifteen (15) days from the date of such notice, and the Option shall
terminate upon the expiration of such period.

     16.  Date of Grant.  The date of grant of an Option or Stock Purchase Right
          -------------
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator.  Notice of the determination shall
be provided to each Optionee within a reasonable time after the date of such
grant.

     17.  Amendment and Termination of the Plan.
          -------------------------------------

          (a)  Amendment and Termination.  The Board may at any time amend,
               -------------------------
alter, suspend or terminate the Plan.

          (b)  Shareholder Approval.  The Company shall obtain shareholder
               --------------------
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.

          (c)  Effect of Amendment or Termination.  No amendment, alteration,
               ----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.

     18.  Conditions Upon Issuance of Shares.
          ----------------------------------

          (a)  Legal Compliance.  Shares shall not be issued pursuant to the
               ----------------
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.

          (b)  Investment Representations.  As a condition to the exercise of an
               --------------------------
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.

     19.  Inability to Obtain Authority.  The inability of the Company to obtain
          -----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.

                                      -14-
<PAGE>

     20.  Reservation of Shares.  The Company, during the term of this Plan,
          ---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.

     21.  Shareholder Approval.  The Plan shall be subject to approval by the
          --------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted.  Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.

                                      -15-
<PAGE>

                         NUMERICAL TECHNOLOGIES, INC.

                            2000 STOCK OPTION PLAN

                            STOCK OPTION AGREEMENT


     Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.

I.   NOTICE OF STOCK OPTION GRANT
     ----------------------------

     [Optionee's Name and Address]

     You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:

     Grant Number                       _____________________________

     Date of Grant                      _____________________________

     Vesting Commencement Date          _____________________________

     Exercise Price per Share           $____________________________

     Total Number of Shares Granted     _____________________________

     Total Exercise Price               $____________________________

     Type of Option:                    ___ Incentive Stock Option

                                        ___ Nonstatutory Stock Option

     Term/Expiration Date:              _____________________________


     Vesting Schedule:
     ----------------

     Subject to accelerated vesting as set forth below, this Option may be
exercised, in whole or in part, in accordance with the following schedule:

     The vesting schedule shall be determined by the Administrator in its sole
discretion.
<PAGE>

     Termination Period:
     ------------------

     This Option may be exercised for thirty days after Optionee ceases to be a
Service Provider.  Upon the death or Disability of the Optionee, this Option may
be exercised for twelve months after Optionee ceases to be a Service Provider.
In no event shall this Option be exercised later than the Term/Expiration Date
as provided above.

II.  AGREEMENT
     ---------

     A.   Grant of Option.
          ---------------

          The Plan Administrator of the Company hereby grants to the Optionee
named in the Notice of Grant attached as Part I of this Agreement (the
"Optionee") an option (the "Option") to purchase the number of Shares, as set
forth in the Notice of Grant, at the exercise price per share set forth in the
Notice of Grant (the "Exercise Price"), subject to the terms and conditions of
the Plan, which is incorporated herein by reference. Subject to Section 15(c) of
the Plan, in the event of a conflict between the terms and conditions of the
Plan and the terms and conditions of this Option Agreement, the terms and
conditions of the Plan shall prevail.

          If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option under
Section 422 of the Code. However, if this Option is intended to be an Incentive
Stock Option, to the extent that it exceeds the $100,000 rule of Code Section
422(d) it shall be treated as a Nonstatutory Stock Option ("NSO").

     B.   Exercise of Option.
          ------------------

          (a)  Right to Exercise.  This Option is exercisable during its term in
               -----------------
accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement.

          (b)  Method of Exercise.  This Option is exercisable by delivery of an
               ------------------
exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan.  The Exercise Notice shall be completed
by the Optionee and delivered to the Chief Financial Officer of the Company.
The Exercise Notice shall be accompanied by payment of the aggregate Exercise
Price as to all Exercised Shares.  This Option shall be deemed to be exercised
upon receipt by the Company of such fully executed Exercise Notice accompanied
by such aggregate Exercise Price.

               No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with Applicable Laws.  Assuming such
compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is exercised with respect to
such Exercised Shares.

                                      -2-
<PAGE>

     C.   Method of Payment.
          -----------------

          Payment of the aggregate Exercise Price shall be by any of the
following, or a combination thereof, at the election of the Optionee:

          1.   cash; or

          2.   check; or

          3.   consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan; or

          4.   surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares; or

          5.   with the Administrator's consent, delivery of Optionee's
promissory note (the "Note") in the form attached hereto as Exhibit C, in the
amount of the aggregate Exercise Price of the Exercised Shares together with the
execution and delivery by the Optionee of the Security Agreement attached hereto
as Exhibit B. The Note shall bear interest at the "applicable federal rate"
prescribed under the Code and its regulations at time of purchase, and shall be
secured by a pledge of the Shares purchased by the Note pursuant to the Security
Agreement; or

          6.   to the extent permitted by the Administrator, delivery of a
properly executed exercise notice together with such other documentation as the
Administrator and the broker, if applicable, shall require to effect an exercise
of the Option and delivery to the Company of the sale proceeds required to pay
the Exercise Price.

     D.   Non-Transferability of Option.
          -----------------------------

          This Option may not be transferred in any manner otherwise than by
will or by the laws of descent or distribution and may be exercised during the
lifetime of Optionee only by the Optionee. The terms of the Plan and this Option
Agreement shall be binding upon the executors, administrators, heirs, successors
and assigns of the Optionee.

     E.   Term of Option.
          --------------

          This Option may be exercised only within the term set out in the
Notice of Grant, and may be exercised during such term only in accordance with
the Plan and the terms of this Option Agreement.

     F.   Tax Consequences.
          ----------------

          Some of the federal tax consequences relating to this Option, as of
the date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY
INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE
SHOULD

                                      -3-
<PAGE>

CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

     G.   Exercising the Option.
          ---------------------

          1.   Nonstatutory Stock Option.  The Optionee may incur regular
               -------------------------
federal income tax liability upon exercise of a NSO. The Optionee will be
treated as having received compensation income (taxable at ordinary income tax
rates) equal to the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price. If the
Optionee is an Employee or a former Employee, the Company will be required to
withhold from his or her compensation or collect from Optionee and pay to the
applicable taxing authorities an amount in cash equal to a percentage of this
compensation income at the time of exercise, and may refuse to honor the
exercise and refuse to deliver Shares if such withholding amounts are not
delivered at the time of exercise.

          2.   Incentive Stock Option.  If this Option qualifies as an ISO, the
               ----------------------
Optionee will have no regular federal income tax liability upon its exercise,
although the excess, if any, of the Fair Market Value of the Exercised Shares on
the date of exercise over their aggregate Exercise Price will be treated as an
adjustment to alternative minimum taxable income for federal tax purposes and
may subject the Optionee to alternative minimum tax in the year of exercise.  In
the event that the Optionee ceases to be an Employee but remains a Service
Provider, any Incentive Stock Option of the Optionee that remains unexercised
shall cease to qualify as an Incentive Stock Option and will be treated for tax
purposes as a Nonstatutory Stock Option on the date three (3) months and one (1)
day following such change of status.

          3.   Disposition of Shares.
               ---------------------

               (a)  NSO.  If the Optionee holds NSO Shares for at least one
                    ---
year, any gain realized on disposition of the Shares will be treated as long-
term capital gain for federal income tax purposes.

               (b)  ISO.  If the Optionee holds ISO Shares for at least one
                    ---
year after exercise and two years after the grant date, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
income tax purposes. If the Optionee disposes of ISO Shares within one year
after exercise or two years after the grant date, any gain realized on such
disposition will be treated as compensation income (taxable at ordinary income
rates) to the extent of the excess, if any, of the lesser of (A) the difference
between the Fair Market Value of the Shares acquired on the date of exercise and
the aggregate Exercise Price, or (B) the difference between the sale price of
such Shares and the aggregate Exercise Price. Any additional gain will be taxed
as capital gain, short-term or long-term depending on the period that the ISO
Shares were held.

               (c)  Notice of Disqualifying Disposition of ISO Shares.  If the
                    -------------------------------------------------
Optionee sells or otherwise disposes of any of the Shares acquired pursuant to
an ISO on or before the later of (i) two years after the grant date, or (ii) one
year after the exercise date, the Optionee shall immediately notify the Company
in writing of such disposition. The Optionee agrees that he or she may be
subject to income tax withholding by the Company on the compensation income
recognized from such early disposition of ISO Shares by payment in cash or out
of the current earnings paid to the Optionee.

                                      -4-
<PAGE>

     H.   Entire Agreement; Governing Law.
          -------------------------------

          The Plan is incorporated herein by reference. The Plan and this Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee's interest except by
means of a writing signed by the Company and Optionee. This agreement is
governed by the internal substantive laws, but not the choice of law rules, of
California.

     I.   NO GUARANTEE OF CONTINUED SERVICE.
          ---------------------------------

          OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT
TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE
PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED,
BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER
ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED
HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS
OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING
PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT
OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE
PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.

     By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.


OPTIONEE:                               NUMERICAL TECHNOLOGIES, INC.



_________________________________       _________________________________
Signature                               By

_________________________________       _________________________________
Print Name                              Title

_________________________________
Residence Address

_________________________________

                                      -5-
<PAGE>

                               CONSENT OF SPOUSE
                               -----------------

     The undersigned spouse of Optionee has read and hereby approves the terms
and conditions of the Plan and this Option Agreement. In consideration of the
Company's granting his or her spouse the right to purchase Shares as set forth
in the Plan and this Option Agreement, the undersigned hereby agrees to be
irrevocably bound by the terms and conditions of the Plan and this Option
Agreement and further agrees that any community property interest shall be
similarly bound. The undersigned hereby appoints the undersigned's spouse as
attorney-in-fact for the undersigned with respect to any amendment or exercise
of rights under the Plan or this Option Agreement.


                                             _________________________________
                                             Spouse of Optionee
<PAGE>

                                   EXHIBIT A
                                   ---------

                         NUMERICAL TECHNOLOGIES, INC.

                                2000 STOCK PLAN

                                EXERCISE NOTICE


Numerical Technologies, Inc.
70 West Plumeria Drive
San Jose, CA 95134

Attention:  Corporate Secretary


     1.   Exercise of Option.  Effective as of today, ________________, _____,
          ------------------
the undersigned ("Purchaser") hereby elects to purchase ______________ shares
(the "Shares") of the Common Stock of Numerical Technologies, Inc. (the
"Company") under and pursuant to the 2000 Stock Plan (the "Plan") and the Stock
Option Agreement dated, _____ (the "Option Agreement"). The purchase price for
the Shares shall be $_____, as required by the Option Agreement.

     2.   Delivery of Payment.  Purchaser herewith delivers to the Company the
          -------------------
full purchase price for the Shares.

     3.   Representations of Purchaser.  Purchaser acknowledges that Purchaser
          ----------------------------
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.

     4.   Rights as Shareholder.  Until the issuance (as evidenced by the
          ---------------------
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option.  The Shares so acquired shall
be issued to the Optionee as soon as practicable after exercise of the Option.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date of issuance, except as provided in Section 13 of the
Plan.

     5.   Tax Consultation.  Purchaser understands that Purchaser may suffer
          ----------------
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares.  Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
<PAGE>

     6.   Entire Agreement; Governing Law.  The Plan and Option Agreement are
          -------------------------------
incorporated herein by reference.  This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Purchaser with respect to the subject matter
hereof, and may not be modified adversely to the Purchaser's interest except by
means of a writing signed by the Company and Purchaser.  This agreement is
governed by the internal substantive laws, but not the choice of law rules, of
California.

Submitted by:                           Accepted by:

PURCHASER:                              NUMERICAL TECHNOLOGIES, INC.


_________________________________       _________________________________
Signature                               By


_________________________________       _________________________________
Print Name                              Its

Address:                                Address:
- -------                                 -------

_________________________________       NUMERICAL TECHNOLOGIES, INC.

_________________________________       70 West Plumeria Drive
                                        San Jose, CA 95134


                                        _________________________________
                                        Date Received

                                      -2-
<PAGE>

                                   EXHIBIT B
                                   ---------

                              SECURITY AGREEMENT


     This Security Agreement is made as of __________, _____ between Numerical
Technologies, Inc., a California corporation ("Pledgee"), and
_________________________ ("Pledgor").

                                   Recitals
                                   --------

     Pursuant to Pledgor's election to purchase Shares under the Option
Agreement dated ________ (the "Option"), between Pledgor and Pledgee under
Pledgee's 2000 Stock Plan, and Pledgor's election under the terms of the Option
to pay for such shares with his promissory note (the "Note"), Pledgor has
purchased _________ shares of Pledgee's Common Stock (the "Shares") at a price
of $________ per share, for a total purchase price of $__________. The Note and
the obligations thereunder are as set forth in Exhibit C to the Option.

     NOW, THEREFORE, it is agreed as follows:

     1.   Creation and Description of Security Interest.  In consideration of
          ---------------------------------------------
the ransfer of the Shares to Pledgor under the Option Agreement, Pledgor,
pursuant to the California Commercial Code, hereby pledges all of such Shares
(herein sometimes referred to as the "Collateral") represented by certificate
number ______, duly endorsed in blank or with executed stock powers, and
herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"),
who shall hold said certificate subject to the terms and conditions of this
Security Agreement.

          The pledged stock (together with an executed blank stock assignment
for use in transferring all or a portion of the Shares to Pledgee if, as and
when required pursuant to this Security Agreement) shall be held by the
Pledgeholder as security for the repayment of the Note, and any extensions or
renewals thereof, to be executed by Pledgor pursuant to the terms of the Option,
and the Pledgeholder shall not encumber or dispose of such Shares except in
accordance with the provisions of this Security Agreement.

     2.   Pledgor's Representations and Covenants.  To induce Pledgee to enter
          ---------------------------------------
into his Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:

          (a)  Payment of Indebtedness.  Pledgor will pay the principal sum of
               -----------------------
the Note secured hereby, together with interest thereon, at the time and in the
manner provided in the Note.
<PAGE>

          (b)  Encumbrances.  The Shares are free of all other encumbrances,
               ------------
defenses and liens, and Pledgor will not further encumber the Shares without the
prior written consent of Pledgee.

          (c)  Margin Regulations.  In the event that Pledgee's Common Stock
               ------------------
is now or later becomes margin-listed by the Federal Reserve Board and Pledgee
is classified as a "lender" within the meaning of the regulations under Part 207
of Title 12 of the Code of Federal Regulations ("Regulation U"), Pledgor agrees
to cooperate with Pledgee in making any amendments to the Note or providing any
additional collateral as may be necessary to comply with such regulations.

     3.   Voting Rights.  During the term of this pledge and so long as all
          -------------
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.

     4.   Stock Adjustments.  In the event that during the term of the pledge
           -----------------
any stock dividend, reclassification, readjustment or other changes are declared
or made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgee under the terms of this Security Agreement
in the same manner as the Shares originally pledged hereunder. In the event of
substitution of such securities, Pledgor, Pledgee and Pledgeholder shall
cooperate and execute such documents as are reasonable so as to provide for the
substitution of such Collateral and, upon such substitution, references to
"Shares" in this Security Agreement shall include the substituted shares of
capital stock of Pledgor as a result thereof.

     5.   Options and Rights.  In the event that, during the term of this
          ------------------
pledge, subscription Options or other rights or options shall be issued in
connection with the pledged Shares, such rights, Options and options shall be
the property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Shares then held
by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.

     6.   Default.  Pledgor shall be deemed to be in default of the Note and of
          -------
this Security Agreement in the event:

          (a)  Payment of principal or interest on the Note shall be delinquent
for a period of 10 days or more; or

          (b)  Pledgor fails to perform any of the covenants set forth in the
Option or contained in this Security Agreement for a period of 10 days after
written notice thereof from Pledgee.

          In the case of an event of Default, as set forth above, Pledgee shall
have the right to accelerate payment of the Note upon notice to Pledgor, and
Pledgee shall thereafter be entitled to pursue its remedies under the California
Commercial Code.

                                      -2-
<PAGE>

     7.   Release of Collateral.  Subject to any applicable contrary rules under
          ---------------------
Regulation G, there shall be released from this pledge a portion of the pledged
Shares held by Pledgeholder hereunder upon payments of the principal of the
Note.  The number of the pledged Shares which shall be released shall be that
number of full Shares which bears the same proportion to the initial number of
Shares pledged hereunder as the payment of principal bears to the initial full
principal amount of the Note.

     8.   Withdrawal or Substitution of Collateral.  Pledgor shall not sell,
          ----------------------------------------
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.

     9.   Term.  The within pledge of Shares shall continue until the payment of
          ----
all indebtedness secured hereby, at which time the remaining pledged stock shall
be promptly delivered to Pledgor, subject to the provisions for prior release of
a portion of the Collateral as provided in paragraph 7 above.

     10.  Insolvency.  Pledgor agrees that if a bankruptcy or insolvency
          ----------
proceeding is instituted by or against it, or if a receiver is appointed for the
property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall become immediately due and
payable, and Pledgee may proceed as provided in the case of default.

     11.  Pledgeholder Liability.  In the absence of willful or gross
          ----------------------
negligence, Pledgeholder shall not be liable to any party for any of his acts,
or omissions to act, as Pledgeholder.

     12.  Invalidity of Particular Provisions.  Pledgor and Pledgee agree that
          -----------------------------------
the enforceability or invalidity of any provision or provisions of this Security
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.

     13.  Successors or Assigns.  Pledgor and Pledgee agree that all of the
          ---------------------
terms of this Security Agreement shall be binding on their respective successors
and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein
shall be deemed to include, for all purposes, the respective designees,
successors, assigns, heirs, executors and administrators.

     14.  Governing Law.  This Security Agreement shall be interpreted and
          -------------
governed under the internal substantive laws, but not the choice of law rules,
of California.

                                      -3-
<PAGE>

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

"PLEDGOR"                     _________________________________________
                              Signature

                              _________________________________________
                              Print Name

                              Address:   ______________________________

                                         ______________________________

"PLEDGEE"                     NUMERICAL TECHNOLOGIES, INC.
                              a California corporation


                              _________________________________________
                              Signature

                              _________________________________________
                              Print Name

                              _________________________________________
                              Title


"PLEDGEHOLDER"                _________________________________________
                              Secretary of Numerical Technologies, Inc.

                                      -4-
<PAGE>

                                   EXHIBIT C
                                   ---------

                                     NOTE


$_______________                                  San Jose, California

                                                  __________________, _____

     FOR VALUE RECEIVED, _____________________ promises to pay to Numerical
Technologies, Inc., a California corporation (the "Company"), or order, the
principal sum of _______________________ ($_____________), together with
interest on the unpaid principal hereof from the date hereof at the rate of
_______________ percent (____%) per annum, compounded semiannually.

     Principal and interest shall be due and payable on _______________, _____.
Payment of principal and interest shall be made in lawful money of the United
States of America.

     The undersigned may at any time prepay all or any portion of the
principal or interest owing hereunder.

     This Note is subject to the terms of the Option, dated as of
________________. This Note is secured in part by a pledge of the Company's
Common Stock under the terms of a Security Agreement of even date herewith and
is subject to all the provisions thereof.

     The holder of this Note shall have full recourse against the undersigned,
and shall not be required to proceed against the collateral securing this Note
in the event of default.

     In the event the undersigned shall cease to be an employee, director or
consultant of the Company for any reason, this Note shall, at the option of the
Company, be accelerated, and the whole unpaid balance on this Note of principal
and accrued interest shall be immediately due and payable.

     Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by the
undersigned.

                                            ____________________________________

                                            ____________________________________
<PAGE>

                         NUMERICAL TECHNOLOGIES, INC.

                                2000 STOCK PLAN

                    NOTICE OF GRANT OF STOCK PURCHASE RIGHT


     Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Notice of Grant.

     [Grantee's Name and Address]

     You have been granted the right to purchase Common Stock of the Company,
subject to the Company's Repurchase Option and your ongoing status as a Service
Provider (as described in the Plan and the attached Restricted Stock Purchase
Agreement), as follows:

     Grant Number                       _________________________

     Date of Grant                      _________________________

     Price Per Share                    $________________________

     Total Number of Shares Subject     _________________________
      to This Stock Purchase Right

     Expiration Date:                   _________________________

     YOU MUST EXERCISE THIS STOCK PURCHASE RIGHT BEFORE THE EXPIRATION DATE OR
IT WILL TERMINATE AND YOU WILL HAVE NO FURTHER RIGHT TO PURCHASE THE SHARES. By
your signature and the signature of the Company's representative below, you and
the Company agree that this Stock Purchase Right is granted under and governed
by the terms and conditions of the 2000 Stock Plan and the Restricted Stock
Purchase Agreement, attached hereto as Exhibit A-1, both of which are made a
part of this document. You further agree to execute the attached Restricted
Stock Purchase Agreement as a condition to purchasing any shares under this
Stock Purchase Right.

GRANTEE:                                NUMERICAL TECHNOLOGIES, INC.

________________________________        _____________________________________
Signature                               By

________________________________        _____________________________________
Print Name                              Title
<PAGE>

                                  EXHIBIT A-1
                                  -----------

                         NUMERICAL TECHNOLOGIES, INC.

                                2000 STOCK PLAN

                      RESTRICTED STOCK PURCHASE AGREEMENT


     Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Restricted Stock Purchase Agreement.

     WHEREAS the Purchaser named in the Notice of Grant, (the "Purchaser") is a
Service Provider, and the Purchaser's continued participation is considered by
the Company to be important for the Company's continued growth; and

     WHEREAS in order to give the Purchaser an opportunity to acquire an equity
interest in the Company as an incentive for the Purchaser to participate in the
affairs of the Company, the Administrator has granted to the Purchaser a Stock
Purchase Right subject to the terms and conditions of the Plan and the Notice of
Grant, which are incorporated herein by reference, and pursuant to this
Restricted Stock Purchase Agreement (the "Agreement").

     NOW THEREFORE, the parties agree as follows:

     1.   Sale of Stock.  The Company hereby agrees to sell to the Purchaser and
          -------------
the Purchaser hereby agrees to purchase shares of the Company's Common Stock
(the "Shares"), at the per Share purchase price and as otherwise described in
the Notice of Grant.

     2.   Payment of Purchase Price.  The purchase price for the Shares may be
          -------------------------
paid by delivery to the Company at the time of execution of this Agreement of
cash, a check, or some combination thereof.

     3.   Repurchase Option.
          -----------------

          (a)  In the event the Purchaser ceases to be a Service Provider for
any or no reason (including death or disability) before all of the Shares are
released from the Company's Repurchase Option (see Section 4), the Company
shall, upon the date of such termination (as reasonably fixed and determined by
the Company) have an irrevocable, exclusive option (the "Repurchase Option") for
a period of ninety (90) days from such date to repurchase up to that number of
shares which constitute the Unreleased Shares (as defined in Section 4) at the
original purchase price per share (the "Repurchase Price"). The Repurchase
Option shall be exercised by the Company by delivering written notice to the
Purchaser or the Purchaser's executor (with a copy to the Escrow Holder) AND, at
the Company's option, (i) by delivering to the Purchaser or the Purchaser's
executor a check in the amount of the aggregate Repurchase Price, or (ii) by
canceling an amount of the Purchaser's
<PAGE>

indebtedness to the Company equal to the aggregate Repurchase Price, or (iii) by
a combination of (i) and (ii) so that the combined payment and cancellation of
indebtedness equals the aggregate Repurchase Price. Upon delivery of such notice
and the payment of the aggregate Repurchase Price, the Company shall become the
legal and beneficial owner of the Shares being repurchased and all rights and
interests therein or relating thereto, and the Company shall have the right to
retain and transfer to its own name the number of Shares being repurchased by
the Company.

          (b)  Whenever the Company shall have the right to repurchase Shares
hereunder, the Company may designate and assign one or more employees, officers,
directors or shareholders of the Company or other persons or organizations to
exercise all or a part of the Company's purchase rights under this Agreement and
purchase all or a part of such Shares.  If the Fair Market Value of the Shares
to be repurchased on the date of such designation or assignment (the "Repurchase
FMV") exceeds the aggregate Repurchase Price of such Shares, then each such
designee or assignee shall pay the Company cash equal to the difference between
the Repurchase FMV and the aggregate Repurchase Price of such Shares.

     4.   Release of Shares From Repurchase Option.
          ----------------------------------------

          (a)  The Company's repurchase option shall lapse at the rate
determined by the Administrator.

          (b)  Any of the Shares that have not yet been released from the
Repurchase Option are referred to herein as "Unreleased Shares."

          (c)  The Shares that have been released from the Repurchase Option
shall be delivered to the Purchaser at the Purchaser's request (see Section 6).

     5.   Restriction on Transfer.  Except for the escrow described in Section
          -----------------------
6 or the transfer of the Shares to the Company or its assignees contemplated by
this Agreement, none of the Shares or any beneficial interest therein shall be
transferred, encumbered or otherwise disposed of in any way until such Shares
are released from the Company's Repurchase Option in accordance with the
provisions of this Agreement, other than by will or the laws of descent and
distribution.

     6.   Escrow of Shares.
          ----------------

          (a)  To ensure the availability for delivery of the Purchaser's
Unreleased Shares upon repurchase by the Company pursuant to the Repurchase
Option, the Purchaser shall, upon execution of this Agreement, deliver and
deposit with an escrow holder designated by the Company (the "Escrow Holder")
the share certificates representing the Unreleased Shares, together with the
stock assignment duly endorsed in blank, attached hereto as Exhibit A-2. The
Unreleased Shares and stock assignment shall be held by the Escrow Holder,
pursuant to the Joint Escrow Instructions of the Company and Purchaser attached
hereto as Exhibit A-3, until such time as the Company's Repurchase Option
expires. As a further condition to the Company's obligations under this
Agreement, the Company may require the spouse of Purchaser, if any, to execute
and deliver to the Company the Consent of Spouse attached hereto as Exhibit A-4.

                                      -2-
<PAGE>

          (b)  The Escrow Holder shall not be liable for any act it may do or
omit to do with respect to holding the Unreleased Shares in escrow while acting
in good faith and in the exercise of its judgment.

          (c)  If the Company or any assignee exercises the Repurchase Option
hereunder, the Escrow Holder, upon receipt of written notice of such exercise
from the proposed transferee, shall take all steps necessary to accomplish such
transfer.

          (d)  When the Repurchase Option has been exercised or expires
unexercised or a portion of the Shares has been released from the Repurchase
Option, upon request the Escrow Holder shall promptly cause a new certificate to
be issued for the released Shares and shall deliver the certificate to the
Company or the Purchaser, as the case may be.

          (e)  Subject to the terms hereof, the Purchaser shall have all the
rights of a shareholder with respect to the Shares while they are held in
escrow, including without limitation, the right to vote the Shares and to
receive any cash dividends declared thereon. If, from time to time during the
term of the Repurchase Option, there is (i) any stock dividend, stock split or
other change in the Shares, or (ii) any merger or sale of all or substantially
all of the assets or other acquisition of the Company, any and all new,
substituted or additional securities to which the Purchaser is entitled by
reason of the Purchaser's ownership of the Shares shall be immediately subject
to this escrow, deposited with the Escrow Holder and included thereafter as
"Shares" for purposes of this Agreement and the Repurchase Option.

     7.   Legends.  The share certificate evidencing the Shares, if any,  issued
          -------
hereunder shall be endorsed with the following legend (in addition to any legend
required under applicable state securities laws):

          THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT
BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.

     8.   Adjustment for Stock Split.  All references to the number of Shares
          --------------------------
and the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares that may be made by the Company after the date of this Agreement.

     9.   Tax Consequences.  The Purchaser has reviewed with the Purchaser's own
          ----------------
tax advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement.  The Purchaser
is relying solely on such advisors and not on any statements or representations
of the Company or any of its agents.  The Purchaser understands that the
Purchaser (and not the Company) shall be responsible for the Purchaser's own tax
liability that may arise as a result of the transactions contemplated by this
Agreement.  The Purchaser understands that Section 83 of the Internal Revenue
Code of 1986, as amended (the "Code"), taxes as ordinary income the difference
between the purchase price for the Shares and the Fair Market Value of the

                                      -3-
<PAGE>

Shares as of the date any restrictions on the Shares lapse. In this context,
"restriction" includes the right of the Company to buy back the Shares pursuant
to the Repurchase Option. The Purchaser understands that the Purchaser may elect
to be taxed at the time the Shares are purchased rather than when and as the
Repurchase Option expires by filing an election under Section 83(b) of the Code
with the IRS within 30 days from the date of purchase. The form for making this
election is attached as Exhibit A-5 hereto.

          THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION
83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE
THIS FILING ON THE PURCHASER'S BEHALF.

     10.  General Provisions.
          ------------------

          (a)  This Agreement shall be governed by the internal substantive
laws, but not the choice of law rules of California. This Agreement, subject to
the terms and conditions of the Plan and the Notice of Grant, represents the
entire agreement between the parties with respect to the purchase of the Shares
by the Purchaser. Subject to Section 15(c) of the Plan, in the event of a
conflict between the terms and conditions of the Plan and the terms and
conditions of this Agreement, the terms and conditions of the Plan shall
prevail. Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Agreement.

          (b)  Any notice, demand or request required or permitted to be given
by either the Company or the Purchaser pursuant to the terms of this Agreement
shall be in writing and shall be deemed given when delivered personally or
deposited in the U.S. mail, First Class with postage prepaid, and addressed to
the parties at the addresses of the parties set forth at the end of this
Agreement or such other address as a party may request by notifying the other in
writing.

               Any notice to the Escrow Holder shall be sent to the Company's
address with a copy to the other party hereto.

          (c)  The rights of the Company under this Agreement shall be
transferable to any one or more persons or entities, and all covenants and
agreements hereunder shall inure to the benefit of, and be enforceable by the
Company's successors and assigns. The rights and obligations of the Purchaser
under this Agreement may only be assigned with the prior written consent of the
Company.

          (d)  Either party's failure to enforce any provision of this Agreement
shall not in any way be construed as a waiver of any such provision, nor prevent
that party from thereafter enforcing any other provision of this Agreement. The
rights granted both parties hereunder are cumulative and shall not constitute a
waiver of either party's right to assert any other legal remedy available to it.

          (e)  The Purchaser agrees upon request to execute any further
documents or instruments necessary or desirable to carry out the purposes or
intent of this Agreement.

                                      -4-
<PAGE>

          (f)  PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES
PURSUANT TO SECTION 4 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS A SERVICE
PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED OR
PURCHASING SHARES HEREUNDER). PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT
THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE
SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED
ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT
ALL, AND SHALL NOT INTERFERE WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE PURCHASER'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.

     By Purchaser's signature below, Purchaser represents that he or she is
familiar with the terms and provisions of the Plan, and hereby accepts this
Agreement subject to all of the terms and provisions thereof. Purchaser has
reviewed the Plan and this Agreement in their entirety, has had an opportunity
to obtain the advice of counsel prior to executing this Agreement and fully
understands all provisions of this Agreement. Purchaser agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Agreement.
Purchaser further agrees to notify the Company upon any change in the residence
indicated in the Notice of Grant.

DATED:  __________________________

PURCHASER:                              NUMERICAL TECHNOLOGIES, INC.


__________________________________      ___________________________________
Signature                               By

__________________________________      ___________________________________
Print Name                              Title

                                      -5-
<PAGE>

                                  EXHIBIT A-2
                                  -----------

                     ASSIGNMENT SEPARATE FROM CERTIFICATE


     FOR VALUE RECEIVED I, _______________________________, hereby sell, assign
and transfer unto (__________) shares of the Common Stock of Numerical
Technologies, Inc., standing in my name of the books of said corporation
represented by Certificate No. _____ herewith and do hereby irrevocably
constitute and appoint _____________________________________________ to transfer
the said stock on the books of the within named corporation with full power of
substitution in the premises.

     This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement (the "Agreement") between________________________ and
the undersigned dated ______________, _____.

Dated: _______________, _____
                                        Signature:______________________________



     INSTRUCTIONS: Please do not fill in any blanks other than the signature
line. The purpose of this assignment is to enable the Company to exercise the
Repurchase Option, as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE>

                                  EXHIBIT A-3
                                  -----------

                           JOINT ESCROW INSTRUCTIONS

                                                        __________________, ____

Corporate Secretary
Numerical Technologies, Inc.
70 West Plumeria Drive
San Jose, CA 95134

Dear Corporate Secretary:

     As Escrow Agent for both Numerical Technologies, Inc., a California
corporation (the "Company"), and the undersigned purchaser of stock of the
Company (the "Purchaser"), you are hereby authorized and directed to hold the
documents delivered to you pursuant to the terms of that certain Restricted
Stock Purchase Agreement ("Agreement") between the Company and the undersigned,
in accordance with the following instructions:

     1.   In the event the Company and/or any assignee of the Company (referred
to collectively as the "Company") exercises the Company's Repurchase Option set
forth in the Agreement, the Company shall give to Purchaser and you a written
notice specifying the number of shares of stock to be purchased, the purchase
price, and the time for a closing hereunder at the principal office of the
Company. Purchaser and the Company hereby irrevocably authorize and direct you
to close the transaction contemplated by such notice in accordance with the
terms of said notice.

     2.   At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, or some combination thereof) for the number of shares of stock
being purchased pursuant to the exercise of the Company's Repurchase Option.

     3.   Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities.
<PAGE>

Subject to the provisions of this paragraph 3, Purchaser shall exercise all
rights and privileges of a shareholder of the Company while the stock is held by
you.

     4.   Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's Repurchase Option has been exercised, you
shall deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the Company's Repurchase Option.
Within 90 days after Purchaser ceases to be a Service Provider, you shall
deliver to Purchaser a certificate or certificates representing the aggregate
number of shares held or issued pursuant to the Agreement and not purchased by
the Company or its assignees pursuant to exercise of the Company's Repurchase
Option.

     5.   If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.

     6.   Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.

     7.   You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties.
You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in
good faith, and any act done or omitted by you pursuant to the advice of your
own attorneys shall be conclusive evidence of such good faith.

     8.   You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law, and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court.
In case you obey or comply with any such order, judgment or decree, you shall
not be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.

     9.   You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.

     10.  You shall not be liable for the outlawing of any rights under the
statute of limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.

     11.  You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.

                                      -2-
<PAGE>

     12.  Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be an officer or agent of the Company or if you shall resign by
written notice to each party.  In the event of any such termination, the Company
shall appoint a successor Escrow Agent.

     13.  If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.

     14.  It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.

     15.  Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.


          COMPANY:            Numerical Technologies, Inc.
                              70 West Plumeria Drive
                              San Jose, CA 95134

          PURCHASER:          _________________________________
                              _________________________________
                              _________________________________

          ESCROW AGENT:       Corporate Secretary
                              Numerical Technologies, Inc.
                              70 West Plumeria Drive
                              San Jose, CA 95134


     16.  By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.

                                      -3-
<PAGE>

     17.  This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.

     18.  These Joint Escrow Instructions shall be governed by, and construed
and enforced in accordance with, the internal substantive laws, but not the
choice of law rules, of California.

                                        Very truly yours,


                                        NUMERICAL TECHNOLOGIES, INC.


                                        _____________________________________
                                        By

                                        _____________________________________
                                        Title



                                        PURCHASER:

                                        _____________________________________
                                        Signature

                                        _____________________________________
                                        Print Name



ESCROW AGENT:

___________________________________
Corporate Secretary

                                      -4-
<PAGE>

                                  EXHIBIT A-4
                                  -----------

                               CONSENT OF SPOUSE


     I, _________________________, spouse of ________________________, have read
and approve the foregoing Restricted Stock Purchase Agreement (the "Agreement").
In consideration of the Company's grant to my spouse of the right to purchase
shares of Numerical Technologies, Inc., as set forth in the Agreement, I hereby
appoint my spouse as my attorney-in-fact in respect to the exercise of any
rights under the Agreement and agree to be bound by the provisions of the
Agreement insofar as I may have any rights in said Agreement or any shares
issued pursuant thereto under the community property laws or similar laws
relating to marital property in effect in the state of our residence as of the
date of the signing of the foregoing Agreement.

Dated: ____________________, _____

                                        ________________________________________
                                        Signature of Spouse
<PAGE>

                                  EXHIBIT A-5
                                  -----------

                         ELECTION UNDER SECTION 83(b)
                     OF THE INTERNAL REVENUE CODE OF 1986

The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the
Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income
for the current taxable year the amount of any compensation taxable to taxpayer
in connection with his or her receipt of the property described below:

1.   The name, address, taxpayer identification number and taxable year of the
     undersigned are as follows:

     NAME:                    TAXPAYER:                     SPOUSE:

     ADDRESS:

     IDENTIFICATION NO.:      TAXPAYER:                     SPOUSE:

     TAXABLE YEAR:

2.   The property with respect to shares (the "Shares") of the which the
     election is made is Common Stock of Numerical described as follows:
     Technologies, Inc. (the "Company").

3.   The date on which the property was transferred is:_________________, ____.

4.   The property is subject to the following restrictions:

     The Shares may be repurchased by the Company, or its assignee, upon certain
     events.  This right lapses with regard to a portion of the Shares based on
     the continued performance of services by the taxpayer over time.

5.   The fair market value at the time of transfer, determined without regard to
     any restriction other than a restriction which by its terms will never
     lapse, of such property is: $__________.

6.   The amount (if any) paid for such property is:  $___________.

The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property.  The transferee of such property is the person
performing the services in connection with the transfer of said property.

The undersigned understands that the foregoing election may not be revoked
- --------------------------------------------------------------------------
except with the consent of the Commissioner.
- -------------------------------------------

Dated:    _________________, ____       _______________________________________
                                        Taxpayer

The undersigned spouse of taxpayer joins in this election.

Dated:    _________________, ____       _______________________________________
                                        Spouse of Taxpayer

<PAGE>


                                                                    EXHIBIT 10.3


                         NUMERICAL TECHNOLOGIES, INC.

                                1997 STOCK PLAN

                           (as amended and restated)

     1.   Purposes of the Plan.  The purposes of this Stock Plan are to
          --------------------
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants and to promote the success of the Company's business. Options
granted under the Plan may be Incentive Stock Options or Nonstatutory Stock
Options, as determined by the Administrator at the time of grant. Stock Purchase
Rights may also be granted under the Plan.

     2.   Definitions.  As used herein, the following definitions shall apply:
          -----------

          (a)  "Administrator" means the Board or any of its Committees as
               -------------
shall be administering the Plan in accordance with Section 4 hereof.

          (b)  "Applicable Laws" means the requirements relating to the
                ---------------
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any other country or jurisdiction where Options or Stock Purchase Rights are
granted under the Plan.

          (c)  "Board" means the Board of Directors of the Company.
                -----

          (d)  "Code" means the Internal Revenue Code of 1986, as amended.
                ----

          (e)  "Committee"  means a committee of Directors appointed by the
                ---------
Board in accordance with Section 4 hereof.

          (f)  "Common Stock" means the Common Stock of the Company.
                ------------

          (g)  "Company" means Numerical Technologies, Inc., a California
                -------
corporation.

          (h)  "Consultant" means any person who is engaged by the Company or
                ----------
any Parent or Subsidiary to render consulting or advisory services to such
entity.

          (i)  "Director" means a member of the Board of Directors of the
                --------
Company.

          (j)  "Disability" means total and permanent disability as defined in
                ----------
Section 22(e)(3) of the Code.

          (k)  "Employee" means any person, including Officers and Directors,
                --------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any
<PAGE>

successor. For purposes of Incentive Stock Options, no such leave may exceed
ninety days, unless reemployment upon expiration of such leave is guaranteed by
statute or contract. If reemployment upon expiration of a leave of absence
approved by the Company is not so guaranteed, on the 181st day of such leave any
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory
Stock Option. Neither service as a Director nor payment of a director's fee by
the Company shall be sufficient to constitute "employment" by the Company.

          (l)  "Exchange Act" means the Securities Exchange Act of 1934, as
                ------------
amended.

          (m)  "Fair Market Value" means, as of any date, the value of Common
                -----------------
Stock determined as follows:

               (i)   If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;

               (ii)  If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination; or

               (iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.

          (n)  "Incentive Stock Option" means an Option intended to qualify as
                ----------------------
an incentive stock option within the meaning of Section 422 of the Code.

          (o)  "Nonstatutory Stock Option" means an Option not intended to
                -------------------------
qualify as an Incentive Stock Option.

          (p)  "Officer" means a person who is an officer of the Company
                -------
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.

          (q)  "Option" means a stock option granted pursuant to the Plan.
                ------

          (r)  "Option Agreement" means a written or electronic agreement
                ----------------
between the Company and an Optionee evidencing the terms and conditions of an
individual Option grant. The Option Agreement is subject to the terms and
conditions of the Plan.

          (s)  "Option Exchange Program" means a program whereby outstanding
                -----------------------
Options are exchanged for Options with a lower exercise price.

                                      -2-
<PAGE>

          (t)  "Optioned Stock" means the Common Stock subject to an Option or
                --------------
a Stock Purchase Right.

          (u)  "Optionee" means the holder of an outstanding Option or Stock
                --------
Purchase Right granted under the Plan.

          (v)  "Parent" means a "parent corporation," whether now or hereafter
                ------
existing, as defined in Section 424(e) of the Code.

          (w)  "Plan" means this 1997 Stock Plan.
                ----

          (x)  "Restricted Stock" means shares of Common Stock acquired
                ----------------
pursuant to a grant of a Stock Purchase Right under Section 11 below.

          (y)  "Section 16(b)" means Section 16(b) of the Securities Exchange
                -------------
Act of 1934, as amended.

          (z)  "Service Provider"  means an Employee, Director or Consultant.
                ----------------

          (aa) "Share" means a share of the Common Stock, as adjusted in
                -----
accordance with Section 12 below.

          (bb) "Stock Purchase Right" means a right to purchase Common Stock
                --------------------
pursuant to Section 11 below.

          (cc) "Subsidiary" means a "subsidiary corporation," whether now or
                ----------
hereafter existing, as defined in Section 424(f) of the Code.

     3.   Stock Subject to the Plan.  Subject to the provisions of Section 12 of
          -------------------------
the Plan, the maximum aggregate number of Shares which may be subject to option
and sold under the Plan is 4,131,000 Shares.  The Shares may be authorized but
unissued, or reacquired Common Stock.

     If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated). However, Shares that have actually been issued under the Plan, upon
exercise of either an Option or Stock Purchase Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.

     4.   Administration of the Plan.
          --------------------------

          (a)  Administrator.  The Plan shall be administered by the Board or a
               -------------
Committee appointed by the Board, which Committee shall be constituted to comply
with Applicable Laws.

                                      -3-
<PAGE>

          (b)  Powers of the Administrator.  Subject to the provisions of the
               ---------------------------
Plan and, in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities, the
Administrator shall have the authority in its discretion:

               (i)    to determine the Fair Market Value;

               (ii)   to select the Service Providers to whom Options and Stock
Purchase Rights may from time to time be granted hereunder;

               (iii)  to determine the number of Shares to be covered by each
such award granted hereunder;

               (iv)   to approve forms of agreement for use under the Plan;

               (v)    to determine the terms and conditions, of any Option or
Stock Purchase Right granted hereunder. Such terms and conditions include, but
are not limited to, the exercise price, the time or times when Options or Stock
Purchase Rights may be exercised (which may be based on performance criteria),
any vesting acceleration or waiver of forfeiture restrictions, and any
restriction or limitation regarding any Option or Stock Purchase Right or the
Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;

               (vi)   to determine whether and under what circumstances an
Option may be settled in cash under subsection 9(e) instead of Common Stock;

               (vii)  to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted;

               (viii) to initiate an Option Exchange Program;

               (ix)   to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;

               (x)    to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair Market
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined. All elections by Optionees to
have Shares withheld for this purpose shall be made in such form and under such
conditions as the Administrator may deem necessary or advisable; and

               (xi)   to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.

                                      -4-
<PAGE>

          (c)  Effect of Administrator's Decision.  All decisions,
               ----------------------------------
determinations and interpretations of the Administrator shall be final and
binding on all Optionees.

     5.   Eligibility.
          -----------

          (a)  Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Service Providers. Incentive Stock Options may be granted only to
Employees.

          (b)  Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 5(b), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.

          (c)  Neither the Plan nor any Option or Stock Purchase Right shall
confer upon any Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall it interfere in
any way with his or her right or the Company's right to terminate such
relationship at any time, with or without cause.

     6.   Term of Plan.  The Plan shall become effective upon its adoption by
          ------------
the Board. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 14 of the Plan.

     7.   Term of Option.  The term of each Option shall be stated in the Option
          --------------
Agreement; provided, however, that the term shall be no more than ten (10) years
from the date of grant thereof.  In the case of an Incentive Stock Option
granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Option shall
be five (5) years from the date of grant or such shorter term as may be provided
in the Option Agreement.

     8.   Option Exercise Price and Consideration.
          ---------------------------------------

          (a)  The per share exercise price for the Shares to be issued upon
exercise of an Option shall be such price as is determined by the Administrator,
but shall be subject to the following:

               (i)  In the case of an Incentive Stock Option

                    (A)  granted to an Employee who, at the time of grant of
such Option, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
exercise price shall be no less than 110% of the Fair Market Value per Share on
the date of grant.

                                      -5-
<PAGE>

                     (B)  granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.

               (ii)  In the case of a Nonstatutory Stock Option

                     (A)  granted to a Service Provider who, at the time of
grant of such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the exercise price shall be no less than 110% of the Fair Market Value per Share
on the date of grant.

                     (B)  granted to any other Service Provider, the per Share
exercise price shall be no less than 85% of the Fair Market Value per Share on
the date of grant.

               (iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price other than as required above pursuant to a merger or
other corporate transaction.

          (b)  The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). Such consideration may consist of (1) cash,
(2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) consideration received by the Company
under a cashless exercise program implemented by the Company in connection with
the Plan, or (6) any combination of the foregoing methods of payment. In making
its determination as to the type of consideration to accept, the Administrator
shall consider if acceptance of such consideration may be reasonably expected to
benefit the Company.

     9.   Exercise of Option.
          ------------------

          (a)  Procedure for Exercise; Rights as a Shareholder. Any Option
               -----------------------------------------------
granted hereunder shall be exercisable according to the terms hereof at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement. Except in the case of Options granted to Officers,
Directors and Consultants, Options shall become exercisable at a rate of no less
than 20% per year over five (5) years from the date the Options are granted.
Unless the Administrator provides otherwise, vesting of Options granted
hereunder shall be tolled during any unpaid leave of absence. An Option may not
be exercised for a fraction of a Share.

          An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised.  Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan.  Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right

                                      -6-
<PAGE>

to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Shares, notwithstanding the exercise of the Option.  The
Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised.  No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 12 of the Plan.

          Exercise of an Option in any manner shall result in a decrease in the
number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.

          (b)  Termination of Relationship as a Service Provider.  If an
               -------------------------------------------------
Optionee ceases to be a Service Provider, such Optionee may exercise his or her
Option within such period of time as is specified in the Option Agreement (of at
least thirty (30) days) to the extent that the Option is vested on the date of
termination (but in no event later than the expiration of the term of the Option
as set forth in the Option Agreement). In the absence of a specified time in the
Option Agreement, the Option shall remain exercisable for three (3) months
following the Optionee's termination. If, on the date of termination, the
Optionee is not vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall revert to the Plan. If, after termination,
the Optionee does not exercise his or her Option within the time specified by
the Administrator, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.

          (c)  Disability of Optionee.  If an Optionee ceases to be a Service
               ----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
(of at least six (6) months) to the extent the Option is vested on the date of
termination (but in no event later than the expiration of the term of such
Option as set forth in the Option Agreement). In the absence of a specified time
in the Option Agreement, the Option shall remain exercisable for twelve (12)
months following the Optionee's termination. If, on the date of termination, the
Optionee is not vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall revert to the Plan. If, after termination,
the Optionee does not exercise his or her Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.

          (d)  Death of Optionee.  If an Optionee dies while a Service Provider,
               -----------------
the Option may be exercised within such period of time as is specified in the
Option Agreement (of at least six (6) months) to the extent that the Option is
vested on the date of death (but in no event later than the expiration of the
term of such Option as set forth in the Option Agreement) by the Optionee's
estate or by a person who acquires the right to exercise the Option by bequest
or inheritance. In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, at the time of death, the Optionee is not vested as to the
entire Option, the Shares covered by the unvested portion of the Option shall
immediately revert to the Plan. If the Option is not so exercised within the
time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.

          (e)  Buyout Provisions.  The Administrator may at any time offer to
               -----------------
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.

                                      -7-
<PAGE>

     10.  Non-Transferability of Options and Stock Purchase Rights.  The Options
          --------------------------------------------------------
and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.

     11.  Stock Purchase Rights.
          ---------------------

          (a)  Rights to Purchase.  Stock Purchase Rights may be issued either
               ------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically of the terms, conditions and restrictions
related to the offer, including the number of Shares that such person shall be
entitled to purchase, the price to be paid, and the time within which such
person must accept such offer. The terms of the offer shall comply in all
respects with Section 260.140.42 of Title 10 of the California Code of
Regulations. The offer shall be accepted by execution of a Restricted Stock
purchase agreement in the form determined by the Administrator.

          (b)  Repurchase Option.  Unless the Administrator determines
               -----------------
otherwise, the Restricted Stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine. Except with respect to Shares purchased by
Officers, Directors and Consultants, the repurchase option shall in no case
lapse at a rate of less than 20% per year over five (5) years from the date of
purchase.

          (c)  Other Provisions.  The Restricted Stock purchase agreement shall
               ----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.

          (d)  Rights as a Shareholder.  Once the Stock Purchase Right is
               -----------------------
exercised, the purchaser shall have rights equivalent to those of a shareholder
and shall be a shareholder when his or her purchase is entered upon the records
of the duly authorized transfer agent of the Company. No adjustment shall be
made for a dividend or other right for which the record date is prior to the
date the Stock Purchase Right is exercised, except as provided in Section 12 of
the Plan.

     12.  Adjustments Upon Changes in Capitalization, Merger or Asset Sale.
          ----------------------------------------------------------------

          (a)  Changes in Capitalization.  Subject to any required action by the
               -------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the

                                      -8-
<PAGE>

number of issued shares of Common Stock resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common
Stock, or any other increase or decrease in the number of issued shares of
Common Stock effected without receipt of consideration by the Company. The
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Board, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock subject to an
Option or Stock Purchase Right.

          (b)  Dissolution or Liquidation.  In the event of the proposed
               --------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option or Stock Purchase Right until
fifteen (15) days prior to such transaction as to all of the Optioned Stock
covered thereby, including Shares as to which the Option or Stock Purchase Right
would not otherwise be exercisable. In addition, the Administrator may provide
that any Company repurchase option applicable to any Shares purchased upon
exercise of an Option or Stock Purchase Right shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an
Option or Stock Purchase Right will terminate immediately prior to the
consummation of such proposed action.

          (c)  Merger or Asset Sale.  In the event of a merger of the Company
               --------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Option or Stock Purchase Right shall terminate as of
the date of the closing of the merger or asset sale. For the purposes of this
paragraph, the Option or Stock Purchase Right shall be considered assumed if,
following the merger or sale of assets, the option or right confers the right to
purchase or receive, for each Share of Optioned Stock subject to the Option or
Stock Purchase Right immediately prior to the merger or sale of assets, the
consideration (whether stock, cash, or other securities or property) received in
the merger or sale of assets by holders of Common Stock for each Share held on
the effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares); provided, however, that if such consideration received
in the merger or sale of assets is not solely common stock of the successor
corporation or its Parent, the Administrator may, with the consent of the
successor corporation, provide for the consideration to be received upon the
exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.

     13.  Time of Granting Options and Stock Purchase Rights.  The date of
          --------------------------------------------------
grant of an Option or Stock Purchase Right shall, for all purposes, be the date
on which the Administrator makes the

                                      -9-
<PAGE>

determination granting such Option or Stock Purchase Right, or such other date
as is determined by the Administrator. Notice of the determination shall be
given to each Employee to whom an Option or Stock Purchase Right is so granted
within a reasonable time after the date of such grant.

     14.  Amendment and Termination of the Plan.
          -------------------------------------

          (a)  Amendment and Termination.  The Board may at any time amend,
               -------------------------
alter, suspend or terminate the Plan.

          (b)  Shareholder Approval.  The Board shall obtain shareholder
               --------------------
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.

          (c)  Effect of Amendment or Termination.  No amendment, alteration,
               ----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.

     15.  Conditions Upon Issuance of Shares.
          ----------------------------------

          (a)  Legal Compliance.  Shares shall not be issued pursuant to the
               ----------------
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.

          (b)  Investment Representations.  As a condition to the exercise of an
               --------------------------
Option, the Administrator may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.

     16.  Inability to Obtain Authority.  The inability of the Company to obtain
          -----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.

     17.  Reservation of Shares.  The Company, during the term of this Plan,
          ---------------------
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.

     18.  Shareholder Approval.  The Plan shall be subject to approval by the
          --------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted.  Such shareholder approval shall be obtained in the degree and manner
required under Applicable Laws.

                                      -10-
<PAGE>

     19.  Information to Optionees and Purchasers.  The Company shall provide to
          ---------------------------------------
each Optionee and to each individual who acquires Shares pursuant to the Plan,
not less frequently than annually during the period such Optionee or purchaser
has one or more Options or Stock Purchase Rights outstanding, and, in the case
of an individual who acquires Shares pursuant to the Plan, during the period
such individual owns such Shares, copies of annual financial statements.  The
Company shall not be required to provide such statements to key employees whose
duties in connection with the Company assure their access to equivalent
information.

                                      -11-
<PAGE>

                         NUMERICAL TECHNOLOGIES, INC.

                                1997 STOCK PLAN

                   STOCK OPTION AGREEMENT -- EARLY EXERCISE

     Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.

I.   NOTICE OF STOCK OPTION GRANT
     ----------------------------

     [Optionee's Name]

     You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:

     Date of Grant:                     ________________________________

     Vesting Commencement Date:         ________________________________

     Exercise Price per Share:          $_______________________________

     Total Number of Shares Granted:    ________________________________

     Total Exercise Price:              $_______________________________

     Type of Option:                    ____  Incentive Stock Option

                                        ____  Nonstatutory Stock Option

     Term/Expiration Date:              Ten Years/________________*

_______________
*  Or earlier, pursuant to the termination period set forth below.

     Exercise and Vesting Schedule:
     -----------------------------

     This Option is exercisable immediately, in whole or in part, and shall vest
according to the following vesting schedule:

     The vesting schedule shall be determined by the Administrator in its sole
discretion.
<PAGE>

     Termination Period:
     ------------------

     You may exercise this Option for thirty days after you cease to be a
Service Provider. Upon your death or disability, this Option may be exercised
for one year after you cease to be a Service Provider. In no event may you
exercise this Option after the Term/Expiration Date as provided above.

II.  AGREEMENT
     ---------

     1.   Grant of Option.  The Plan Administrator of the Company hereby grants
          ---------------
to the Optionee named in the Notice of Grant (the "Optionee"), an option (the
"Option") to purchase the number of Shares set forth in the Notice of Grant, at
the exercise price per Share set forth in the Notice of Grant (the "Exercise
Price"), and subject to the terms and conditions of the Plan, which is
incorporated herein by reference. Subject to Section 14(c) of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this Option
Agreement, the terms and conditions of the Plan shall prevail.

     If designated in the Notice of Grant as an Incentive Stock Option ("ISO"),
this Option is intended to qualify as an Incentive Stock Option as defined in
Section 422 of the Code. Nevertheless, to the extent that it exceeds the
$100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").

     2.   Exercise of Option.  This Option shall be exercisable during its
          ------------------
term in accordance with the provisions of Section 9 of the Plan as follows:

          (a)  Right to Exercise.
               -----------------

               (i)   Subject to subsections 2(a)(ii) and 2(a)(iii) below, this
Option shall be exercisable cumulatively according to the vesting schedule set
forth in the Notice of Grant. Alternatively, at the election of the Optionee,
this option may be exercised in whole or in part at any time as to Shares which
have not yet vested. For purposes of this Stock Option Agreement, Shares subject
to the Option shall vest based on continued employment of Optionee with the
Company. Vested Shares shall not be subject to the Company's repurchase right
(as set forth in the Restricted Stock Purchase Agreement, attached hereto as
Exhibit C-1).
- -----------

               (ii)  As a condition to exercising this Option for unvested
Shares, the Optionee shall execute the Restricted Stock Purchase Agreement.

               (iii) This Option may not be exercised for a fraction of a Share.

          (b)  Method of Exercise.  This Option shall be exercisable by delivery
               ------------------
of an exercise notice in the form attached as Exhibit A (the "Exercise Notice")
                                              ---------
which shall state the election to exercise the Option, the number of Shares with
respect to which the Option is being exercised, and such other representations
and agreements as may be required by the Company. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Exercised

                                      -2-
<PAGE>

Shares. This Option shall be deemed to be exercised upon receipt by the Company
of such fully executed Exercise Notice accompanied by the aggregate Exercise
Price.

     No Shares shall be issued pursuant to the exercise of an Option unless such
issuance and such exercise complies with Applicable Laws.  Assuming such
compliance, for income tax purposes the Shares shall be considered transferred
to the Optionee on the date on which the Option is exercised with respect to
such Shares.

     3.   Optionee's Representations.  In the event the Shares have not been
          --------------------------
registered under the Securities Act of 1933, as amended, at the time this Option
is exercised, the Optionee shall, if required by the Company, concurrently with
the exercise of all or any portion of this Option, deliver to the Company his or
her Investment Representation Statement in the form attached hereto as Exhibit
                                                                       -------
B.

     4.   Lock-Up Period.  Optionee hereby agrees that, if so requested by the
          --------------
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
the effective date of a registration statement of the Company filed under the
Securities Act.  Such restriction shall apply only  to the first registration
statement of the Company to become effective under the Securities Act that
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act.  The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.

     5.   Method of Payment.  Payment of the aggregate Exercise Price shall be
          -----------------
by any of the following, or a combination thereof, at the election of the
Optionee:

          (a)  cash;

          (b)  check;

          (c)  consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan; or

          (d)  surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares.

     6.   Restrictions on Exercise.  This Option may not be exercised until such
          ------------------------
time as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any Applicable
Law.

                                      -3-
<PAGE>

     7.   Non-Transferability of Option.  This Option may not be transferred
          -----------------------------
in any manner otherwise than by will or by the laws of descent or distribution
and may be exercised during the lifetime of Optionee only by Optionee. The terms
of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.

     8.   Term of Option.  This Option may be exercised only within the term set
          --------------
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.

     9.   Tax Consequences.  Set forth below is a brief summary as of the date
          ----------------
of this Option of some of the federal tax consequences of exercise of this
Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE,
AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD
CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

          (a)  Exercise of ISO.  If this Option qualifies as an ISO, there will
               ---------------
be no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price will be treated as an adjustment to the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.

          (b)  Exercise of ISO Following Disability.  If the Optionee ceases to
               ------------------------------------
be an Employee as a result of a disability that is not a total and permanent
disability as defined in Section 22(e)(3) of the Code, to the extent permitted
on the date of termination, the Optionee must exercise an ISO within three
months of such termination for the ISO to be qualified as an ISO.

          (c)  Exercise of Nonstatutory Stock Option.  There may be a regular
               -------------------------------------
federal income tax liability upon the exercise of a Nonstatutory Stock Option.
The Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market Value
of the Shares on the date of exercise over the Exercise Price. If Optionee is an
Employee or a former Employee, the Company will be required to withhold from
Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount in cash equal to a percentage of this compensation
income at the time of exercise, and may refuse to honor the exercise and refuse
to deliver Shares if such withholding amounts are not delivered at the time of
exercise.

          (d)  Disposition of Shares.  In the case of an NSO, if Shares are
               ---------------------
held for at least one year, any gain realized on disposition of the Shares will
be treated as long-term capital gain for federal income tax purposes. In the
case of an ISO, if Shares transferred pursuant to the Option are held for at
least one year after exercise and at least two years after the Date of Grant,
any gain realized on disposition of the Shares will also be treated as long-term
capital gain for federal income tax purposes. If Shares purchased under an ISO
are disposed of within one year after exercise or two years after the Date of
Grant, any gain realized on such disposition will be treated as compensation
income (taxable at ordinary income rates) to the extent of the difference
between the Exercise Price and the lesser of (i) the Fair Market Value of the
Shares on the date of exercise, or (ii) the sale price

                                      -4-
<PAGE>

of the Shares. Any additional gain will be taxed as capital gain, short-term
depending on the period that the ISO Shares were held.

          (e)  Notice of Disqualifying Disposition of ISO Shares.  If the Option
               -------------------------------------------------
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (i) the date two years after the Date of Grant, or (ii) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition.  Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.

          (f)  Section 83(b) Election for Unvested Shares Purchased Pursuant to
               ----------------------------------------------------------------
Options.  With respect to the exercise of an Option for unvested Shares, an
- -------
election may be filed by the Optionee with the Internal Revenue Service, within
                                                                         ------
30 days of the purchase of the Shares, electing pursuant to Section 83(b) of the
- -------
Code to be taxed currently on any difference between the purchase price of the
Shares and their Fair Market Value on the date of purchase.  In the case of a
Nonstatutory Stock Option, this will result in a recognition of taxable income
to the Optionee on the date of exercise, measured by the excess, if any, of the
fair market value of the Shares, at the time the Option is exercised over the
purchase price for the Shares.  Absent such an election, taxable income will be
measured and recognized by Optionee at the time or times on which the Company's
Repurchase Option lapses.  In the case of an Incentive Stock Option, such an
election will result in a recognition of income to the Optionee for alternative
minimum tax purposes on the date of exercise, measured by the excess, if any, of
the fair market value of the Shares, at the time the option is exercised, over
the purchase price for the Shares.  Absent such an election, alternative minimum
taxable income will be measured and recognized by Optionee at the time or times
on which the Company's Repurchase Option lapses.   Optionee is strongly
encouraged to seek the advice of his or her own tax consultants in connection
with the purchase of the Shares and the advisability of filing of the Election
under Section 83(b) of the Code.  A form of Election under Section 83(b) is
attached hereto as Exhibit C-5 for reference.
                   -----------

     OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY AND NOT THE
COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF OPTIONEE
REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON OPTIONEE'S
BEHALF.

     10.  Entire Agreement; Governing Law.  The Plan is incorporated herein by
          -------------------------------
reference.  The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee.  This agreement is governed by the internal substantive laws but not
the choice of law rules of California.

     11.  No Guarantee of Continued Service.  OPTIONEE ACKNOWLEDGES AND AGREES
          ---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH
THE ACT OF BEING HIRED, BEING GRANTED THIS

                                      -5-
<PAGE>

OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES
THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING
SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF
CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY
PERIOD, OR AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR
THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER
AT ANY TIME, WITH OR WITHOUT CAUSE.

     Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option. Optionee
further agrees to notify the Company upon any change in the residence address
indicated below.

OPTIONEE:                          NUMERICAL TECHNOLOGIES, INC.


_______________________________    _______________________________
Signature                          By

_______________________________    _______________________________
Print Name                         Title

_______________________________
_______________________________
Residence Address

                                      -6-
<PAGE>

                                   EXHIBIT A
                                   ---------

                                1997 STOCK PLAN

                                EXERCISE NOTICE

Numerical Technologies, Inc.
70 West Plumeria Drive
San Jose, CA  95134-2134

Attention:  Secretary

     1.   Exercise of Option.  Effective as of today, _____________, _____, the
          ------------------
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
_________ shares of the Common Stock (the "Shares") of Numerical Technologies,
Inc. (the "Company") under and pursuant to the 1997 Stock Plan (the "Plan") and
the [  ] Incentive [  ] Nonstatutory Stock Option Agreement dated ____________,
______ (the "Option Agreement").

     2.   Delivery of Payment.  Purchaser herewith delivers to the Company the
          -------------------
full purchase price of the Shares, as set forth in the Option Agreement.

     3.   Representations of Optionee.  Optionee acknowledges that Optionee has
          ---------------------------
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.

     4.   Rights as Shareholder.  Until the issuance of the Shares (as
          ---------------------
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company), no right to vote or receive dividends
or any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares shall be issued to
the Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 12 of the Plan.

     5.   Company's Right of First Refusal.  Before any Shares held by
          --------------------------------
Optionee or any transferee (either being sometimes referred to herein as the
"Holder") may be sold or otherwise transferred (including transfer by gift or
operation of law), the Company or its assignee(s) shall have a right of first
refusal to purchase the Shares on the terms and conditions set forth in this
Section (the "Right of First Refusal").

          (a)  Notice of Proposed Transfer.  The Holder of the Shares shall
               ---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder proposes to
transfer the
<PAGE>

Shares (the "Offered Price"), and the Holder shall offer the Shares at the
Offered Price to the Company or its assignee(s).

          (b)  Exercise of Right of First Refusal.  At any time within thirty
               ----------------------------------
(30) days after receipt of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.

          (c)  Purchase Price.  The purchase price ("Purchase Price") for the
               --------------
Shares purchased by the Company or its assignee(s) under this Section shall be
the Offered Price. If the Offered Price includes consideration other than cash,
the cash equivalent value of the non-cash consideration shall be determined by
the Board of Directors of the Company in good faith.

          (d)  Payment.  Payment of the Purchase Price shall be made, at the
               -------
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.

          (e)  Holder's Right to Transfer.  If all of the Shares proposed in the
               --------------------------
Notice to be transferred to a given Proposed Transferee are not purchased by the
Company and/or its assignee(s) as provided in this Section, then the Holder may
sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice, that any such sale or
other transfer is effected in accordance with any applicable securities laws and
that the Proposed Transferee agrees in writing that the provisions of this
Section shall continue to apply to the Shares in the hands of such Proposed
Transferee.  If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.

          (f)  Exception for Certain Family Transfers.  Anything to the contrary
               --------------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Optionee's lifetime or on the Optionee's death by will or
intestacy to the Optionee's immediate family or a trust for the benefit of the
Optionee's immediate family shall be exempt from the provisions of this Section.
"Immediate Family" as used herein shall mean spouse, lineal descendant or
antecedent, father, mother, brother or sister.  In such case, the transferee or
other recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.

          (g)  Termination of Right of First Refusal.  The Right of First
               -------------------------------------
Refusal shall terminate as to any Shares upon the first sale of Common Stock of
the Company to the general public pursuant to a registration statement filed
with and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.

                                      -2-
<PAGE>

     6.   Tax Consultation.  Optionee understands that Optionee may suffer
          ----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.

     7.   Restrictive Legends and Stop-Transfer Orders.
          --------------------------------------------

          (a)  Legends.  Optionee understands and agrees that the Company shall
               -------
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by the Company or by state or
federal securities laws:

          THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
          SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR
          OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
          REGISTERED UNDER THE ACT OR, IN THE OPINION OF COMPANY COUNSEL
          SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR
          TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.

          THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
          RESTRICTIONS ON TRANSFER AND RIGHT OF FIRST REFUSAL OPTIONS HELD BY
          THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE
          BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF
          WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER.  SUCH
          TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON
          TRANSFEREES OF THESE SHARES.

          (b)  Stop-Transfer Notices.  Optionee agrees that, in order to ensure
               ---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company  transfers its own securities, it may make appropriate
notations to the same effect in its own records.

          (c)  Refusal to Transfer.  The Company shall not be required (i) to
               -------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.

     8.   Successors and Assigns.  The Company may assign any of its rights
          ----------------------
under this Agreement to single or multiple assignees, and this Agreement shall
inure to the benefit of the successors and assigns of the Company. Subject to
the restrictions on transfer herein set forth, this Agreement shall be binding
upon Optionee and his or her heirs, executors, administrators, successors and
assigns.

                                      -3-
<PAGE>

     9.   Interpretation.  Any dispute regarding the interpretation of this
          --------------
Agreement shall be submitted by Optionee or by the Company forthwith to the
Administrator which shall review such dispute at its next regular meeting.  The
resolution of such a dispute by the Administrator shall be final and binding on
all parties.

     10.  Governing Law; Severability.  This Agreement is governed by the
          ---------------------------
internal substantive laws, but not the choice of law rules, of California.

     11.  Entire Agreement.  The Plan and Option Agreement are incorporated
          ----------------
herein by reference.  This Agreement, the Plan, the Restricted Stock Purchase
Agreement, the Option Agreement and the Investment Representation Statement
constitute the entire agreement of the parties with respect to the subject
matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee's interest except by
means of a writing signed by the Company and Optionee.

Submitted by:                           Accepted by:

OPTIONEE:                               NUMERICAL TECHNOLOGIES, INC.


________________________________        ________________________________
Signature                               By


________________________________        ________________________________
Print Name                              Its

Address:                                Address:
- -------                                 -------

- --------------------------------        70 West Plumeria Drive
                                        San Jose, CA  95134-2134

- --------------------------------


                                        ________________________________
                                        Date Received

                                      -4-
<PAGE>

                                   EXHIBIT B
                                   ---------

                      INVESTMENT REPRESENTATION STATEMENT

OPTIONEE       :

COMPANY        :    NUMERICAL TECHNOLOGIES, INC.

SECURITY       :    COMMON STOCK

AMOUNT         :

DATE           :

     In connection with the purchase of the above-listed Securities, the
undersigned Optionee represents to the Company the following:

          (a)  Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities.  Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").

          (b)  Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Optionee's investment intent as expressed herein. In this connection,
Optionee understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Optionee's representation was predicated solely upon a present intention to hold
these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. Optionee further understands that the Securities must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Optionee further
acknowledges and understands that the Company is under no obligation to register
the Securities. Optionee understands that the certificate evidencing the
Securities will be imprinted with a legend which prohibits the transfer of the
Securities unless they are registered or such registration is not required in
the opinion of counsel satisfactory to the Company, and any other legend
required under applicable state securities laws.

          (c)  Optionee is familiar with the provisions of Rule 701 and Rule
144, each promulgated under the Securities Act, which, in substance, permit
limited public resale of "restricted securities" acquired, directly or
indirectly from the issuer thereof, in a non-public offering subject to
<PAGE>

the satisfaction of certain conditions. Rule 701 provides that if the issuer
qualifies under Rule 701 at the time of the grant of the Option to the Optionee,
the exercise will be exempt from registration under the Securities Act. In the
event the Company becomes subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or
such longer period as any market stand-off agreement may require) the Securities
exempt under Rule 701 may be resold, subject to the satisfaction of certain of
the conditions specified by Rule 144, including: (1) the resale being made
through a broker in an unsolicited "broker's transaction" or in transactions
directly with a market maker (as said term is defined under the Securities
Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of
certain public information about the Company, (3) the amount of Securities being
sold during any three month period not exceeding the limitations specified in
Rule 144(e), and (4) the timely filing of a Form 144, if applicable.

     In the event that the Company does not qualify under Rule 701 at the time
of grant of the Option, then the Securities may be resold in certain limited
circumstances subject to the provisions of Rule 144, which requires the resale
to occur not less than one year after the later of the date the Securities were
sold by the Company or the date the Securities were sold by an affiliate of the
Company, within the meaning of Rule 144; and, in the case of acquisition of the
Securities by an affiliate, or by a non-affiliate who subsequently holds the
Securities less than two years, the satisfaction of the conditions set forth in
sections (1), (2), (3) and (4) of the paragraph immediately above.

          (d)  Optionee further understands that in the event all of the
applicable requirements of Rule 701 or 144 are not satisfied, registration under
the Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk. Optionee understands that no assurances can be given that any
such other registration exemption will be available in such event.


                                             Signature of Optionee:

                                             ___________________________________

                                             Date:______________________, ______

                                      -2-
<PAGE>

                                  EXHIBIT C-1
                                  -----------

                         NUMERICAL TECHNOLOGIES, INC.

                                1997 STOCK PLAN

                      RESTRICTED STOCK PURCHASE AGREEMENT

     THIS AGREEMENT is made between ____________________________________ (the
"Purchaser") and Numerical Technologies, Inc. (the "Company") as of
__________________, _____.

                                   RECITALS
                                   --------

     (1) Pursuant to the exercise of the stock option granted to Purchaser under
the Company's 1997 Stock Plan (the "Plan") and pursuant to the Stock Option
Agreement (the "Option Agreement") dated ____________, _____ by and between the
Company and Purchaser with respect to such grant, which Plan and Option
Agreement are hereby incorporated by reference, Purchaser has elected to
purchase _________ of those shares which have not become vested under the
vesting schedule set forth in the Option Agreement ("Unvested Shares").  The
Unvested Shares and the shares subject to the Option Agreement which have become
vested are sometimes collectively referred to herein as the "Shares".

     (2) As required by the Option Agreement, as a condition to Purchaser's
election to exercise the option, Purchaser must execute this Restricted Stock
Purchase Agreement, which sets forth the rights and obligations of the parties
with respect to Shares acquired upon exercise of the Option.

     1.  Repurchase Option.
         -----------------

         (a)  If Purchaser's status as a Service Provider is terminated for any
reason, including for cause, death, and disability, the Company shall have the
right and option to purchase from Purchaser, or Purchaser's personal
representative, as the case may be, all of the Purchaser's Unvested Shares as of
the date of such termination at the price paid by the Purchaser for such Shares
(the "Repurchase Option").

         (b)  Upon the occurrence of a termination, the Company may exercise its
Repurchase Option by delivering personally or by registered mail, to Purchaser
(or his transferee or legal representative, as the case may be), within ninety
(90) days of the termination, a notice in writing indicating the Company's
intention to exercise the Repurchase Option and setting forth a date for closing
not later than thirty (30) days from the mailing of such notice. The closing
shall take place at the Company's office. At the closing, the holder of the
certificates for the Unvested Shares being transferred shall deliver the stock
certificate or certificates evidencing the Unvested Shares, and the Company
shall deliver the purchase price therefor.
<PAGE>

          (c)  At its option, the Company may elect to make payment for the
Unvested Shares to a bank selected by the Company. The Company shall avail
itself of this option by a notice in writing to Purchaser stating the name and
address of the bank, date of closing, and waiving the closing at the Company's
office.

          (d)  If the Company does not elect to exercise the Repurchase Option
conferred above by giving the requisite notice within ninety (90) days following
the termination, the Repurchase Option shall terminate.

          (e)  The Repurchase Option shall terminate in accordance with the
Vesting Schedule in Optionee's Option Agreement.

     2.   Transferability of the Shares; Escrow.
          -------------------------------------

          (a)  Purchaser hereby authorizes and directs the secretary of the
Company, or such other person designated by the Company, to transfer the
Unvested Shares as to which the Repurchase Option has been exercised from
Purchaser to the Company.

          (b)  To insure the availability for delivery of Purchaser's Unvested
Shares upon repurchasby the Company pursuant to the Repurchase Option under
Section 1, Purchaser hereby appoints the secretary, or any other person
designated by the Company as escrow agent, as its attorney-in-fact to sell,
assign and transfer unto the Company, such Unvested Shares, if any, repurchased
by the Company pursuant to the Repurchase Option and shall, upon execution of
this Agreement, deliver and deposit with the secretary of the Company, or such
other person designated by the Company, the share certificates representing the
Unvested Shares, together with the stock assignment duly endorsed in blank,
attached hereto as Exhibit C-2. The Unvested Shares and stock assignment shall
                   -----------
be held by the secretary in escrow, pursuant to the Joint Escrow Instructions of
the Company and Purchaser attached as Exhibit C-3 hereto, until the Company
                                      -----------
exercises its purchase right as provided in Section 1, until such Unvested
Shares are vested, or until such time as this Agreement no longer is in effect.
As a further condition to the Company's obligations under this Agreement, the
spouse of the Purchaser, if any, shall execute and deliver to the Company the
Consent of Spouse attached hereto as Exhibit C-4. Upon vesting of the Unvested
                                     -----------
Shares, the escrow agent shall promptly deliver to the Purchaser the certificate
or certificates representing such Shares in the escrow agent's possession
belonging to the Purchaser, and the escrow agent shall be discharged of all
further obligations hereunder; provided, however, that the escrow agent shall
nevertheless retain such certificate or certificates as escrow agent if so
required pursuant to other restrictions imposed pursuant to this Agreement.

          (c)  The Company, or its designee, shall not be liable for any act it
may do or omit to do with respect to holding the Shares in escrow and while
acting in good faith and in the exercise of its judgment.

          (d)  Transfer or sale of the Shares is subject to restrictions on
transfer imposed by any applicable state and federal securities laws. Any
transferee shall hold such Shares subject to all the provisions hereof and the
Exercise Notice executed by the Purchaser with respect to any

                                      -2-
<PAGE>

Unvested Shares purchased by Purchaser and shall acknowledge the same by signing
a copy of this Agreement.

     3.   Ownership, Voting Rights, Duties. This Agreement shall not affect in
          --------------------------------
any way the ownership, voting rights or other rights or duties of Purchaser,
except as specifically provided herein.

     4.   Legends.  The share certificate evidencing the Shares issued hereunder
          -------
shall be endorsed with the following legend (in addition to any legend required
under applicable state securities laws):

     THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT
BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.

     5.   Adjustment for Stock Split. All references to the number of Shares and
          --------------------------
the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.

     6.   Notices.  Notices required hereunder shall be given in person or by
          -------
registered mail to the address of Purchaser shown on the records of the Company,
and to the Company at their respective principal executive offices.

     7.   Survival of Terms. This Agreement shall apply to and bind Purchaser
          -----------------
and the Company and their respective permitted assignees and transferees, heirs,
legatees, executors, administrators and legal successors.

     8.   Section 83(b) Election.  Purchaser hereby acknowledges that he or she
          ----------------------
has been informed that, with respect to the exercise of an Option for unvested
Shares, an election may be filed by the Purchaser with the Internal Revenue
Service, within 30 days of the purchase of the Shares, electing pursuant to
         --------------
Section 83(b) of the Code to be taxed currently on any difference between the
purchase price of the Shares and their Fair Market Value on the date of
purchase. In the case of a Nonstatutory Stock Option, this will result in a
recognition of taxable income to the Purchaser on the date of exercise, measured
by the excess, if any, of the fair market value of the Shares, at the time the
Option is exercised over the purchase price for the Shares. Absent such an
election, taxable income will be measured and recognized by Purchaser at the
time or times on which the Company's Repurchase Option lapses. In the case of an
Incentive Stock Option, such an election will result in a recognition of income
to the Purchaser for alternative minimum tax purposes on the date of exercise,
measured by the excess, if any, of the fair market value of the Shares, at the
time the option is exercised, over the purchase price for the Shares. Absent
such an election, alternative minimum taxable income will be measured and
recognized by Purchaser at the time or times on which the Company's Repurchase
Option lapses. Purchaser is strongly encouraged to seek the advice of his or her
own tax consultants in connection with the purchase of the Shares and the
advisability of filing

                                      -3-
<PAGE>

of the Election under Section 83(b) of the Code. A form of Election under
Section 83(b) is attached hereto as Exhibit C-5 for reference.
                                    -----------

     PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE RESPONSIBILITY AND NOT
THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF PURCHASER
REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON PURCHASER'S
BEHALF.

     9.   Representations.  Purchaser has reviewed with his own tax advisors the
          ---------------
federal, state, local and foreign tax consequences of this investment and the
transactions contemplated by this Agreement. Purchaser is relying solely on such
advisors and not on any statements or representations of the Company or any of
its agents. Purchaser understands that he (and not the Company) shall be
responsible for his own tax liability that may arise as a result of this
investment or the transactions contemplated by this Agreement.

     10.  Governing Law.  This Agreement shall be governed by the internal
          -------------
substantive laws, but not the choice of law rules, of California.

     Purchaser represents that he has read this Agreement and is familiar with
its terms and provisions.  Purchaser hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board upon any
questions arising under this Agreement.

                                      -4-
<PAGE>

     IN WITNESS WHEREOF, this Agreement is deemed made as of the date first set
forth above.

                                    "COMPANY"

                                    NUMERICAL TECHNOLOGIES, INC


                                    _______________________________________
                                    By

                                    _______________________________________
                                    Title

                                    "PURCHASER"


                                    _______________________________________
                                    Signature

                                    _______________________________________
                                    Printed Name

                                    _______________________________________
                                    Soc. Sec. No.

                                    Address:
                                    -------

                                    _______________________________________

                                    _______________________________________

                                      -5-
<PAGE>

                                  EXHIBIT C-2
                                  -----------

                     ASSIGNMENT SEPARATE FROM CERTIFICATE

     FOR VALUE RECEIVED I, __________________________, hereby sell, assign and
transfer unto Numerical Technologies, Inc. (__________) shares of the Common
Stock of Numerical Technologies, Inc. standing in my name of the books of said
corporation represented by Certificate No. _____ herewith and do hereby
irrevocably constitute and appoint    to transfer the said stock on the books of
the within named corporation with full power of substitution in the premises.

     This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between Numerical Technologies, Inc. and the
undersigned dated ______________, _____.

Dated: _______________, ______

       Signature:________________________________



INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise its
"repurchase option," as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE>

                                  EXHIBIT C-3
                                  -----------

                           JOINT ESCROW INSTRUCTIONS

                                                             ____________, _____

Numerical Technologies, Inc.
70 West Plumeria Drive
San Jose, CA  95134-2134
Attention:  Secretary

Dear:

     As Escrow Agent for both Numerical Technologies, Inc. (the "Company"), and
the undersigned purchaser of stock of the Company (the "Purchaser"), you are
hereby authorized and directed to hold the documents delivered to you pursuant
to the terms of that certain Restricted Stock Purchase Agreement ("Agreement")
between the Company and the undersigned, in accordance with the following
instructions:

     1.   In the event the Company and/or any assignee of the Company (referred
to collectively for convenience herein as the "Company") exercises the Company's
repurchase option set forth in the Agreement, the Company shall give to
Purchaser and you a written notice specifying the number of shares of stock to
be purchased, the purchase price, and the time for a closing hereunder at the
principal office of the Company. Purchaser and the Company hereby irrevocably
authorize and direct you to close the transaction contemplated by such notice in
accordance with the terms of said notice.

     2.   At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, or some combination thereof) for the number of shares of stock
being purchased pursuant to the exercise of the Company's repurchase option.

     3.   Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a stockholder of the Company while the
stock is held by you.
<PAGE>

     4.   Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's repurchase option has been exercised, you
will deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the Company's repurchase option.
Within 120 days after cessation of Purchaser's continuous employment by or
services to the Company, or any parent or subsidiary of the Company, you will
deliver to Purchaser a certificate or certificates representing the aggregate
number of shares held or issued pursuant to the Agreement and not purchased by
the Company or its assignees pursuant to exercise of the Company's repurchase
option.

     5.   If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.

     6.   Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.

     7.   You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith,
and any act done or omitted by you pursuant to the advice of your own attorneys
shall be conclusive evidence of such good faith.

     8.   You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court. In
case you obey or comply with any such order, judgment or decree, you shall not
be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.

     9.   You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.

     10.  You shall not be liable for the outlawing of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.

     11.  You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.

                                      -2-
<PAGE>

     12.  Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be an officer or agent of the Company or if you shall resign by
written notice to each party. In the event of any such termination, the Company
shall appoint a successor Escrow Agent.

     13.  If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.

     14.  It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.

     15.  Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.

          COMPANY:       Numerical Technologies, Inc.
                         70 West Plumeria Drive
                         San Jose, CA 95134-2134
                         Attention:  Secretary

          PURCHASER:     ____________________________


          ESCROW AGENT:  Wilson Sonsini Goodrich & Rosati
                         650 Page Mill Road
                         Palo Alto, CA 94304

     16.  By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.

     17.  This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.

                                      -3-
<PAGE>

     18.  These Joint Escrow Instructions shall be governed by the internal
substantive laws, but not the choice of law rules, of California.

                                    NUMERICAL TECHNOLOGIES, INC.

                                    ______________________________
                                    By

                                    ______________________________
                                    Title

                                    PURCHASER

                                    ______________________________
                                    Signature

                                    ______________________________
                                    Typed or Printed Name

                                    ESCROW AGENT

                                    WILSON SONSINI GOODRICH & ROSATI

                                    ______________________________
                                    By

                                    ______________________________
                                    Title

                                      -4-
<PAGE>

                                 EXHIBIT  C-4
                                 ------------

                               CONSENT OF SPOUSE
                               -----------------

     I, ____________________, spouse of ___________________, have read and
approve the foregoing Agreement.  In consideration of granting of the right to
my spouse to purchase shares of ____________________________, as set forth in
the Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to
the exercise of any rights under the Agreement and agree to be bound by the
provisions of the Agreement insofar as I may have any rights in said Agreement
or any shares issued pursuant thereto under the community property laws or
similar laws relating to marital property in effect in the state of our
residence as of the date of the signing of the foregoing Agreement.

Dated: _______________,  _____

                                             ______________________________

<PAGE>

                                  EXHIBIT C-5
                                  -----------

                         ELECTION UNDER SECTION 83(b)
                         -----------------------------
                     OF THE INTERNAL REVENUE CODE OF 1986
                     ------------------------------------

The undersigned taxpayer hereby elects, pursuant to Sections 55 and 83(b) of the
Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income
or alternative minimum taxable income, as the case may be, for the current
taxable year the amount of any compensation taxable to taxpayer in connection
with taxpayer's receipt of the property described below:

1.   The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:

     NAME:                 TAXPAYER:                SPOUSE:

     ADDRESS:

     IDENTIFICATION NO.:   TAXPAYER:                SPOUSE:

     TAXABLE YEAR:

2.   The property with respect to which the election is made is described as
follows:______________________________ shares (the "Shares") of the Common Stock
of ___________________________ (the "Company").

3.   The date on which the property was transferred is:  _______________, _____.

4.   The property is subject to the following restrictions:

     The Shares may not be transferred and are subject to forfeiture under the
terms of an agreement between the taxpayer and the Company.  These restrictions
lapse upon the satisfaction of certain conditions contained in such agreement.

5.   The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never lapse, of
such property is:
     $______________________.

6.   The amount (if any) paid for such property is:
     $______________________.

The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property.  The transferee of such property is the person
performing the services in connection with the transfer of said property.

The undersigned understands that the foregoing election may not be revoked
- --------------------------------------------------------------------------
except with the consent of the Commissioner.
- -------------------------------------------

Dated:  ___________________, _____           ___________________________________
                                             Taxpayer

The undersigned spouse of taxpayer joins in this election.

Dated:  ___________________, _____           ___________________________________

<PAGE>
                                                                  Exhibit 10.28
                         NUMERICAL TECHNOLOGIES, INC.

                                2000 STOCK PLAN

                   STOCK OPTION AGREEMENT -- EARLY EXERCISE

     Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.

I.   NOTICE OF STOCK OPTION GRANT
     ----------------------------

     Roger Sturgeon

     You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:

     Date of Grant:                          February 1, 2000

     Vesting Commencement Date:              January 1, 2000

     Exercise Price per Share:               $4.00

     Total Number of Shares Granted:         150,000

     Total Exercise Price:                   $600,000.00

     Type of Option:                         ___ Incentive Stock Option

                                              X  Nonstatutory Stock Option
                                             ---

     Term/Expiration Date:                   Ten Years/February 1,2010*

________________
* Or earlier, pursuant to the termination period set forth below.

     Exercise and Vesting Schedule:
     -----------------------------

     This Option is exercisable immediately, in whole or in part, and shall vest
according to the following vesting schedule:

     One-half (1/2) of the Shares subject to this Option shall vest on January
1, 2002 and one-sixteenth (1/16th) of the Shares subject to this Option shall
vest on April 1, 2002 and on the last day of each three month anniversary
thereafter, subject to your continuing to be a Service Provider on such dates;
provided, however, if your employment with the Company is terminated prior to
January 1, 2002 by reason of your death or disability (as defined in the Plan),
then the shares shall
<PAGE>

become vested on an accelerated basis, and the Company's repurchase right shall
accordingly lapse, in accordance with the following schedule: one-sixteenth
(1/16th) of the shares subject to this Option shall vest for each three (3)
month period, measured from January 1, 2000, for which you completed employment
with the Company prior to your termination by reason of death or disability.

     Change of Control; Constructive Termination:
     -------------------------------------------

     Notwithstanding the provisions of Section 14(c) of the Plan, if the Company
merges with or into another entity, sells all or substantially all of its
assets, or enters into any other similar transaction or reorganization
(including without limitation, a sale of stock of the Company) as a result of
which the shareholders of the Company immediately prior to such transaction will
not hold at least 50% of the voting power of the surviving, purchasing or
continuing entity, as applicable (taking into account any securities issued to
the shareholders of the Company in the transaction) (a "Change of Control
Transaction"), then on the later of (i) January 2, 2002 (the "Two Year
Employment Anniversary Date") or (ii) the six month anniversary of the Change of
Control Transaction (the "Merger Anniversary Date") fifty percent (50%) of the
Shares subject to the Option which have not vested as of the Two Year Employment
Anniversary Date or the Merger Anniversary Date, as applicable, shall become
fully vested and exercisable.  The Board shall notify the Optionee at least
fifteen (15) days prior to the closing of a Change of Control Transaction, and
such notification shall include a statement as to whether or not the Option will
be assumed by the surviving or purchasing entity or whether an equivalent
substitute option will be provided by such entity.

     Following an assumption or substitution of the Option in connection with a
Change of Control Transaction, if the Optionee's status as an Employee of the
successor corporation is terminated by the successor corporation as a result of
an Involuntary Termination (as defined below) within twelve months following the
Change of Control Transaction, the Optionee shall fully vest in and have the
right to exercise the Option as to all of the Shares, including Shares as to
which the Option would not otherwise be vested or exercisable.

     Any of the following events shall constitute an "Involuntary Termination":
(i) without the Optionee's express written consent, a significant reduction of
the Optionee's duties, authority and responsibilities, relative to the
Optionee's duties, authority and responsibilities as in effect immediately prior
to the Change of Control Transaction; (ii) a material reduction in the base
salary of the Optionee as in effect immediately prior to the Change of Control
Transaction; (iii) a material reduction in the kind or level of employee
benefits, including bonuses, to which the Optionee was entitled immediately
prior to the Change of Control Transaction with the result that the Optionee's
overall benefits package is significantly reduced; (iv) the relocation of the
Optionee to a facility or a location more than sixty (60) miles from the
Optionee's then present location, without the Optionee's express written
consent; (v) any purported termination of the Optionee which is not effected for
Disability or for Cause (as defined below), or any purported termination for
which the grounds relied upon are not valid; (vi) or any act or set of facts or
circumstances which would, under California case law or statute, constitute a
constructive termination of the Optionee.

                                      -2-
<PAGE>

     "Cause" shall mean (i) any act of personal dishonesty taken by the Optionee
in connection with his responsibilities as a Service Provider and intended to
result in substantial personal enrichment of the Optionee, (ii) Optionee's
conviction of a felony, (iii) a willful act by the Optionee which constitutes
gross misconduct and which is injurious to the Successor Corporation, and (iv)
following delivery to the Optionee of a written demand for performance from the
Successor Corporation which describes the basis for the Successor Corporation's
belief that the Optionee has not substantially performed his duties, continued
violations by the Optionee of the Optionee's obligations to the Successor
Corporation which are demonstrably willful and deliberate on the Optionee's
part.

     Termination Period:
     ------------------

     You may exercise this Option for thirty days after you cease to be a
Service Provider.  Upon your death or disability, this Option may be exercised
for one year after you cease to be a Service Provider.  In no event may you
exercise this Option after the Term/Expiration Date as provided above.

II.  AGREEMENT
     ---------

     1.   Grant of Option.  The Plan Administrator of the Company hereby
          ---------------
grants to the Optionee named in the Notice of Grant (the "Optionee"), an option
(the "Option") to purchase the number of Shares set forth in the Notice of
Grant, at the exercise price per Share set forth in the Notice of Grant (the
"Exercise Price"), and subject to the terms and conditions of the Plan, which is
incorporated herein by reference. Subject to Section 17(c) of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this Option
Agreement, the terms and conditions of the Plan shall prevail.

     If designated in the Notice of Grant as an Incentive Stock Option ("ISO"),
this Option is intended to qualify as an Incentive Stock Option as defined in
Section 422 of the Code.  Nevertheless, to the extent that it exceeds the
$100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").

     2.   Exercise of Option.  This Option shall be exercisable during its term
          ------------------
in accordance with the provisions of Section 10 of the Plan as follows:

          (a)  Right to Exercise.
               -----------------

               (i)  Subject to subsections 2(a)(ii) and 2(a)(iii) below, this
Option shall be exercisable cumulatively according to the vesting schedule set
forth in the Notice of Grant. Alternatively, at the election of the Optionee,
this option may be exercised in whole or in part at any time as to Shares which
have not yet vested. For purposes of this Stock Option Agreement, Shares subject
to the Option shall vest based on continued employment of Optionee with the
Company. Vested Shares shall not be subject to the Company's repurchase right
(as set forth in the Restricted Stock Purchase Agreement, attached hereto as
Exhibit C-1).
- -----------

                                      -3-

<PAGE>

               (ii)  As a condition to exercising this Option for unvested
Shares, the Optionee shall execute the Restricted Stock Purchase Agreement.

               (iii) This Option may not be exercised for a fraction of a Share.

          (b)  Method of Exercise.  This Option shall be exercisable by
               ------------------
delivery of an exercise notice in the form attached as Exhibit A (the "Exercise
                                                       ---------
Notice") which shall state the election to exercise the Option, the number of
Shares with respect to which the Option is being exercised, and such other
representations and agreements as may be required by the Company. The Exercise
Notice shall be accompanied by payment of the aggregate Exercise Price as to all
Exercised Shares. This Option shall be deemed to be exercised upon receipt by
the Company of such fully executed Exercise Notice accompanied by the aggregate
Exercise Price.

     No Shares shall be issued pursuant to the exercise of an Option unless such
issuance and such exercise complies with Applicable Laws.  Assuming such
compliance, for income tax purposes the Shares shall be considered transferred
to the Optionee on the date on which the Option is exercised with respect to
such Shares.

     3.   Optionee's Representations.  In the event the Shares have not been
          --------------------------
registered under the Securities Act of 1933, as amended, at the time this Option
is exercised, the Optionee shall, if required by the Company, concurrently with
the exercise of all or any portion of this Option, deliver to the Company his or
her Investment Representation Statement in the form attached hereto as Exhibit
                                                                       -------
B.
- -

     4.   Lock-Up Period.  Optionee hereby agrees that, if so requested by the
          --------------
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
the effective date of a registration statement of the Company filed under the
Securities Act. Such restriction shall apply only to the first registration
statement of the Company to become effective under the Securities Act that
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.

     5.   Method of Payment.  Payment of the aggregate Exercise Price shall be
          -----------------
by any of the following, or a combination thereof, at the election of the
Optionee:

          (a)  cash;

          (b)  check;

          (c)  consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan; or

                                      -4-
<PAGE>

          (d)  surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares.

     6.   Restrictions on Exercise.  This Option may not be exercised until
          ------------------------
such time as the Plan has been approved by the shareholders of the Company, or
if the issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any Applicable
Law.

     7.   Non-Transferability of Option.  This Option may not be transferred
          -----------------------------
in any manner otherwise than by will or by the laws of descent or distribution
and may be exercised during the lifetime of Optionee only by Optionee. The terms
of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.

     8.   Term of Option.  This Option may be exercised only within the term
          --------------
set out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.

     9.   Tax Consequences.  Set forth below is a brief summary as of the date
          ----------------
of this Option of some of the federal tax consequences of exercise of this
Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE,
AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD
CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

          (a)  Exercise of ISO.  If this Option qualifies as an ISO, there will
               ---------------
be no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price will be treated as an adjustment to the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.

          (b)  Exercise of ISO Following Disability.  If the Optionee ceases to
               ------------------------------------
be an Employee as a result of a disability that is not a total and permanent
disability as defined in Section 22(e)(3) of the Code, to the extent permitted
on the date of termination, the Optionee must exercise an ISO within three
months of such termination for the ISO to be qualified as an ISO.

          (c)  Exercise of Nonstatutory Stock Option.  There may be a regular
               -------------------------------------
federal income tax liability upon the exercise of a Nonstatutory Stock Option.
The Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market Value
of the Shares on the date of exercise over the Exercise Price. If Optionee is an
Employee or a former Employee, the Company will be required to withhold from
Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount in cash equal to a percentage of this compensation
income at the time of exercise, and may refuse to honor the exercise and refuse
to deliver Shares if such withholding amounts are not delivered at the time of
exercise.

                                      -5-
<PAGE>

          (d)  Disposition of Shares. In the case of an NSO, if Shares are held
               ---------------------
for at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes. In the case
of an ISO, if Shares transferred pursuant to the Option are held for at least
one year after exercise and at least two years after the Date of Grant, any gain
realized on disposition of the Shares will also be treated as long-term capital
gain for federal income tax purposes. If Shares purchased under an ISO are
disposed of within one year after exercise or two years after the Date of Grant,
any gain realized on such disposition will be treated as compensation income
(taxable at ordinary income rates) to the extent of the difference between the
Exercise Price and the lesser of (i) the Fair Market Value of the Shares on the
date of exercise, or (ii) the sale price of the Shares. Any additional gain will
be taxed as capital gain, short-term depending on the period that the ISO Shares
were held.

          (e)  Notice of Disqualifying Disposition of ISO Shares.  If the
               -------------------------------------------------
Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (i) the date two years after the Date of Grant, or (ii) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.

          (f)  Section 83(b) Election for Unvested Shares Purchased Pursuant to
               ----------------------------------------------------------------
Options. With respect to the exercise of an Option for unvested Shares, an
- -------
election may be filed by the Optionee with the Internal Revenue Service, within
                                                                         ------
30 days of the purchase of the Shares, electing pursuant to Section 83(b) of the
- -------
Code to be taxed currently on any difference between the purchase price of the
Shares and their Fair Market Value on the date of purchase. In the case of a
Nonstatutory Stock Option, this will result in a recognition of taxable income
to the Optionee on the date of exercise, measured by the excess, if any, of the
fair market value of the Shares, at the time the Option is exercised over the
purchase price for the Shares. Absent such an election, taxable income will be
measured and recognized by Optionee at the time or times on which the Company's
Repurchase Option lapses. In the case of an Incentive Stock Option, such an
election will result in a recognition of income to the Optionee for alternative
minimum tax purposes on the date of exercise, measured by the excess, if any, of
the fair market value of the Shares, at the time the option is exercised, over
the purchase price for the Shares. Absent such an election, alternative minimum
taxable income will be measured and recognized by Optionee at the time or times
on which the Company's Repurchase Option lapses. Optionee is strongly encouraged
to seek the advice of his or her own tax consultants in connection with the
purchase of the Shares and the advisability of filing of the Election under
Section 83(b) of the Code. A form of Election under Section 83(b) is attached
hereto as Exhibit C-5 for reference.
          -----------

     OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY AND NOT THE
COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF OPTIONEE
REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON OPTIONEE'S
BEHALF.

                                      -6-
<PAGE>

     10.  Entire Agreement; Governing Law.  The Plan is incorporated herein by
          -------------------------------
reference.  The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee.  This agreement is governed by the internal substantive laws but not
the choice of law rules of California.

     11.  No Guarantee of Continued Service.  OPTIONEE ACKNOWLEDGES AND AGREES
          ---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH
THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.

     Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof.  Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option.  Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.

OPTIONEE:                           NUMERICAL TECHNOLOGIES, INC.

/s/ Roger Sturgeon                  /s/ Yagyensh C. Pati
________________________________    ________________________________
Signature                           By

Roger Sturgeon                      President & CEO
- --------------------------------    --------------------------------
Print Name                          Title

16490 Lucky Road
- --------------------------------
Los Gatos, CA  95030
- --------------------------------
Residence Address

                                      -7-
<PAGE>

                                   EXHIBIT A
                                   ---------

                                2000 STOCK PLAN

                                EXERCISE NOTICE

Numerical Technologies, Inc.
70 West Plumeria Drive
San Jose, CA  95134-2134

Attention:  Secretary

     1.   Exercise of Option.  Effective as of today, February 1, 2000, the
          ------------------
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
150,000 shares of the Common Stock (the "Shares") of Numerical Technologies,
Inc. (the "Company") under and pursuant to the 2000 Stock Plan (the "Plan") and
the [ ] Incentive [X] Nonstatutory Stock Option Agreement dated February 1, 2000
(the "Option Agreement").

     2.   Delivery of Payment.  Purchaser herewith delivers to the Company the
          -------------------
full purchase price of the Shares, as set forth in the Option Agreement.

     3.   Representations of Optionee.  Optionee acknowledges that Optionee has
          ---------------------------
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.

     4.   Rights as Shareholder.  Until the issuance of the Shares (as
          ---------------------
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company), no right to vote or receive dividends
or any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares shall be issued to
the Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 14 of the Plan.

     5.   Company's Right of First Refusal.  Before any Shares held by Optionee
          --------------------------------
or any transferee (either being sometimes referred to herein as the "Holder")
may be sold or otherwise transferred (including transfer by gift or operation of
law), the Company or its assignee(s) shall have a right of first refusal to
purchase the Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").

          (a)  Notice of Proposed Transfer.  The Holder of the Shares shall
               ---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder proposes to
transfer the
<PAGE>

Shares (the "Offered Price"), and the Holder shall offer the Shares at the
Offered Price to the Company or its assignee(s).

          (b)  Exercise of Right of First Refusal.  At any time within thirty
               ----------------------------------
(30) days after receipt of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.

          (c)  Purchase Price.  The purchase price ("Purchase Price") for the
               --------------
Shares purchased by the Company or its assignee(s) under this Section shall be
the Offered Price. If the Offered Price includes consideration other than cash,
the cash equivalent value of the non-cash consideration shall be determined by
the Board of Directors of the Company in good faith.

          (d)  Payment.  Payment of the Purchase Price shall be made, at the
               -------
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.

          (e)  Holder's Right to Transfer.  If all of the Shares proposed in the
               --------------------------
Notice to be transferred to a given Proposed Transferee are not purchased by the
Company and/or its assignee(s) as provided in this Section, then the Holder may
sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice, that any such sale or
other transfer is effected in accordance with any applicable securities laws and
that the Proposed Transferee agrees in writing that the provisions of this
Section shall continue to apply to the Shares in the hands of such Proposed
Transferee.  If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.

          (f)  Exception for Certain Family Transfers.  Anything to the contrary
               --------------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Optionee's lifetime or on the Optionee's death by will or
intestacy to the Optionee's immediate family or a trust for the benefit of the
Optionee's immediate family shall be exempt from the provisions of this Section.
"Immediate Family" as used herein shall mean spouse, lineal descendant or
antecedent, father, mother, brother or sister.  In such case, the transferee or
other recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.

          (g)  Termination of Right of First Refusal.  The Right of First
               -------------------------------------
Refusal shall terminate as to any Shares upon the first sale of Common Stock of
the Company to the general public pursuant to a registration statement filed
with and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.

                                      -2-
<PAGE>

     6.   Tax Consultation.  Optionee understands that Optionee may suffer
          ----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.

     7.   Restrictive Legends and Stop-Transfer Orders.
          --------------------------------------------

          (a)  Legends.  Optionee understands and agrees that the Company shall
               -------
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by the Company or by state or
federal securities laws:

          THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
          SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR
          OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
          REGISTERED UNDER THE ACT OR, IN THE OPINION OF COMPANY COUNSEL
          SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR
          TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.

          THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
          RESTRICTIONS ON TRANSFER AND RIGHT OF FIRST REFUSAL OPTIONS HELD BY
          THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE
          BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF
          WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER.  SUCH
          TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON
          TRANSFEREES OF THESE SHARES.

          (b)  Stop-Transfer Notices.  Optionee agrees that, in order to ensure
               ---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company  transfers its own securities, it may make appropriate
notations to the same effect in its own records.

          (c)  Refusal to Transfer.  The Company shall not be required (i) to
               -------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.

     8.   Successors and Assigns.  The Company may assign any of its rights
          ----------------------
under this Agreement to single or multiple assignees, and this Agreement shall
inure to the benefit of the successors and assigns of the Company. Subject to
the restrictions on transfer herein set forth, this Agreement shall be binding
upon Optionee and his or her heirs, executors, administrators, successors and
assigns.

                                      -3-
<PAGE>

     9.   Interpretation.  Any dispute regarding the interpretation of this
          --------------
Agreement shall be submitted by Optionee or by the Company forthwith to the
Administrator which shall review such dispute at its next regular meeting. The
resolution of such a dispute by the Administrator shall be final and binding on
all parties.

     10.  Governing Law; Severability.  This Agreement is governed by the
          ---------------------------
internal substantive laws, but not the choice of law rules, of California.

     11.  Entire Agreement.  The Plan and Option Agreement are incorporated
          ----------------
herein by reference. This Agreement, the Plan, the Restricted Stock Purchase
Agreement, the Option Agreement and the Investment Representation Statement
constitute the entire agreement of the parties with respect to the subject
matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee's interest except by
means of a writing signed by the Company and Optionee.

Submitted by:                       Accepted by:

OPTIONEE:                           NUMERICAL TECHNOLOGIES, INC.

/s/ Roger Sturgeon                  /s/ Yagyensh C. Pati
_______________________________     _______________________________
Signature                           By

Roger Sturgeon                      President & CEO
- -------------------------------     _______________________________
Print Name                          Its

Address:                            Address:
- -------                             -------

16490 Lucky Road                    70 West Plumeria Drive
- -------------------------------
                                    San Jose, CA  95134-2134

Los Gatos, CA  95030
- -------------------------------

                                    February 1, 2000
                                    -------------------------------
                                    Date Received

                                      -4-
<PAGE>

                                   EXHIBIT B
                                   ---------

                      INVESTMENT REPRESENTATION STATEMENT

OPTIONEE       :       ROGER STUREGON

COMPANY        :       NUMERICAL TECHNOLOGIES, INC.

SECURITY       :       COMMON STOCK

AMOUNT         :       150,000 SHARES

DATE           :       FEBRUARY 1, 2000

     In connection with the purchase of the above-listed Securities, the
undersigned Optionee represents to the Company the following:

          (a)  Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").

          (b)  Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Optionee's investment intent as expressed herein. In this connection,
Optionee understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Optionee's representation was predicated solely upon a present intention to hold
these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. Optionee further understands that the Securities must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Optionee further
acknowledges and understands that the Company is under no obligation to register
the Securities. Optionee understands that the certificate evidencing the
Securities will be imprinted with a legend which prohibits the transfer of the
Securities unless they are registered or such registration is not required in
the opinion of counsel satisfactory to the Company, and any other legend
required under applicable state securities laws.

          (c)  Optionee is familiar with the provisions of Rule 144, promulgated
under the Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions, including, among other things: (1)
the resale occurring not less than one year after the later of the date the
securities were sold by the
<PAGE>

Company or the date they were sold by an affiliate of the Company, within the
meaning of Rule 144; and, in the case of an affiliate, or of a non-affiliate who
has held the securities less than two years, (2) the availability of certain
public information about the Company, (3) the sale being made through a broker
in an unsolicited "broker's transaction" or in transactions directly with a
market maker (as said term is defined under the Securities Exchange Act of
1934), and (4) the amount of securities being sold during any three month period
not exceeding the specified limitations stated therein, if applicable.

          (d)  Optionee further understands that in the event all of the
applicable requirements of or 144 are not satisfied, registration under the
Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rule 144 is
not exclusive, the Staff of the Securities and Exchange Commission has expressed
its opinion that persons proposing to sell private placement securities other
than in a registered offering and otherwise than pursuant to Rule 144 will have
a substantial burden of proof in establishing that an exemption from
registration is available for such offers or sales, and that such persons and
their respective brokers who participate in such transactions do so at their own
risk. Optionee understands that no assurances can be given that any such other
registration exemption will be available in such event.



                                    Signature of Optionee:

                                    /s/ Roger Sturgeon
                                    ____________________________________
                                    Date:  February 1, 2000

                                      -2-
<PAGE>

                                  EXHIBIT C-1
                                  -----------

                         NUMERICAL TECHNOLOGIES, INC.

                                2000 STOCK PLAN

                      RESTRICTED STOCK PURCHASE AGREEMENT

     THIS AGREEMENT is made between Roger Sturgeon (the "Purchaser") and
Numerical Technologies, Inc. (the "Company") as of February 1, 2000.

                                   RECITALS
                                   --------

     (1)  Pursuant to the exercise of the stock option granted to Purchaser
under the Company's 2000 Stock Plan (the "Plan") and pursuant to the Stock
Option Agreement (the "Option Agreement") dated February 1, 2000 by and between
the Company and Purchaser with respect to such grant, which Plan and Option
Agreement are hereby incorporated by reference, Purchaser has elected to
purchase 150,000 of those shares which have not become vested under the vesting
schedule set forth in the Option Agreement ("Unvested Shares"). The Unvested
Shares and the shares subject to the Option Agreement which have become vested
are sometimes collectively referred to herein as the "Shares".

     (2)  As required by the Option Agreement, as a condition to Purchaser's
election to exercise the option, Purchaser must execute this Restricted Stock
Purchase Agreement, which sets forth the rights and obligations of the parties
with respect to Shares acquired upon exercise of the Option.

     1.   Repurchase Option.
          -----------------

          (a)  If Purchaser's status as a Service Provider is terminated for any
reason, including for cause, death, and disability, the Company shall have the
right and option to purchase from Purchaser, or Purchaser's personal
representative, as the case may be, all of the Purchaser's Unvested Shares as of
the date of such termination at the price paid by the Purchaser for such Shares
(the "Repurchase Option").

          (b)  Upon the occurrence of a termination, the Company may exercise
its Repurchase Option by delivering personally or by registered mail, to
Purchaser (or his transferee or legal representative, as the case may be),
within ninety (90) days of the termination, a notice in writing indicating the
Company's intention to exercise the Repurchase Option and setting forth a date
for closing not later than thirty (30) days from the mailing of such notice. The
closing shall take place at the Company's office. At the closing, the holder of
the certificates for the Unvested Shares being transferred shall deliver the
stock certificate or certificates evidencing the Unvested Shares, and the
Company shall deliver the purchase price therefor.
<PAGE>

          (c)  At its option, the Company may elect to make payment for the
Unvested Shares to a bank selected by the Company. The Company shall avail
itself of this option by a notice in writing to Purchaser stating the name and
address of the bank, date of closing, and waiving the closing at the Company's
office.

          (d)  If the Company does not elect to exercise the Repurchase Option
conferred above by giving the requisite notice within ninety (90) days following
the termination, the Repurchase Option shall terminate.

          (e)  The Repurchase Option shall terminate in accordance with the
Vesting Schedule in Optionee's Option Agreement.

     2.   Transferability of the Shares; Escrow.
          -------------------------------------

          (a)  Purchaser hereby authorizes and directs the secretary of the
Company, or such other person designated by the Company, to transfer the
Unvested Shares as to which the Repurchase Option has been exercised from
Purchaser to the Company.

          (b)  To insure the availability for delivery of Purchaser's Unvested
Shares upon repurchase by the Company pursuant to the Repurchase Option under
Section 1, Purchaser hereby appoints the secretary, or any other person
designated by the Company as escrow agent, as its attorney-in-fact to sell,
assign and transfer unto the Company, such Unvested Shares, if any, repurchased
by the Company pursuant to the Repurchase Option and shall, upon execution of
this Agreement, deliver and deposit with the secretary of the Company, or such
other person designated by the Company, the share certificates representing the
Unvested Shares, together with the stock assignment duly endorsed in blank,
attached hereto as Exhibit C-2. The Unvested Shares and stock assignment shall
                   -----------
be held by the secretary in escrow, pursuant to the Joint Escrow Instructions of
the Company and Purchaser attached as Exhibit C-3 hereto, until the Company
                                      -----------
exercises its purchase right as provided in Section 1, until such Unvested
Shares are vested, or until such time as this Agreement no longer is in effect.
As a further condition to the Company's obligations under this Agreement, the
spouse of the Purchaser, if any, shall execute and deliver to the Company the
Consent of Spouse attached hereto as Exhibit C-4. Upon vesting of the Unvested
                                     -----------
Shares, the escrow agent shall promptly deliver to the Purchaser the certificate
or certificates representing such Shares in the escrow agent's possession
belonging to the Purchaser, and the escrow agent shall be discharged of all
further obligations hereunder; provided, however, that the escrow agent shall
nevertheless retain such certificate or certificates as escrow agent if so
required pursuant to other restrictions imposed pursuant to this Agreement.

          (c)  The Company, or its designee, shall not be liable for any act it
may do or omit to do with respect to holding the Shares in escrow and while
acting in good faith and in the exercise of its judgment.

          (d)  Transfer or sale of the Shares is subject to restrictions on
transfer imposed by any applicable state and federal securities laws. Any
transferee shall hold such Shares subject to all the provisions hereof and the
Exercise Notice executed by the Purchaser with respect to any

                                      -2-
<PAGE>

Unvested Shares purchased by Purchaser and shall acknowledge the same by signing
a copy of this Agreement.

     3.   Ownership, Voting Rights, Duties.  This Agreement shall not affect in
          --------------------------------
any way the ownership, voting rights or other rights or duties of Purchaser,
except as specifically provided herein.

     4.   Legends.  The share certificate evidencing the Shares issued hereunder
          -------
shall be endorsed with the following legend (in addition to any legend required
under applicable state securities laws):

     THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT
BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.

     5.   Adjustment for Stock Split. All references to the number of Shares and
          --------------------------
the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.

     6.   Notices. Notices required hereunder shall be given in person or by
          -------
registered mail to the address of Purchaser shown on the records of the Company,
and to the Company at their respective principal executive offices.

     7.   Survival of Terms. This Agreement shall apply to and bind Purchaser
          -----------------
and the Company and their respective permitted assignees and transferees, heirs,
legatees, executors, administrators and legal successors.

     8.   Section 83(b) Election. Purchaser hereby acknowledges that he or she
          ----------------------
has been informed that, with respect to the exercise of an Option for unvested
Shares, an election may be filed by the Purchaser with the Internal Revenue
Service, within 30 days of the purchase of the Shares, electing pursuant to
         --------------
Section 83(b) of the Code to be taxed currently on any difference between the
purchase price of the Shares and their Fair Market Value on the date of
purchase. In the case of a Nonstatutory Stock Option, this will result in a
recognition of taxable income to the Purchaser on the date of exercise, measured
by the excess, if any, of the fair market value of the Shares, at the time the
Option is exercised over the purchase price for the Shares. Absent such an
election, taxable income will be measured and recognized by Purchaser at the
time or times on which the Company's Repurchase Option lapses. In the case of an
Incentive Stock Option, such an election will result in a recognition of income
to the Purchaser for alternative minimum tax purposes on the date of exercise,
measured by the excess, if any, of the fair market value of the Shares, at the
time the option is exercised, over the purchase price for the Shares. Absent
such an election, alternative minimum taxable income will be measured and
recognized by Purchaser at the time or times on which the Company's Repurchase
Option lapses. Purchaser is strongly encouraged to seek the advice of his or her
own tax consultants in connection with the purchase of the Shares and the
advisability of filing

                                      -3-
<PAGE>

of the Election under Section 83(b) of the Code. A form of Election under
Section 83(b) is attached hereto as Exhibit C-5 for reference.
                                    -----------

     PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE RESPONSIBILITY AND NOT
THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF PURCHASER
REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON PURCHASER'S
BEHALF.

     9.   Representations.  Purchaser has reviewed with his own tax advisors the
          ---------------
federal, state, local and foreign tax consequences of this investment and the
transactions contemplated by this Agreement. Purchaser is relying solely on such
advisors and not on any statements or representations of the Company or any of
its agents. Purchaser understands that he (and not the Company) shall be
responsible for his own tax liability that may arise as a result of this
investment or the transactions contemplated by this Agreement.

     10.  Governing Law.  This Agreement shall be governed by the internal
          -------------
substantive laws, but not the choice of law rules, of California.

     Purchaser represents that he has read this Agreement and is familiar with
its terms and provisions.  Purchaser hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board upon any
questions arising under this Agreement.

                                      -4-
<PAGE>

     IN WITNESS WHEREOF, this Agreement is deemed made as of the date first set
forth above.

                                    "COMPANY"

                                    NUMERICAL TECHNOLOGIES, INC

                                    /s/ Yagyensh C. Pati
                                    _____________________________________
                                    By

                                    President & CEO
                                    _____________________________________
                                    Title

                                    "PURCHASER"

                                    /s/ Roger Sturgeon
                                    _____________________________________
                                    Signature

                                    Roger Sturgeon
                                    -------------------------------------
                                    Printed Name

                                    _____________________________________
                                    Soc. Sec. No.

                                    Address:
                                    -------

                                    16490 Lucky Road
                                    -------------------------------------

                                    Los Gatos, CA  95030
                                    -------------------------------------

                                      -5-
<PAGE>

                                  EXHIBIT C-2
                                  -----------

                     ASSIGNMENT SEPARATE FROM CERTIFICATE

     FOR VALUE RECEIVED I, __________________________, hereby sell, assign and
transfer unto Numerical Technologies, Inc. (__________) shares of the Common
Stock of Numerical Technologies, Inc. standing in my name of the books of said
corporation represented by Certificate No. _____ herewith and do hereby
irrevocably constitute and appoint         to transfer the said stock on the
books of the within named corporation with full power of substitution in the
premises.

     This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between Numerical Technologies, Inc. and the
undersigned dated ______________, _____.

Dated: _______________, ______

               /s/ Roger Sturgeon
     Signature:________________________________



INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise its
"repurchase option," as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE>

                                  EXHIBIT C-3
                                  -----------

                           JOINT ESCROW INSTRUCTIONS

                                                                February 1, 2000

Numerical Technologies, Inc.
70 West Plumeria Drive
San Jose, CA  95134-2134
Attention:  Secretary

Dear__________:

     As Escrow Agent for both Numerical Technologies, Inc. (the "Company"), and
the undersigned purchaser of stock of the Company (the "Purchaser"), you are
hereby authorized and directed to hold the documents delivered to you pursuant
to the terms of that certain Restricted Stock Purchase Agreement ("Agreement")
between the Company and the undersigned, in accordance with the following
instructions:

     1.   In the event the Company and/or any assignee of the Company (referred
to collectively for convenience herein as the "Company") exercises the Company's
repurchase option set forth in the Agreement, the Company shall give to
Purchaser and you a written notice specifying the number of shares of stock to
be purchased, the purchase price, and the time for a closing hereunder at the
principal office of the Company. Purchaser and the Company hereby irrevocably
authorize and direct you to close the transaction contemplated by such notice in
accordance with the terms of said notice.

     2.   At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, or some combination thereof) for the number of shares of stock
being purchased pursuant to the exercise of the Company's repurchase option.

     3.   Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a stockholder of the Company while the
stock is held by you.
<PAGE>

     4.   Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's repurchase option has been exercised, you
will deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the Company's repurchase option.
Within 120 days after cessation of Purchaser's continuous employment by or
services to the Company, or any parent or subsidiary of the Company, you will
deliver to Purchaser a certificate or certificates representing the aggregate
number of shares held or issued pursuant to the Agreement and not purchased by
the Company or its assignees pursuant to exercise of the Company's repurchase
option.

     5.   If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.

     6.   Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.

     7.   You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith,
and any act done or omitted by you pursuant to the advice of your own attorneys
shall be conclusive evidence of such good faith.

     8.   You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court. In
case you obey or comply with any such order, judgment or decree, you shall not
be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.

     9.   You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.

     10.  You shall not be liable for the outlawing of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.

     11.  You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.

     12.  Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be an officer or agent of the Company or if you shall resign by
written notice to each party. In the event of any such termination, the Company
shall appoint a successor Escrow Agent.

                                      -2-
<PAGE>

     13.  If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.

     14.  It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.

     15.  Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.

          COMPANY:       Numerical Technologies, Inc.
                         70 West Plumeria Drive
                         San Jose, CA  95134-2134
                         Attention:  Secretary

          PURCHASER:     Roger Sturgeon
                         16490 Lucky Road
                         Los Gatos, CA  95030

          ESCROW AGENT:  Wilson Sonsini Goodrich & Rosati
                         650 Page Mill Road
                         Palo Alto, CA  94304

     16.  By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.

     17.  This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.

                                      -3-
<PAGE>

     18.  These Joint Escrow Instructions shall be governed by the internal
substantive laws, but not the choice of law rules, of California.

                                    NUMERICAL TECHNOLOGIES, INC.

                                    /s/ Yagyensh C. Pati
                                    _____________________________________
                                    By

                                    President & CEO
                                    _____________________________________
                                    Title


                                    PURCHASER

                                    /s/ Roger Sturgeon
                                    _____________________________________
                                    Signature

                                    Roger Sturgeon
                                    -------------------------------------
                                    Typed or Printed Name


                                    ESCROW AGENT

                                    WILSON SONSINI GOODRICH & ROSATI

                                    /s/ John V. Roos
                                    _____________________________________
                                    By

                                    Member
                                    _____________________________________
                                    Title

                                      -4-
<PAGE>

                                  EXHIBIT C-4
                                 ------------

                               CONSENT OF SPOUSE
                               -----------------
        Isobel Sturgeon
     I, ____________________, spouse of Roger Sturgeon, have read and approve
the foregoing Agreement.  In consideration of granting of the right to my spouse
to purchase shares of Numerical Technologies, Inc., as set forth in the
Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the
exercise of any rights under the Agreement and agree to be bound by the
provisions of the Agreement insofar as I may have any rights in said Agreement
or any shares issued pursuant thereto under the community property laws or
similar laws relating to marital property in effect in the state of our
residence as of the date of the signing of the foregoing Agreement.

       February 1
Dated: _______________,  2000

                                             /s/ Isobel Sturgeon
                                             ___________________________________
<PAGE>

                                  EXHIBIT C-5
                                  -----------

                         ELECTION UNDER SECTION 83(b)
                         -----------------------------
                     OF THE INTERNAL REVENUE CODE OF 1986
                     ------------------------------------

The undersigned taxpayer hereby elects, pursuant to Sections 55 and 83(b) of the
Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income
or alternative minimum taxable income, as the case may be, for the current
taxable year the amount of any compensation taxable to taxpayer in connection
with taxpayer's receipt of the property described below:

1.   The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:

     NAME:               TAXPAYER: Roger Sturgeon     SPOUSE: Isobel Sturgeon

     ADDRESS:            16490 Lucky Road, Los Gatos, CA 95030

     IDENTIFICATION NO.: TAXPAYER: ###-##-####        SPOUSE: ###-##-####

     TAXABLE YEAR:       2000

2.   The property with respect to which the election is made is described as
follows: 150,000 shares (the "Shares") of the Common Stock of Numerical
Technologies, Inc. (the "Company").

3.   The date on which the property was transferred is:  Feb. 1, 2000.

4.   The property is subject to the following restrictions:

     The Shares may not be transferred and are subject to forfeiture under the
terms of an agreement between the taxpayer and the Company.  These restrictions
lapse upon the satisfaction of certain conditions contained in such agreement.

5.   The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never lapse, of
such property is:
     $600,000.

6.   The amount (if any) paid for such property is:
     $600,000.

The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property.  The transferee of such property is the person
performing the services in connection with the transfer of said property.

The undersigned understands that the foregoing election may not be revoked
- --------------------------------------------------------------------------
except with the consent of the Commissioner.
- -------------------------------------------

                                        /s/ Roger Sturgeon
Dated:  Feb. 1,2000                     ________________________________________
                                        Taxpayer

The undersigned spouse of taxpayer joins in this election.

                                        /s/ Isobel Sturgeon
Dated:  Feb. 1,2000                     ________________________________________

<PAGE>
                                                                  Exhibit 10.29
                         NUMERICAL TECHNOLOGIES, INC.

                                2000 STOCK PLAN

                   STOCK OPTION AGREEMENT -- EARLY EXERCISE

     Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.

I.   NOTICE OF STOCK OPTION GRANT
     ----------------------------

     Kevin MacLean

     You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:

     Date of Grant:                            February 1, 2000

     Vesting Commencement Date:                January 1, 2000

     Exercise Price per Share:                 $4.00

     Total Number of Shares Granted:           150,000

     Total Exercise Price:                     $600,000.00

     Type of Option:                           _____ Incentive Stock Option

                                                 X   Nonstatutory Stock Option
                                               -----

     Term/Expiration Date:                     Ten Years/February 1, 2010*

_______________
* Or earlier, pursuant to the termination period set forth below.

     Exercise and Vesting Schedule:
     -----------------------------

     This Option is exercisable immediately, in whole or in part, and shall vest
according to the following vesting schedule:

     One-half (1/2) of the Shares subject to this Option shall vest on January
1, 2002 and one-sixteenth (1/16th) of the Shares subject to this Option shall
vest on April 1, 2002 and on the last day of each three month anniversary
thereafter, subject to your continuing to be a Service Provider on such dates;
provided, however, if your employment with the Company is terminated prior to
January 1, 2002 by reason of your death or disability (as defined in the Plan),
then the shares shall become vested on an accelerated basis, and the Company's
repurchase right shall accordingly lapse, in accordance with the following
schedule: one-sixteenth (1/16th) of the shares subject to this Option
<PAGE>

shall vest for each three (3) month period, measured from January 1, 2000, for
which you completed employment with the Company prior to your termination by
reason of death or disability.

     Change of Control; Constructive Termination:
     -------------------------------------------

     Notwithstanding the provisions of Section 14(c) of the Plan, if the Company
merges with or into another entity, sells all or substantially all of its
assets, or enters into any other similar transaction or reorganization
(including without limitation, a sale of stock of the Company) as a result of
which the shareholders of the Company immediately prior to such transaction will
not hold at least 50% of the voting power of the surviving, purchasing or
continuing entity, as applicable (taking into account any securities issued to
the shareholders of the Company in the transaction) (a "Change of Control
Transaction"), then on the later of (i) January 2, 2002 (the "Two Year
Employment Anniversary Date") or (ii) the six month anniversary of the Change of
Control Transaction (the "Merger Anniversary Date") fifty percent (50%) of the
Shares subject to the Option which have not vested as of the Two Year Employment
Anniversary Date or the Merger Anniversary Date, as applicable, shall become
fully vested and exercisable. The Board shall notify the Optionee at least
fifteen (15) days prior to the closing of a Change of Control Transaction, and
such notification shall include a statement as to whether or not the Option will
be assumed by the surviving or purchasing entity or whether an equivalent
substitute option will be provided by such entity.

     Following an assumption or substitution of the Option in connection with a
Change of Control Transaction, if the Optionee's status as an Employee of the
successor corporation is terminated by the successor corporation as a result of
an Involuntary Termination (as defined below) within twelve months following the
Change of Control Transaction, the Optionee shall fully vest in and have the
right to exercise the Option as to all of the Shares, including Shares as to
which the Option would not otherwise be vested or exercisable.

     Any of the following events shall constitute an "Involuntary Termination":
(i) without the Optionee's express written consent, a significant reduction of
the Optionee's duties, authority and responsibilities, relative to the
Optionee's duties, authority and responsibilities as in effect immediately prior
to the Change of Control Transaction; (ii) a material reduction in the base
salary of the Optionee as in effect immediately prior to the Change of Control
Transaction; (iii) a material reduction in the kind or level of employee
benefits, including bonuses, to which the Optionee was entitled immediately
prior to the Change of Control Transaction with the result that the Optionee's
overall benefits package is significantly reduced; (iv) the relocation of the
Optionee to a facility or a location more than sixty (60) miles from the
Optionee's then present location, without the Optionee's express written
consent; (v) any purported termination of the Optionee which is not effected for
Disability or for Cause (as defined below), or any purported termination for
which the grounds relied upon are not valid; (vi) or any act or set of facts or
circumstances which would, under California case law or statute, constitute a
constructive termination of the Optionee.

     "Cause" shall mean (i) any act of personal dishonesty taken by the Optionee
in connection with his responsibilities as a Service Provider and intended to
result in substantial personal enrichment of the Optionee, (ii) Optionee's
conviction of a felony, (iii) a willful act by the Optionee which constitutes
gross misconduct and which is injurious to the Successor Corporation, and (iv)

                                      -2-
<PAGE>

following delivery to the Optionee of a written demand for performance from the
Successor Corporation which describes the basis for the Successor Corporation's
belief that the Optionee has not substantially performed his duties, continued
violations by the Optionee of the Optionee's obligations to the Successor
Corporation which are demonstrably willful and deliberate on the Optionee's
part.

     Termination Period:
     ------------------

     You may exercise this Option for thirty days after you cease to be a
Service Provider.  Upon your death or disability, this Option may be exercised
for one year after you cease to be a Service Provider.  In no event may you
exercise this Option after the Term/Expiration Date as provided above.

II.  AGREEMENT
     ---------

     1.   Grant of Option.  The Plan Administrator of the Company hereby grants
          ---------------
to the Optionee named in the Notice of Grant (the "Optionee"), an option (the
"Option") to purchase the number of Shares set forth in the Notice of Grant, at
the exercise price per Share set forth in the Notice of Grant (the "Exercise
Price"), and subject to the terms and conditions of the Plan, which is
incorporated herein by reference.  Subject to Section 17(c) of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this Option
Agreement, the terms and conditions of the Plan shall prevail.

          If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option as
defined in Section 422 of the Code.  Nevertheless, to the extent that it exceeds
the $100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").

     2.  Exercise of Option.  This Option shall be exercisable during its term
         ------------------
in accordance with the provisions of Section 10 of the Plan as follows:

          (a)  Right to Exercise.
               -----------------

                    (i)    Subject to subsections 2(a)(ii) and 2(a)(iii) below,
this Option shall be exercisable cumulatively according to the vesting schedule
set forth in the Notice of Grant. Alternatively, at the election of the
Optionee, this option may be exercised in whole or in part at any time as to
Shares which have not yet vested. For purposes of this Stock Option Agreement,
Shares subject to the Option shall vest based on continued employment of
Optionee with the Company. Vested Shares shall not be subject to the Company's
repurchase right (as set forth in the Restricted Stock Purchase Agreement,
attached hereto as Exhibit E-1).
                   -----------

                    (ii)   As a condition to exercising this Option for unvested
Shares, the Optionee shall execute the Restricted Stock Purchase Agreement.

                    (iii)  This Option may not be exercised for a fraction of a
Share.

                                      -3-
<PAGE>

          (b)  Method of Exercise.  This Option shall be exercisable by delivery
               ------------------
of an exercise notice in the form attached as Exhibit A (the "Exercise Notice")
                                              ---------
which shall state the election to exercise the Option, the number of Shares
with respect to which the Option is being exercised (the "Exercised Shares"),
and such other representations and agreements as may be required by the Company.
The Exercise Notice shall be accompanied by payment of the aggregate Exercise
Price as to all Exercised Shares. This Option shall be deemed to be exercised
upon receipt by the Company of such fully executed Exercise Notice accompanied
by the aggregate Exercise Price.

          No Shares shall be issued pursuant to the exercise of an Option unless
such issuance and such exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Shares shall be considered transferred
to the Optionee on the date on which the Option is exercised with respect to
such Shares.

     3.   Optionee's Representations.  In the event the Shares have not been
          --------------------------
registered under the Securities Act of 1933, as amended, at the time this Option
is exercised, the Optionee shall, if required by the Company, concurrently with
the exercise of all or any portion of this Option, deliver to the Company his or
her Investment Representation Statement in the form attached hereto as Exhibit
                                                                       -------
B.
- -

     4.   Lock-Up Period.  Optionee hereby agrees that, if so requested by the
          --------------
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
the effective date of a registration statement of the Company filed under the
Securities Act. Such restriction shall apply only to the first registration
statement of the Company to become effective under the Securities Act that
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.

     5.   Method of Payment.  Payment of the aggregate Exercise Price shall be
          -----------------
by any of the following, or a combination thereof, at the election of the
Optionee:

          (a)  cash;

          (b)  check;

          (c)  consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan;

          (d)  surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares; or

                                      -4-
<PAGE>

          (e)  with the Administrator's consent, delivery of Optionee's
promissory note (the "Note") in the form attached hereto as Exhibit D, in the
amount of the aggregate Exercise Price of the Exercised Shares together with the
execution and delivery by the Optionee of the Security Agreement attached hereto
as Exhibit C. The Note shall bear interest at the "applicable federal rate"
prescribed under the Code and its regulations at time of purchase, and shall be
secured by a pledge of the Shares purchased by the Note pursuant to the Security
Agreement.

     6.   Restrictions on Exercise.  This Option may not be exercised until such
          ------------------------
time as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any Applicable
Law.

     7.   Non-Transferability of Option.  This Option may not be transferred in
          -----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.

     8.   Term of Option.  This Option may be exercised only within the term
          --------------
set out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.

     9.  Tax Consequences.  Set forth below is a brief summary as of the date of
         ----------------
this Option of some of the federal tax consequences of exercise of this Option
and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE
TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A
TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

          (a)  Exercise of ISO.  If this Option qualifies as an ISO, there will
               ---------------
be no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price will be treated as an adjustment to the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.

          (b)  Exercise of ISO Following Disability.  If the Optionee ceases to
               ------------------------------------
be an Employee as a result of a disability that is not a total and permanent
disability as defined in Section 22(e)(3) of the Code, to the extent permitted
on the date of termination, the Optionee must exercise an ISO within three
months of such termination for the ISO to be qualified as an ISO.

          (c)  Exercise of Nonstatutory Stock Option.  There may be a regular
               -------------------------------------
federal income tax liability upon the exercise of a Nonstatutory Stock Option.
The Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market Value
of the Shares on the date of exercise over the Exercise Price. If Optionee is an
Employee or a former Employee, the Company will be required to withhold from
Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount in cash equal to a percentage of this compensation
income at the time of exercise, and may

                                      -5-
<PAGE>

refuse to honor the exercise and refuse to deliver Shares if such withholding
amounts are not delivered at the time of exercise.

          (d)  Disposition of Shares.  In the case of an NSO, if Shares are held
               ---------------------
for at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes. In the case
of an ISO, if Shares transferred pursuant to the Option are held for at least
one year after exercise and at least two years after the Date of Grant, any gain
realized on disposition of the Shares will also be treated as long-term capital
gain for federal income tax purposes. If Shares purchased under an ISO are
disposed of within one year after exercise or two years after the Date of Grant,
any gain realized on such disposition will be treated as compensation income
(taxable at ordinary income rates) to the extent of the difference between the
Exercise Price and the lesser of (i) the Fair Market Value of the Shares on the
date of exercise, or (ii) the sale price of the Shares. Any additional gain will
be taxed as capital gain, short-term depending on the period that the ISO Shares
were held.

          (e)  Notice of Disqualifying Disposition of ISO Shares.  If the Option
               -------------------------------------------------
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (i) the date two years after the Date of Grant, or (ii) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.

          (f)  Section 83(b) Election for Unvested Shares Purchased Pursuant to
               ----------------------------------------------------------------
Options. With respect to the exercise of an Option for unvested Shares, an
election may be filed by the Optionee with the Internal Revenue Service, within
                                                                         ------
30 days of the purchase of the Shares, electing pursuant to Section 83(b) of the
- -------
Code to be taxed currently on any difference between the purchase price of the
Shares and their Fair Market Value on the date of purchase. In the case of a
Nonstatutory Stock Option, this will result in a recognition of taxable income
to the Optionee on the date of exercise, measured by the excess, if any, of the
fair market value of the Shares, at the time the Option is exercised over the
purchase price for the Shares. Absent such an election, taxable income will be
measured and recognized by Optionee at the time or times on which the Company's
Repurchase Option lapses. In the case of an Incentive Stock Option, such an
election will result in a recognition of income to the Optionee for alternative
minimum tax purposes on the date of exercise, measured by the excess, if any, of
the fair market value of the Shares, at the time the option is exercised, over
the purchase price for the Shares. Absent such an election, alternative minimum
taxable income will be measured and recognized by Optionee at the time or times
on which the Company's Repurchase Option lapses. Optionee is strongly encouraged
to seek the advice of his or her own tax consultants in connection with the
purchase of the Shares and the advisability of filing of the Election under
Section 83(b) of the Code. A form of Election under Section 83(b) is attached
hereto as Exhibit E-5 for reference.
          -----------

     OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY AND NOT THE
COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF OPTIONEE
REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON OPTIONEE'S
BEHALF.

                                      -6-
<PAGE>

10.  Entire Agreement; Governing Law.  The Plan is incorporated herein by
     -------------------------------
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws but not
the choice of law rules of California.

11.  No Guarantee of Continued Service.  OPTIONEE ACKNOWLEDGES AND AGREES THAT
     ---------------------------------
THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY
CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT
OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER).
OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS
CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT
CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE
PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT
INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT
CAUSE.

     Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option. Optionee
further agrees to notify the Company upon any change in the residence address
indicated below.


OPTIONEE:                               NUMERICAL TECHNOLOGIES, INC.

/s/ Kevin MacLean                       /s/ Yagyensh C. Pati
- ----------------------------------      --------------------------------------
Signature                               By


Kevin MacLean                           President & CEO
- ----------------------------------      --------------------------------------
Print Name                              Title


95 Church St., #2105
- ----------------------------------

Los Gatos, CA 95032
- ----------------------------------
Residence Address
<PAGE>

                                   EXHIBIT A
                                   ---------

                                2000 STOCK PLAN

                                EXERCISE NOTICE

Numerical Technologies, Inc.
70 West Plumeria Drive
San Jose, CA 95134-2134

Attention: Secretary

     1.   Exercise of Option.  Effective as of today, February 1, 2000, the
          ------------------
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
150,000 shares of the Common Stock (the "Shares") of Numerical Technologies,
Inc. (the "Company") under and pursuant to the 2000 Stock Plan (the "Plan") and
the [  ] Incentive [X] Nonstatutory Stock Option Agreement dated February 1,
2000 (the "Option Agreement").

     2.   Delivery of Payment.  Purchaser herewith delivers to the Company the
          -------------------
full purchase price of the Shares, as set forth in the Option Agreement.

     3.   Representations of Optionee.  Optionee acknowledges that Optionee has
          ---------------------------
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.

     4.   Rights as Shareholder.  Until the issuance of the Shares (as evidenced
          ---------------------
by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Shares shall be issued to the
Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 14 of the Plan.

     5.   Company's Right of First Refusal.  Before any Shares held by Optionee
          --------------------------------
or any transferee (either being sometimes referred to herein as the "Holder")
may be sold or otherwise transferred (including transfer by gift or operation of
law), the Company or its assignee(s) shall have a right of first refusal to
purchase the Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").

          (a)  Notice of Proposed Transfer.  The Holder of the Shares shall
               ---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder proposes to
transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares
at the Offered Price to the Company or its assignee(s).
<PAGE>

          (b)  Exercise of Right of First Refusal.  At any time within thirty
               ----------------------------------
(30) days after receipt of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.

          (c)  Purchase Price.  The purchase price ("Purchase Price") for the
               --------------
Shares purchased by the Company or its assignee(s) under this Section shall be
the Offered Price. If the Offered Price includes consideration other than cash,
the cash equivalent value of the non-cash consideration shall be determined by
the Board of Directors of the Company in good faith.

          (d)  Payment.  Payment of the Purchase Price shall be made, at the
               -------
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.

          (e)  Holder's Right to Transfer.  If all of the Shares proposed in the
               --------------------------
Notice to be transferred to a given Proposed Transferee are not purchased by the
Company and/or its assignee(s) as provided in this Section, then the Holder may
sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice, that any such sale or
other transfer is effected in accordance with any applicable securities laws and
that the Proposed Transferee agrees in writing that the provisions of this
Section shall continue to apply to the Shares in the hands of such Proposed
Transferee. If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.

          (f)  Exception for Certain Family Transfers.  Anything to the contrary
               --------------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Optionee's lifetime or on the Optionee's death by will or
intestacy to the Optionee's immediate family or a trust for the benefit of the
Optionee's immediate family shall be exempt from the provisions of this Section.
"Immediate Family" as used herein shall mean spouse, lineal descendant or
antecedent, father, mother, brother or sister. In such case, the transferee or
other recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.

          (g)  Termination of Right of First Refusal.  The Right of First
               -------------------------------------
Refusal shall terminate as to any Shares upon the first sale of Common Stock of
the Company to the general public pursuant to a registration statement filed
with and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.

     6.   Tax Consultation.  Optionee understands that Optionee may suffer
          ----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with

                                      -2-
<PAGE>

the purchase or disposition of the Shares and that Optionee is not relying on
the Company for any tax advice.

     7.   Restrictive Legends and Stop-Transfer Orders.
          --------------------------------------------

          (a)  Legends.  Optionee understands and agrees that the Company shall
               -------
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by the Company or by state or
federal securities laws:

          THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
          REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT")
          AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED,
          PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED
          UNDER THE ACT OR, IN THE OPINION OF COMPANY COUNSEL
          SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH
          OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN
          COMPLIANCE THEREWITH.

          THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
          TO CERTAIN RESTRICTIONS ON TRANSFER AND RIGHT OF FIRST
          REFUSAL OPTIONS HELD BY THE ISSUER OR ITS ASSIGNEE(S)
          AS SET FORTH IN THE EXERCISE NOTICE BETWEEN THE ISSUER
          AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF
          WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE
          ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST
          REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES.

          (b)  Stop-Transfer Notices.  Optionee agrees that, in order to ensure
               ---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.

          (c)  Refusal to Transfer.  The Company shall not be required (i) to
               -------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.

     8.   Successors and Assigns. The Company may assign any of its rights under
          ----------------------
this Agreement to single or multiple assignees, and this Agreement shall inure
to the benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer herein set forth, this Agreement shall be binding upon
Optionee and his or her heirs, executors, administrators, successors and
assigns.

                                      -3-
<PAGE>

     9.   Interpretation.  Any dispute regarding the interpretation of this
          --------------
Agreement shall be submitted by Optionee or by the Company forthwith to the
Administrator which shall review such dispute at its next regular meeting. The
resolution of such a dispute by the Administrator shall be final and binding on
all parties.

     10.  Governing Law; Severability.  This Agreement is governed by the
          ---------------------------
internal substantive laws, but not the choice of law rules, of California.

     11.  Entire Agreement.  The Plan and Option Agreement are incorporated
          ----------------
herein by reference. This Agreement, the Plan, the Restricted Stock Purchase
Agreement, the Option Agreement and the Investment Representation Statement
constitute the entire agreement of the parties with respect to the subject
matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee's interest except by
means of a writing signed by the Company and Optionee.


Submitted by:                           Accepted by:

OPTIONEE:                               NUMERICAL TECHNOLOGIES, INC.

/s/ Kevin MacLean                       /s/ Yagyensh C. Pati
___________________________________     ________________________________________
Signature                               By


Kevin MacLean                           President & CEO
- -----------------------------------     ________________________________________
Print Name                              Its

Address:                                Address:
- -------                                 -------

95 Church st., #2105
___________________________________     70 West Plumeria Drive

Los Gatos, CA 95032                     San Jose, CA 95134-2134
___________________________________

___________________________________


                                        February 1, 2000
                                        ----------------------------------------
                                        Date Received
<PAGE>

                                   EXHIBIT B
                                   ---------

                      INVESTMENT REPRESENTATION STATEMENT

OPTIONEE :     KEVIN MACLEAN

COMPANY  :     NUMERICAL TECHNOLOGIES, INC.

SECURITY :     COMMON STOCK

AMOUNT   :     150,000 SHARES

DATE     :     FEBRUARY 1, 2000

     In connection with the purchase of the above-listed Securities, the
undersigned Optionee represents to the Company the following:

          (a)  Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").

          (b)  Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Optionee's investment intent as expressed herein. In this connection,
Optionee understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Optionee's representation was predicated solely upon a present intention to hold
these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. Optionee further understands that the Securities must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Optionee further
acknowledges and understands that the Company is under no obligation to register
the Securities. Optionee understands that the certificate evidencing the
Securities will be imprinted with a legend which prohibits the transfer of the
Securities unless they are registered or such registration is not required in
the opinion of counsel satisfactory to the Company, and any other legend
required under applicable state securities laws.

          (c)  Optionee is familiar with the provisions of Rule 144, promulgated
under the Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions, including, among other things: (1)
the resale occurring not less than one year after the later of the date the
securities were sold by the
<PAGE>

Company or the date they were sold by an affiliate of the Company, within the
meaning of Rule 144; and, in the case of an affiliate, or of a non-affiliate who
has held the securities less than two years, (2) the availability of certain
public information about the Company, (3) the sale being made through a broker
in an unsolicited "broker's transaction" or in transactions directly with a
market maker (as said term is defined under the Securities Exchange Act of
1934), and (4) the amount of securities being sold during any three month period
not exceeding the specified limitations stated therein, if applicable.

          (d)  Optionee further understands that in the event all of the
applicable requirements of or 144 are not satisfied, registration under the
Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rule 144 is
not exclusive, the Staff of the Securities and Exchange Commission has expressed
its opinion that persons proposing to sell private placement securities other
than in a registered offering and otherwise than pursuant to Rule 144 will have
a substantial burden of proof in establishing that an exemption from
registration is available for such offers or sales, and that such persons and
their respective brokers who participate in such transactions do so at their own
risk. Optionee understands that no assurances can be given that any such other
registration exemption will be available in such event.


                                        Signature of Optionee:

                                        /s/ Kevin MacLean
                                        ________________________________________

                                        Date:  February 1, 2000
<PAGE>

                                   EXHIBIT C
                                   ---------

                              SECURITY AGREEMENT

     This Security Agreement is made as of February 1, 2000 between Numerical
Technologies, Inc., a California corporation ("Pledgee"), and Kevin MacLean
("Pledgor").

                                   Recitals
                                   --------

     Pursuant to Pledgor's election to purchase Shares under the Option
Agreement dated February 1, 2000 (the "Option"), between Pledgor and Pledgee
under Pledgee's 2000 Stock Plan, and Pledgor's election under the terms of the
Option to pay for such shares with his promissory note (the "Note"), Pledgor has
purchased 150,000 shares of Pledgee's Common Stock (the "Shares") at a price of
$4.00 per share, for a total purchase price of $600,000.00.  The Note and the
obligations thereunder are as set forth in Exhibit D to the Option.

     NOW, THEREFORE, it is agreed as follows:

     A.   Creation and Description of Security Interest. In consideration of the
          ---------------------------------------------
transfer of the Shares to Pledgor under the Option Agreement, Pledgor, pursuant
to the California Commercial Code, hereby pledges all of such Shares (herein
sometimes referred to as the "Collateral") represented by certificate number
233, duly endorsed in blank or with executed stock powers, and herewith delivers
said certificate to the Secretary of Pledgee ("Pledgeholder"), who shall hold
said certificate subject to the terms and conditions of this Security Agreement.

     The pledged stock (together with an executed blank stock assignment for use
in transferring all or a portion of the Shares to Pledgee if, as and when
required pursuant to this Security Agreement) shall be held by the Pledgeholder
as security for the repayment of the Note, and any extensions or renewals
thereof, to be executed by Pledgor pursuant to the terms of the Option, and the
Pledgeholder shall not encumber or dispose of such Shares except in accordance
with the provisions of this Security Agreement.

     B.   Pledgor's Representations and Covenants.  To induce Pledgee to enter
          ---------------------------------------
into this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:

          (A)  Payment of Indebtedness.  Pledgor will pay the principal sum of
               -----------------------
the Note secured hereby, together with interest thereon, at the time and in the
manner provided in the Note.

          (B)  Encumbrances.  The Shares are free of all other encumbrances,
               ------------
defenses and liens, and Pledgor will not further encumber the Shares without the
prior written consent of Pledgee.

          (C)  Margin Regulations.  In the event that Pledgee's Common Stock is
               ------------------
now or later becomes margin-listed by the Federal Reserve Board and Pledgee is
                                          -------
classified as a "lender" within the meaning of the regulations under Part 207 of
Title 12 of the Code of Federal Regulations
<PAGE>

("Regulation G"), Pledgor agrees to cooperate with Pledgee in making any
amendments to the Note or providing any additional collateral as may be
necessary to comply with such regulations.

     C.   Voting Rights.  During the term of this pledge and so long as all
          -------------
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.

     D.   Stock Adjustments. In the event that during the term of the pledge any
          -----------------
stock dividend, reclassification, readjustment or other changes are declared or
made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgee under the terms of this Security Agreement
in the same manner as the Shares originally pledged hereunder.  In the event of
substitution of such securities, Pledgor, Pledgee and Pledgeholder shall
cooperate and execute such documents as are reasonable so as to provide for the
substitution of such Collateral and, upon such substitution, references to
"Shares" in this Security Agreement shall include the substituted shares of
capital stock of Pledgor as a result thereof.

     E.   Options and Rights. In the event that, during the term of this pledge,
          ------------------
subscription Options or other rights or options shall be issued in connection
with the pledged Shares, such rights, Options and options shall be the property
of Pledgor and, if exercised by Pledgor, all new stock or other securities so
acquired by Pledgor as it relates to the pledged Shares then held by
Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.

     F    Default.  Pledgor shall be deemed to be in default of the Note and of
          -------
this Security Agreement in the event:

          (A)  Payment of principal or interest on the Note shall be delinquent
for a period of 10 days or more; or

          (B)  Pledgor fails to perform any of the covenants set forth in the
Option or contained in this Security Agreement for a period of 10 days after
written notice thereof from Pledgee.

     In the case of an event of Default, as set forth above, Pledgee shall have
the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee
shall thereafter be entitled to pursue its remedies under the California
Commercial Code.

     (G)  Release of Collateral.  Subject to any applicable contrary rules under
          ---------------------
Regulation G, there shall be released from this pledge a portion of the pledged
Shares held by Pledgeholder hereunder upon payments of the principal of the
Note.  The number of the pledged Shares which shall be released shall be that
number of full Shares which bears the same proportion to the initial number of
Shares pledged hereunder as the payment of principal bears to the initial full
principal amount of the Note.

                                      -2-
<PAGE>

     (H)  Withdrawal or Substitution of Collateral.  Pledgor shall not sell,
          ----------------------------------------
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.

     (I)  Term.  The within pledge of Shares shall continue until the payment of
          ----
all indebtedness secured hereby, at which time the remaining pledged stock shall
be promptly delivered to Pledgor, subject to the provisions for prior release of
a portion of the Collateral as provided in paragraph 7 above.

     (J)  Insolvency.  Pledgor agrees that if a bankruptcy or insolvency
          ----------
proceeding is instituted by or against it, or if a receiver is appointed for the
property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall become immediately due and
payable, and Pledgee may proceed as provided in the case of default.

     (K)  Pledgeholder Liability. In the absence of willful or gross negligence,
          ----------------------
Pledgeholder shall not be liable to any party for any of his acts, or omissions
to act, as Pledgeholder.

     (L)  Invalidity of Particular Provisions.  Pledgor and Pledgee agree that
          -----------------------------------
the enforceability or invalidity of any provision or provisions of this Security
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.

     (M)  Successors or Assigns. Pledgor and Pledgee agree that all of the terms
          ---------------------
of this Security Agreement shall be binding on their respective successors and
assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall
be deemed to include, for all purposes, the respective designees, successors,
assigns, heirs, executors and administrators.

     (N)  Governing Law.  This Security Agreement shall be interpreted and
          -------------
governed under the internal substantive laws, but not the choice of law rules,
of California.

                                      -3-
<PAGE>

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

                                       /s/ Kevin MacLean
     "PLEDGOR"                         ________________________________________
                                       Signature

                                       Kevin MacLean
                                       ---------------------------------------
                                       Print Name

                                                95 Church St., #2105
                                       Address:_______________________________

                                                Los Gatos, CA 95032
                                               _______________________________



     "PLEDGEE"                         NUMERICAL TECHNOLOGIES, INC.
                                       a California corporation

                                       /s/ Yagyensh C. Pati
                                       _______________________________________
                                       Signature

                                       Yagyensh C. Pati
                                       _______________________________________
                                       Print Name

                                       President & CEO
                                       _______________________________________
                                       Title

                                       /s/ Yagyensh C. Pati
     "PLEDGEHOLDER"                    _______________________________________
                                       Secretary of Numerical Technologies, Inc.
<PAGE>

                                   EXHIBIT D
                                   ---------

                                     NOTE

$600,000.00                                              Santa Clara, California

                                                                February 1, 2000


     FOR VALUE RECEIVED, Kevin MacLean promises to pay to Numerical
Technologies, Inc., a California corporation (the "Company"), or order, the
principal sum of Six Hundred Thousand Dollars ($600,000.00), together with
interest on the unpaid principal hereof from the date hereof at the rate of 8.0%
per annum, compounded annually.

     Principal and interest shall be due and payable on February 1, 2001.
Payment of principal and interest shall be made in lawful money of the United
States of America.

     The undersigned may at any time prepay all or any portion of the principal
or interest owing hereunder.

     This Note is subject to the terms of the Option, dated as of February 1,
2000.  This Note is secured in part by a pledge of the Company's Common Stock
under the terms of a Security Agreement of even date herewith and is subject to
all the provisions thereof.

     The holder of this Note shall have full recourse against the undersigned,
and shall not be required to proceed against the collateral securing this Note
in the event of default.

     In the event the undersigned shall cease to be an employee, director or
consultant of the Company for any reason, this Note shall, at the option of the
Company, be accelerated, and the whole unpaid balance on this Note of principal
and accrued interest shall be immediately due and payable.

     Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by the
undersigned.

                                            /s/ Kevin MacLean
                                            ____________________________________
                                            Kevin MacLean
<PAGE>

                                  EXHIBIT E-1
                                  -----------

                         NUMERICAL TECHNOLOGIES, INC.

                                2000 STOCK PLAN

                      RESTRICTED STOCK PURCHASE AGREEMENT


     THIS AGREEMENT is made between Kevin MacLean (the "Purchaser") and
Numerical Technologies, Inc. (the "Company") as of February 1, 2000.

                                   RECITALS
                                   --------

     (1)  Pursuant to the exercise of the stock option granted to Purchaser
under the Company's 2000 Stock Plan (the "Plan") and pursuant to the Stock
Option Agreement (the "Option Agreement") dated February 1, 2000 by and between
the Company and Purchaser with respect to such grant, which Plan and Option
Agreement are hereby incorporated by reference, Purchaser has elected to
purchase 150,000 of those shares which have not become vested under the vesting
schedule set forth in the Option Agreement ("Unvested Shares"). The Unvested
Shares and the shares subject to the Option Agreement which have become vested
are sometimes collectively referred to herein as the "Shares".

     (2)  As required by the Option Agreement, as a condition to Purchaser's
election to exercise the option, Purchaser must execute this Restricted Stock
Purchase Agreement, which sets forth the rights and obligations of the parties
with respect to Shares acquired upon exercise of the Option.

     1.   Repurchase Option.
          -----------------

          (a)  If Purchaser's status as a Service Provider is terminated for any
reason, including for cause, death, and disability, the Company shall have the
right and option to purchase from Purchaser, or Purchaser's personal
representative, as the case may be, all of the Purchaser's Unvested Shares as of
the date of such termination at the price paid by the Purchaser for such Shares
(the "Repurchase Option").

          (b)  Upon the occurrence of a termination, the Company may exercise
its Repurchase Option by delivering personally or by registered mail, to
Purchaser (or his transferee or legal representative, as the case may be),
within ninety (90) days of the termination, a notice in writing indicating the
Company's intention to exercise the Repurchase Option and setting forth a date
for closing not later than thirty (30) days from the mailing of such notice. The
closing shall take place at the Company's office. At the closing, the holder of
the certificates for the Unvested Shares being transferred shall deliver the
stock certificate or certificates evidencing the Unvested Shares, and the
Company shall deliver the purchase price therefor.
<PAGE>

          (c)  At its option, the Company may elect to make payment for the
Unvested Shares to a bank selected by the Company. The Company shall avail
itself of this option by a notice in writing to Purchaser stating the name and
address of the bank, date of closing, and waiving the closing at the Company's
office.

          (d)  If the Company does not elect to exercise the Repurchase Option
conferred above by giving the requisite notice within ninety (90) days following
the termination, the Repurchase Option shall terminate.

          (e)  The Repurchase Option shall terminate in accordance with the
Vesting Schedule in Optionee's Option Agreement.

     2.   Transferability of the Shares; Escrow.
          -------------------------------------

          (a)  Purchaser hereby authorizes and directs the secretary of the
Company, or such other person designated by the Company, to transfer the
Unvested Shares as to which the Repurchase Option has been exercised from
Purchaser to the Company.

          (b)  To insure the availability for delivery of Purchaser's Unvested
Shares upon repurchase by the Company pursuant to the Repurchase Option under
Section 1, Purchaser hereby appoints the secretary, or any other person
designated by the Company as escrow agent, as its attorney-in-fact to sell,
assign and transfer unto the Company, such Unvested Shares, if any, repurchased
by the Company pursuant to the Repurchase Option and shall, upon execution of
this Agreement, deliver and deposit with the secretary of the Company, or such
other person designated by the Company, the share certificates representing the
Unvested Shares, together with the stock assignment duly endorsed in blank,
attached hereto as Exhibit E-2. The Unvested Shares and stock assignment shall
                   -----------
be held by the secretary in escrow, pursuant to the Joint Escrow Instructions of
the Company and Purchaser attached as Exhibit E-3 hereto, until the Company
                                      -----------
exercises its purchase right as provided in Section 1, until such Unvested
Shares are vested, or until such time as this Agreement no longer is in effect.
As a further condition to the Company's obligations under this Agreement, the
spouse of the Purchaser, if any, shall execute and deliver to the Company the
Consent of Spouse attached hereto as Exhibit E-4. Upon vesting of the Unvested
                                     -----------
Shares, the escrow agent shall promptly deliver to the Purchaser the certificate
or certificates representing such Shares in the escrow agent's possession
belonging to the Purchaser, and the escrow agent shall be discharged of all
further obligations hereunder; provided, however, that the escrow agent shall
nevertheless retain such certificate or certificates as escrow agent if so
required pursuant to other restrictions imposed pursuant to this Agreement.

          (c)  The Company, or its designee, shall not be liable for any act it
may do or omit to do with respect to holding the Shares in escrow and while
acting in good faith and in the exercise of its judgment.

          (d)  Transfer or sale of the Shares is subject to restrictions on
transfer imposed by any applicable state and federal securities laws. Any
transferee shall hold such Shares subject to all the provisions hereof and the
Exercise Notice executed by the Purchaser with respect to any

                                      -2-
<PAGE>

Unvested Shares purchased by Purchaser and shall acknowledge the same by signing
a copy of this Agreement.

     3.   Ownership, Voting Rights, Duties.  This Agreement shall not affect in
          --------------------------------
any way the ownership, voting rights or other rights or duties of Purchaser,
except as specifically provided herein.

     4.   Legends.  The share certificate evidencing the Shares issued hereunder
          -------
shall be endorsed with the following legend (in addition to any legend required
under applicable state securities laws):

     THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT
BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.

     5.   Adjustment for Stock Split.  All references to the number of Shares
          --------------------------
and the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.

     6.   Notices.  Notices required hereunder shall be given in person or by
          -------
registered mail to the address of Purchaser shown on the records of the Company,
and to the Company at their respective principal executive offices.

     7.   Survival of Terms.  This Agreement shall apply to and bind Purchaser
          -----------------
and the Company and their respective permitted assignees and transferees, heirs,
legatees, executors, administrators and legal successors.

     8.   Section 83(b) Election.  Purchaser hereby acknowledges that he or she
          ----------------------
has been informed that, with respect to the exercise of an Option for unvested
Shares, an election may be filed by the Purchaser with the Internal Revenue
Service, within 30 days of the purchase of the Shares, electing pursuant to
         --------------
Section 83(b) of the Code to be taxed currently on any difference between the
purchase price of the Shares and their Fair Market Value on the date of
purchase. In the case of a Nonstatutory Stock Option, this will result in a
recognition of taxable income to the Purchaser on the date of exercise, measured
by the excess, if any, of the fair market value of the Shares, at the time the
Option is exercised over the purchase price for the Shares. Absent such an
election, taxable income will be measured and recognized by Purchaser at the
time or times on which the Company's Repurchase Option lapses. In the case of an
Incentive Stock Option, such an election will result in a recognition of income
to the Purchaser for alternative minimum tax purposes on the date of exercise,
measured by the excess, if any, of the fair market value of the Shares, at the
time the option is exercised, over the purchase price for the Shares. Absent
such an election, alternative minimum taxable income will be measured and
recognized by Purchaser at the time or times on which the Company's Repurchase
Option lapses. Purchaser is strongly encouraged to seek the advice of his or her
own tax consultants in connection with the purchase of the Shares and the
advisability of filing

                                      -3-
<PAGE>

of the Election under Section 83(b) of the Code. A form of Election under
Section 83(b) is attached hereto as Exhibit E-5 for reference.
                                    -----------

     PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE RESPONSIBILITY AND NOT
THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF PURCHASER
REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON PURCHASER'S
BEHALF.

     9.   Representations.  Purchaser has reviewed with his own tax advisors the
          ---------------
federal, state, local and foreign tax consequences of this investment and the
transactions contemplated by this Agreement. Purchaser is relying solely on such
advisors and not on any statements or representations of the Company or any of
its agents. Purchaser understands that he (and not the Company) shall be
responsible for his own tax liability that may arise as a result of this
investment or the transactions contemplated by this Agreement.

     10.  Governing Law.  This Agreement shall be governed by the internal
          -------------
substantive laws, but not the choice of law rules, of California.

     Purchaser represents that he has read this Agreement and is familiar with
its terms and provisions. Purchaser hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board upon any
questions arising under this Agreement.

                                      -4-
<PAGE>

     IN WITNESS WHEREOF, this Agreement is deemed made as of the date first set
forth above.

                                        "COMPANY"

                                        NUMERICAL TECHNOLOGIES, INC.

                                        /s/ Yagyensh C. Pati
                                        ________________________________________
                                        By

                                        President & CEO
                                        ________________________________________
                                        Title

                                        "PURCHASER"

                                        /s/ Kevin MacLean
                                        ________________________________________
                                        Signature

                                        Kevin MacLean
                                        ----------------------------------------
                                        Printed Name

                                        ###-##-####
                                        ________________________________________
                                        Soc. Sec. No.

                                        Address:
                                        -------

                                        95 Church St., #2105
                                        ________________________________________

                                        Los Gatos, CA 95032
                                        ________________________________________
<PAGE>

                                  EXHIBIT E-2
                                  -----------

                     ASSIGNMENT SEPARATE FROM CERTIFICATE

     FOR VALUE RECEIVED I, __________________________, hereby sell, assign and
transfer unto Numerical Technologies, Inc. (__________) shares of the Common
Stock of Numerical Technologies, Inc. standing in my name of the books of said
corporation represented by Certificate No. _____ herewith and do hereby
irrevocably constitute and appoint _______________________ to transfer the said
stock on the books of the within named corporation with full power of
substitution in the premises.

     This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between Numerical Technologies, Inc. and the
undersigned dated ______________, 20___.


Dated: _________________, ____


                 /s/ Kevin MacLean
       Signature:_____________________________



     INSTRUCTIONS: Please do not fill in any blanks other than the signature
line. The purpose of this assignment is to enable the Company to exercise its
"repurchase option," as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE>

                                  EXHIBIT E-3
                                  -----------

                           JOINT ESCROW INSTRUCTIONS
                           -------------------------

                                                           February 1, 2000

Numerical Technologies, Inc.
70 West Plumeria Drive
San Jose, CA 95134-2134

Attention:  Secretary

Dear ___________:

     As Escrow Agent for both Numerical Technologies, Inc. (the "Company"), and
the undersigned purchaser of stock of the Company (the "Purchaser"), you are
hereby authorized and directed to hold the documents delivered to you pursuant
to the terms of that certain Restricted Stock Purchase Agreement ("Agreement")
between the Company and the undersigned, in accordance with the following
instructions:

     1.   In the event the Company and/or any assignee of the Company (referred
to collectively for convenience herein as the "Company") exercises the Company's
repurchase option set forth in the Agreement, the Company shall give to
Purchaser and you a written notice specifying the number of shares of stock to
be purchased, the purchase price, and the time for a closing hereunder at the
principal office of the Company. Purchaser and the Company hereby irrevocably
authorize and direct you to close the transaction contemplated by such notice in
accordance with the terms of said notice.

     2.   At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, cancellation of indebtedness, or some combination thereof) for
the number of shares of stock being purchased pursuant to the exercise of the
Company's repurchase option.

     3.   Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a stockholder of the Company while the
stock is held by you.
<PAGE>

     4.   Provided the Promissory Note dated February 1, 2000 in the principal
amount of $600,000.00 and issued by the Purchaser to the Company (the "Note")
has been paid in full, upon written request of the Purchaser, but no more than
once per calendar year, unless the Company's repurchase option has been
exercised, you will deliver to Purchaser a certificate or certificates
representing so many shares of stock as are not then subject to the Company's
repurchase option. Provided the Note has been paid in full, within 120 days
after cessation of Purchaser's continuous employment by or services to the
Company, or any parent or subsidiary of the Company, you will deliver to
Purchaser a certificate or certificates representing the aggregate number of
shares held or issued pursuant to the Agreement and not purchased by the Company
or its assignees pursuant to exercise of the Company's repurchase option.

     5.   If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.

     6.   Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.

     7.   You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith,
and any act done or omitted by you pursuant to the advice of your own attorneys
shall be conclusive evidence of such good faith.

     8.   You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court. In
case you obey or comply with any such order, judgment or decree, you shall not
be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.

     9.   You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.

     10.  You shall not be liable for the outlawing of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.

     11.  You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.

                                      -2-
<PAGE>

     12.  Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be an officer or agent of the Company or if you shall resign by
written notice to each party. In the event of any such termination, the Company
shall appoint a successor Escrow Agent.

     13.  If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.

     14.  It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.

     15.  Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.

          COMPANY:            Numerical Technologies, Inc.
                              70 West Plumeria Drive
                              San Jose, CA 95134-2134
                              Attention:  Secretary

          PURCHASER:          Kevin MacLean

                              95 Church St., #2105
                              ____________________________

                              Los Gatos, CA 95032
                              ____________________________


          ESCROW AGENT:       Wilson Sonsini, Goodrich & Rosati
                              650 Page Mill Road
                              Palo Alto, CA 94304

     16.  By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.

     17.  This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted
assigns.

                                      -3-
<PAGE>

     18.  These Joint Escrow Instructions shall be governed by the internal
substantive laws, but not the choice of law rules, of California.

                                   NUMERICAL TECHNOLOGIES, INC.

                                   /s/ Yagyensh C. Pati
                                   _____________________________________________
                                   By

                                   President & CEO
                                   _____________________________________________
                                   Title


                                   PURCHASER

                                   /s/ Kevin MacLean
                                   _____________________________________________
                                   Signature

                                   Kevin MacLean
                                   ---------------------------------------------
                                   Typed or Printed Name


                                   ESCROW AGENT

                                   WILSON SONSINI GOODRICH & ROSATI

                                   /s/ John V. Ross
                                   _____________________________________________
                                   By

                                   Member
                                   _____________________________________________
                                   Title
<PAGE>

                                  EXHIBIT E-4
                                  -----------

                               CONSENT OF SPOUSE
                               -----------------

     I, ____________________, spouse of ____________________, have read and
approve the foregoing Agreement. In consideration of granting of the right to my
spouse to purchase shares of Numerical Technologies, Inc., as set forth in the
Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the
exercise of any rights under the Agreement and agree to be bound by the
provisions of the Agreement insofar as I may have any rights in said Agreement
or any shares issued pursuant thereto under the community property laws or
similar laws relating to marital property in effect in the state of our
residence as of the date of the signing of the foregoing Agreement.

Dated: __________________, 2000

                                             __________________________________
<PAGE>

                                  EXHIBIT E-5
                                  -----------

                         ELECTION UNDER SECTION 83(b)
                         ----------------------------
                     OF THE INTERNAL REVENUE CODE OF 1986
                     ------------------------------------

The undersigned taxpayer hereby elects, pursuant to Sections 55 and 83(b) of the
Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income
or alternative minimum taxable income, as the case may be, for the current
taxable year the amount of any compensation taxable to taxpayer in connection
with taxpayer's receipt of the property described below:

1.   The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:


     NAME:                   TAXPAYER:       Kevin MacLean       SPOUSE:

     ADDRESS: 95 Church St. #2105, Los Gatos, CA  95032

     IDENTIFICATION NO.:     TAXPAYER:       ###-##-####         SPOUSE:

     TAXABLE YEAR:    2000

2.   The property with respect to which the election is made is described as
follows: 150,000 shares (the "Shares") of the Common Stock of Numerical
Technologies, Inc. (the "Company").

3.   The date on which the property was transferred is: Feb. 1, 2000.

4.   The property is subject to the following restrictions:

     The Shares may not be transferred and are subject to forfeiture under the
     terms of an agreement between the taxpayer and the Company. These
     restrictions lapse upon the satisfaction of certain conditions contained in
     such agreement.

5.   The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never lapse, of
such property is:

     $600,000.

6.   The amount (if any) paid for such property is:

     $600,000.

The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property.  The transferee of such property is the person
performing the services in connection with the transfer of said property.

The undersigned understands that the foregoing election may not be revoked
- --------------------------------------------------------------------------
except with the consent of the Commissioner.
- -------------------------------------------

                                   /s/ Kevin MacLean
Dated:  2/20/2000                  _____________________________________________
                                                  Taxpayer

The undersigned spouse of taxpayer joins in this election.

Dated:                             _____________________________________________

<PAGE>
                                                                  Exhibit 10.30

                         NUMERICAL TECHNOLOGIES, INC.

                                2000 STOCK PLAN

                   STOCK OPTION AGREEMENT -- EARLY EXERCISE

     Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.

I.   NOTICE OF STOCK OPTION GRANT
     ----------------------------

     Yagyensh C. Pati

     You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:

     Date of Grant:                     February 1, 2000

     Vesting Commencement Date:         February 1, 2000

     Exercise Price per Share:          $4.00

     Total Number of Shares Granted:    400,000

     Total Exercise Price:              $1,600,000.00

     Type of Option:                    ___ Incentive Stock Option

                                         X  Nonstatutory Stock Option
                                        ---

     Term/Expiration Date:              Ten Years/February 1, 2010*

_______________
*  Or earlier, pursuant to the termination period set forth below.

     Exercise and Vesting Schedule:
     -----------------------------

     This Option is exercisable immediately, in whole or in part, and shall vest
according to the following vesting schedule:

     One-fourth (1/4th) of the Shares subject to the Option shall vest twelve
months after the Vesting Commencement Date, and one-sixteenth (1/16th) of the
Shares subject to the Option shall vest on the last day of each three month
anniversary thereafter, subject to your continuing to be a Service Provider on
such dates.
<PAGE>

     Change of Control; Constructive Termination:
     -------------------------------------------

     Notwithstanding the provisions of Section 14(c) of the Plan, if the Company
merges with or into another entity, sells all or substantially all of its
assets, or enters into any other similar transaction or reorganization
(including without limitation, a sale of stock of the Company) as a result of
which the shareholders of the Company immediately prior to such transaction will
not hold at least 50% of the voting power of the surviving, purchasing or
continuing entity, as applicable (taking into account any securities issued to
the shareholders of the Company in the transaction) (a "Change of Control
Transaction"), then on the six month anniversary of the Change of Control
Transaction (the "Anniversary Date") fifty percent (50%) of the Shares subject
to the Option which have not vested as of the Anniversary Date shall become
fully vested and exercisable.  The Board shall notify the Optionee at least
fifteen (15) days prior to the closing of a Change of Control Transaction, and
such notification shall include a statement as to whether or not the Option will
be assumed by the surviving or purchasing entity or whether an equivalent
substitute option will be provided by such entity.

     Following an assumption or substitution of the Option in connection with a
Change of Control Transaction, if the Optionee's status as an Employee of the
successor corporation is terminated by the successor corporation as a result of
an Involuntary Termination (as defined below) within twelve months following the
Change of Control Transaction, the Optionee shall fully vest in and have the
right to exercise the Option as to all of the Shares, including Shares as to
which the Option would not otherwise be vested or exercisable.

     Any of the following events shall constitute an "Involuntary Termination":
(i) without the Optionee's express written consent, a significant reduction of
the Optionee's duties, authority and responsibilities, relative to the
Optionee's duties, authority and responsibilities as in effect immediately prior
to the Change of Control Transaction; (ii) a material reduction in the base
salary of the Optionee as in effect immediately prior to the Change of Control
Transaction; (iii) a material reduction in the kind or level of employee
benefits, including bonuses, to which the Optionee was entitled immediately
prior to the Change of Control Transaction with the result that the Optionee's
overall benefits package is significantly reduced; (iv) the relocation of the
Optionee to a facility or a location more than sixty (60) miles from the
Optionee's then present location, without the Optionee's express written
consent; (v) any purported termination of the Optionee which is not effected for
Disability or for Cause (as defined below), or any purported termination for
which the grounds relied upon are not valid; (vi) or any act or set of facts or
circumstances which would, under California case law or statute, constitute a
constructive termination of the Optionee.

          "Cause" shall mean (i) any act of personal dishonesty taken by the
Optionee in connection with his responsibilities as a Service Provider and
intended to result in substantial personal enrichment of the Optionee, (ii)
Optionee's conviction of a felony, (iii) a willful act by the Optionee which
constitutes gross misconduct and which is injurious to the Successor
Corporation, and (iv) following delivery to the Optionee of a written demand for
performance from the Successor Corporation which describes the basis for the
Successor Corporation's belief that the Optionee has not substantially performed
his duties, continued violations by the Optionee of the Optionee's

                                      -2-
<PAGE>

obligations to the Successor Corporation which are demonstrably willful and
deliberate on the Optionee's part.

     Termination Period:
     ------------------

     You may exercise this Option for thirty days after you cease to be a
Service Provider.  Upon your death or disability, this Option may be exercised
for one year after you cease to be a Service Provider.  In no event may you
exercise this Option after the Term/Expiration Date as provided above.

II.  AGREEMENT
     ---------

     1.   Grant of Option.  The Plan Administrator of the Company hereby
          ---------------
grants to the Optionee named in the Notice of Grant (the "Optionee"), an option
(the "Option") to purchase the number of Shares set forth in the Notice of
Grant, at the exercise price per Share set forth in the Notice of Grant (the
"Exercise Price"), and subject to the terms and conditions of the Plan, which is
incorporated herein by reference. Subject to Section 17(c) of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this Option
Agreement, the terms and conditions of the Plan shall prevail.

          If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option as
defined in Section 422 of the Code.  Nevertheless, to the extent that it exceeds
the $100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").

     2.   Exercise of Option.  This Option shall be exercisable during its term
          ------------------
in accordance with the provisions of Section 10 of the Plan as follows:

          (a)  Right to Exercise.
               -----------------

                    (i)   Subject to subsections 2(a)(ii) and 2(a)(iii) below,
this Option shall be exercisable cumulatively according to the vesting schedule
set forth in the Notice of Grant. Alternatively, at the election of the
Optionee, this option may be exercised in whole or in part at any time as to
Shares which have not yet vested. For purposes of this Stock Option Agreement,
Shares subject to the Option shall vest based on continued employment of
Optionee with the Company. Vested Shares shall not be subject to the Company's
repurchase right (as set forth in the Restricted Stock Purchase Agreement,
attached hereto as Exhibit E-1).
                   -----------

                    (ii)  As a condition to exercising this Option for unvested
Shares, the Optionee shall execute the Restricted Stock Purchase Agreement.

                    (iii) This Option may not be exercised for a fraction of a
Share.

          (b)  Method of Exercise.  This Option shall be exercisable by
               ------------------
delivery of an exercise notice in the form attached as Exhibit A (the "Exercise
                                                       ---------
Notice") which shall state the election to exercise the Option, the number of
Shares with respect to which the Option is being exercised (the "Exercised
Shares"), and such other representations and agreements as may be required by
the

                                      -3-
<PAGE>

Company. The Exercise Notice shall be accompanied by payment of the aggregate
Exercise Price as to all Exercised Shares. This Option shall be deemed to be
exercised upon receipt by the Company of such fully executed Exercise Notice
accompanied by the aggregate Exercise Price.

          No Shares shall be issued pursuant to the exercise of an Option unless
such issuance and such exercise complies with Applicable Laws.  Assuming such
compliance, for income tax purposes the Shares shall be considered transferred
to the Optionee on the date on which the Option is exercised with respect to
such Shares.

     3.   Optionee's Representations.  In the event the Shares have not been
          --------------------------
registered under the Securities Act of 1933, as amended, at the time this Option
is exercised, the Optionee shall, if required by the Company, concurrently with
the exercise of all or any portion of this Option, deliver to the Company his or
her Investment Representation Statement in the form attached hereto as Exhibit
                                                                       -------
B.

     4.   Lock-Up Period.  Optionee hereby agrees that, if so requested by the
          --------------
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
the effective date of a registration statement of the Company filed under the
Securities Act. Such restriction shall apply only to the first registration
statement of the Company to become effective under the Securities Act that
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.

     5.   Method of Payment.  Payment of the aggregate Exercise Price shall be
          -----------------
by any of the following, or a combination thereof, at the election of the
Optionee:

          (a)  cash;

          (b)  check;

          (c)  consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan;

          (d)  surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares; or

          (e)  with the Administrator's consent, delivery of Optionee's
promissory note (the "Note") in the form attached hereto as Exhibit D, in the
amount of the aggregate Exercise Price of the Exercised Shares together with the
execution and delivery by the Optionee of the Security Agreement attached hereto
as Exhibit C. The Note shall bear interest at the "applicable federal rate"

                                      -4-
<PAGE>

prescribed under the Code and its regulations at time of purchase, and shall be
secured by a pledge of the Shares purchased by the Note pursuant to the Security
Agreement.

     6.   Restrictions on Exercise.  This Option may not be exercised until
          ------------------------
such time as the Plan has been approved by the shareholders of the Company, or
if the issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any Applicable
Law.

     7.   Non-Transferability of Option.  This Option may not be transferred
          -----------------------------
in any manner otherwise than by will or by the laws of descent or distribution
and may be exercised during the lifetime of Optionee only by Optionee. The terms
of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.

     8.   Term of Option.  This Option may be exercised only within the term
          --------------
set out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.

     9.   Tax Consequences.  Set forth below is a brief summary as of the date
          ----------------
of this Option of some of the federal tax consequences of exercise of this
Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE,
AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD
CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

          (a)  Exercise of ISO.  If this Option qualifies as an ISO, there will
               ---------------
be no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price will be treated as an adjustment to the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.

          (b)  Exercise of ISO Following Disability.  If the Optionee ceases to
               ------------------------------------
be an Employee as a result of a disability that is not a total and permanent
disability as defined in Section 22(e)(3) of the Code, to the extent permitted
on the date of termination, the Optionee must exercise an ISO within three
months of such termination for the ISO to be qualified as an ISO.

          (c)  Exercise of Nonstatutory Stock Option.  There may be a regular
               -------------------------------------
federal income tax liability upon the exercise of a Nonstatutory Stock Option.
The Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market Value
of the Shares on the date of exercise over the Exercise Price. If Optionee is an
Employee or a former Employee, the Company will be required to withhold from
Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount in cash equal to a percentage of this compensation
income at the time of exercise, and may refuse to honor the exercise and refuse
to deliver Shares if such withholding amounts are not delivered at the time of
exercise.

          (d)  Disposition of Shares.  In the case of an NSO, if Shares are
               ---------------------
held for at least one year, any gain realized on disposition of the Shares will
be treated as long-term capital gain for

                                      -5-
<PAGE>

federal income tax purposes. In the case of an ISO, if Shares transferred
pursuant to the Option are held for at least one year after exercise and at
least two years after the Date of Grant, any gain realized on disposition of the
Shares will also be treated as long-term capital gain for federal income tax
purposes. If Shares purchased under an ISO are disposed of within one year after
exercise or two years after the Date of Grant, any gain realized on such
disposition will be treated as compensation income (taxable at ordinary income
rates) to the extent of the difference between the Exercise Price and the lesser
of (i) the Fair Market Value of the Shares on the date of exercise, or (ii) the
sale price of the Shares. Any additional gain will be taxed as capital gain,
short-term depending on the period that the ISO Shares were held.

          (e)  Notice of Disqualifying Disposition of ISO Shares.  If the
               -------------------------------------------------
Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (i) the date two years after the Date of Grant, or (ii) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.

          (f)  Section 83(b) Election for Unvested Shares Purchased Pursuant
               -------------------------------------------------------------
to Options. With respect to the exercise of an Option for unvested Shares, an
election may be filed by the Optionee with the Internal Revenue Service, within
                                                                         -------
30 days of the purchase of the Shares, electing pursuant to Section 83(b) of the
- -------
Code to be taxed currently on any difference between the purchase price of the
Shares and their Fair Market Value on the date of purchase. In the case of a
Nonstatutory Stock Option, this will result in a recognition of taxable income
to the Optionee on the date of exercise, measured by the excess, if any, of the
fair market value of the Shares, at the time the Option is exercised over the
purchase price for the Shares. Absent such an election, taxable income will be
measured and recognized by Optionee at the time or times on which the Company's
Repurchase Option lapses. In the case of an Incentive Stock Option, such an
election will result in a recognition of income to the Optionee for alternative
minimum tax purposes on the date of exercise, measured by the excess, if any, of
the fair market value of the Shares, at the time the option is exercised, over
the purchase price for the Shares. Absent such an election, alternative minimum
taxable income will be measured and recognized by Optionee at the time or times
on which the Company's Repurchase Option lapses. Optionee is strongly encouraged
to seek the advice of his or her own tax consultants in connection with the
purchase of the Shares and the advisability of filing of the Election under
Section 83(b) of the Code. A form of Election under Section 83(b) is attached
hereto as Exhibit E-5 for reference.
          -----------

     OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY AND NOT THE
COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF OPTIONEE
REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON OPTIONEE'S
BEHALF.

                                      -6-
<PAGE>

     10.  Entire Agreement; Governing Law.  The Plan is incorporated herein by
          -------------------------------
reference.  The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee.  This agreement is governed by the internal substantive laws but not
the choice of law rules of California.

     11.  No Guarantee of Continued Service.  OPTIONEE ACKNOWLEDGES AND AGREES
          ---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH
THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.

     Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof.  Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option.  Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.


OPTIONEE:                          NUMERICAL TECHNOLOGIES, INC.

/s/ Yagyensh C. Pati               /s/ Richard Mora
- -------------------------------    -------------------------------
Signature                          By

Yagyensh C. Pati                   VP, Finance and Operations
- -------------------------------    -------------------------------
Print Name                         Title

816 Amber Lane
- -------------------------------
Los Altos, CA  94024
- -------------------------------
Residence Address
<PAGE>

                                   EXHIBIT A
                                   ---------

                                2000 STOCK PLAN

                                EXERCISE NOTICE

Numerical Technologies, Inc.
70 West Plumeria Drive
San Jose, CA  95134-2134

Attention:  Secretary

     1.   Exercise of Option.  Effective as of today, February 10, 2000, the
          ------------------
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
400,000 shares of the Common Stock (the "Shares") of Numerical Technologies,
Inc. (the "Company") under and pursuant to the 2000 Stock Plan (the "Plan") and
the [  ] Incentive [X] Nonstatutory Stock Option Agreement dated February 1,
2000 (the "Option Agreement").

     2.   Delivery of Payment.  Purchaser herewith delivers to the Company the
          -------------------
full purchase price of the Shares, as set forth in the Option Agreement.

     3.   Representations of Optionee.  Optionee acknowledges that Optionee has
          ---------------------------
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.

     4.   Rights as Shareholder.  Until the issuance of the Shares (as
          ---------------------
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company), no right to vote or receive dividends
or any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares shall be issued to
the Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 14 of the Plan.

     5.   Company's Right of First Refusal.  Before any Shares held by
          --------------------------------
Optionee or any transferee (either being sometimes referred to herein as the
"Holder") may be sold or otherwise transferred (including transfer by gift or
operation of law), the Company or its assignee(s) shall have a right of first
refusal to purchase the Shares on the terms and conditions set forth in this
Section (the "Right of First Refusal").

          (a)  Notice of Proposed Transfer.  The Holder of the Shares shall
               ---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder proposes to
transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares
at the Offered Price to the Company or its assignee(s).
<PAGE>

          (b)  Exercise of Right of First Refusal.  At any time within thirty
               ----------------------------------
(30) days after receipt of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.

          (c)  Purchase Price.  The purchase price ("Purchase Price") for the
               --------------
Shares purchased by the Company or its assignee(s) under this Section shall be
the Offered Price. If the Offered Price includes consideration other than cash,
the cash equivalent value of the non-cash consideration shall be determined by
the Board of Directors of the Company in good faith.

          (d)  Payment.  Payment of the Purchase Price shall be made, at the
               -------
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.

          (e)  Holder's Right to Transfer.  If all of the Shares proposed in
               --------------------------
the Notice to be transferred to a given Proposed Transferee are not purchased by
the Company and/or its assignee(s) as provided in this Section, then the Holder
may sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice, that any such sale or
other transfer is effected in accordance with any applicable securities laws and
that the Proposed Transferee agrees in writing that the provisions of this
Section shall continue to apply to the Shares in the hands of such Proposed
Transferee. If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.

          (f)  Exception for Certain Family Transfers.  Anything to the
               --------------------------------------
contrary contained in this Section notwithstanding, the transfer of any or all
of the Shares during the Optionee's lifetime or on the Optionee's death by will
or intestacy to the Optionee's immediate family or a trust for the benefit of
the Optionee's immediate family shall be exempt from the provisions of this
Section. "Immediate Family" as used herein shall mean spouse, lineal descendant
or antecedent, father, mother, brother or sister. In such case, the transferee
or other recipient shall receive and hold the Shares so transferred subject to
the provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.

          (g)  Termination of Right of First Refusal.  The Right of First
               -------------------------------------
Refusal shall terminate as to any Shares upon the first sale of Common Stock of
the Company to the general public pursuant to a registration statement filed
with and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.

     6.   Tax Consultation.  Optionee understands that Optionee may suffer
          ----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with

                                      -2-
<PAGE>

the purchase or disposition of the Shares and that Optionee is not relying on
the Company for any tax advice.

     7.   Restrictive Legends and Stop-Transfer Orders.
          --------------------------------------------

          (a)  Legends.  Optionee understands and agrees that the Company shall
               -------
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by the Company or by state or
federal securities laws:

          THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
          REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT")
          AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED,
          PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED
          UNDER THE ACT OR, IN THE OPINION OF COMPANY COUNSEL
          SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH
          OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN
          COMPLIANCE THEREWITH.

          THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
          TO CERTAIN RESTRICTIONS ON TRANSFER AND RIGHT OF FIRST
          REFUSAL OPTIONS HELD BY THE ISSUER OR ITS ASSIGNEE(S)
          AS SET FORTH IN THE EXERCISE NOTICE BETWEEN THE ISSUER
          AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF
          WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE
          ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST
          REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES.

          (b)  Stop-Transfer Notices.  Optionee agrees that, in order to ensure
               ---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.

          (c)  Refusal to Transfer.  The Company shall not be required (i) to
               -------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.

     8.   Successors and Assigns.  The Company may assign any of its rights
          ----------------------
under this Agreement to single or multiple assignees, and this Agreement shall
inure to the benefit of the successors and assigns of the Company. Subject to
the restrictions on transfer herein set forth, this Agreement shall be binding
upon Optionee and his or her heirs, executors, administrators, successors and
assigns.

                                      -3-
<PAGE>

     9.   Interpretation.  Any dispute regarding the interpretation of this
          --------------
Agreement shall be submitted by Optionee or by the Company forthwith to the
Administrator which shall review such dispute at its next regular meeting. The
resolution of such a dispute by the Administrator shall be final and binding on
all parties.

     10.  Governing Law; Severability.  This Agreement is governed by the
          ---------------------------
internal substantive laws, but not the choice of law rules, of California.

     11.  Entire Agreement.  The Plan and Option Agreement are incorporated
          ----------------
herein by reference. This Agreement, the Plan, the Restricted Stock Purchase
Agreement, the Option Agreement and the Investment Representation Statement
constitute the entire agreement of the parties with respect to the subject
matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee's interest except by
means of a writing signed by the Company and Optionee.

Submitted by:                           Accepted by:

OPTIONEE:                               NUMERICAL TECHNOLOGIES, INC.

/s/ Yagyensh C. Pati                    /s/ Richard Mora
- ---------------------------------       ---------------------------------
Signature                               By

Yagyensh C. Pati                        VP, Finance and Operations
- ---------------------------------       ---------------------------------
Print Name                              Its

Address:                                Address:
- ---------------------------------       -------

816 Amber Lane                          70 West Plumeria Drive
- ---------------------------------       San Jose, CA 95134-2134
Los Altos, CA  94024
- ---------------------------------

                                        February 10, 2000
                                        ---------------------------------
                                        Date Received
<PAGE>

                                   EXHIBIT B
                                   ---------

                      INVESTMENT REPRESENTATION STATEMENT

OPTIONEE    :       YAGYENSH C. PATI

COMPANY     :       NUMERICAL TECHNOLOGIES, INC.

SECURITY    :       COMMON STOCK

AMOUNT      :       400,000 SHARES

DATE        :       FEBRUARY 10, 2000


     In connection with the purchase of the above-listed Securities, the
undersigned Optionee represents to the Company the following:

          (a)  Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").

          (b)  Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Optionee's investment intent as expressed herein. In this connection,
Optionee understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Optionee's representation was predicated solely upon a present intention to hold
these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. Optionee further understands that the Securities must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Except as set forth in
the 1999 Second Amended and Restated Shareholder Rights Agreement dated January
1, 2000, as amended January 14, 2000, Optionee further acknowledges and
understands that the Company is under no obligation to register the Securities.
Optionee understands that the certificate evidencing the Securities will be
imprinted with a legend which prohibits the transfer of the Securities unless
they are registered or such registration is not required in the opinion of
counsel satisfactory to the Company, and any other legend required under
applicable state securities laws.

          (c)  Optionee is familiar with the provisions of Rule 144, promulgated
under the Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions, including, among other things: (1)
the
<PAGE>

resale occurring not less than one year after the later of the date the
securities were sold by the Company or the date they were sold by an affiliate
of the Company, within the meaning of Rule 144; and, in the case of an
affiliate, or of a non-affiliate who has held the securities less than two
years, (2) the availability of certain public information about the Company, (3)
the sale being made through a broker in an unsolicited "broker's transaction" or
in transactions directly with a market maker (as said term is defined under the
Securities Exchange Act of 1934), and (4) the amount of securities being sold
during any three month period not exceeding the specified limitations stated
therein, if applicable.

          (d)  Optionee further understands that in the event all of the
applicable requirements of or 144 are not satisfied, registration under the
Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rule 144 is
not exclusive, the Staff of the Securities and Exchange Commission has expressed
its opinion that persons proposing to sell private placement securities other
than in a registered offering and otherwise than pursuant to Rule 144 will have
a substantial burden of proof in establishing that an exemption from
registration is available for such offers or sales, and that such persons and
their respective brokers who participate in such transactions do so at their own
risk. Optionee understands that no assurances can be given that any such other
registration exemption will be available in such event.


                                    Signature of Optionee:

                                    /s/ Yagyensh C. Pati
                                    ----------------------------------
                                    Date:  February 10, 2000
<PAGE>

                                   EXHIBIT C
                                   ---------

                              SECURITY AGREEMENT

     This Security Agreement is made as of February 10, 2000 between Numerical
Technologies, Inc., a California corporation ("Pledgee"), and Yagyensh C. Pati
("Pledgor").

                                   Recitals
                                   --------

     Pursuant to Pledgor's election to purchase Shares under the Option
Agreement dated February 1, 2000 (the "Option"), between Pledgor and Pledgee
under Pledgee's 2000 Stock Plan, and Pledgor's election under the terms of the
Option to pay for such shares with his promissory note (the "Note"), Pledgor has
purchased 400,000 shares of Pledgee's Common Stock (the "Shares") at a price of
$4.00 per share, for a total purchase price of $1,600,000.00.  The Note and the
obligations thereunder are as set forth in Exhibit D to the Option.

     NOW, THEREFORE, it is agreed as follows:

     A.  Creation and Description of Security Interest.  In consideration of the
         ---------------------------------------------
transfer of the Shares to Pledgor under the Option Agreement, Pledgor, pursuant
to the California Commercial Code, hereby pledges all of such Shares (herein
sometimes referred to as the "Collateral") represented by certificate number
241, duly endorsed in blank or with executed stock powers, and herewith delivers
said certificate to the Secretary of Pledgee ("Pledgeholder"), who shall hold
said certificate subject to the terms and conditions of this Security Agreement.

     The pledged stock (together with an executed blank stock assignment for use
in transferring all or a portion of the Shares to Pledgee if, as and when
required pursuant to this Security Agreement) shall be held by the Pledgeholder
as security for the repayment of the Note, and any extensions or renewals
thereof, to be executed by Pledgor pursuant to the terms of the Option, and the
Pledgeholder shall not encumber or dispose of such Shares except in accordance
with the provisions of this Security Agreement.

     B.  Pledgor's Representations and Covenants.  To induce Pledgee to enter
         ---------------------------------------
into this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:

         (A)  Payment of Indebtedness.  Pledgor will pay the principal sum of
              -----------------------
the Note secured hereby, together with interest thereon, at the time and in the
manner provided in the Note.

         (B)  Encumbrances.  The Shares are free of all other encumbrances,
              ------------
defenses and liens, and Pledgor will not further encumber the Shares without the
prior written consent of Pledgee.

         (C)  Margin Regulations.  In the event that Pledgee's Common Stock is
              ------------------
now or later becomes margin-listed by the Federal Reserve Board and Pledgee is
                                          -------
classified as a "lender" within the meaning of the regulations under Part 207 of
Title 12 of the Code of Federal Regulations
<PAGE>

("Regulation G"), Pledgor agrees to cooperate with Pledgee in making any
amendments to the Note or providing any additional collateral as may be
necessary to comply with such regulations.

     C.  Voting Rights.  During the term of this pledge and so long as all
         -------------
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.

     D.  Stock Adjustments.  In the event that during the term of the pledge any
         -----------------
stock dividend, reclassification, readjustment or other changes are declared or
made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgee under the terms of this Security Agreement
in the same manner as the Shares originally pledged hereunder.  In the event of
substitution of such securities, Pledgor, Pledgee and Pledgeholder shall
cooperate and execute such documents as are reasonable so as to provide for the
substitution of such Collateral and, upon such substitution, references to
"Shares" in this Security Agreement shall include the substituted shares of
capital stock of Pledgor as a result thereof.

     E.  Options and Rights.  In the event that, during the term of this pledge,
         ------------------
subscription Options or other rights or options shall be issued in connection
with the pledged Shares, such rights, Options and options shall be the property
of Pledgor and, if exercised by Pledgor, all new stock or other securities so
acquired by Pledgor as it relates to the pledged Shares then held by
Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.

     F   Default.  Pledgor shall be deemed to be in default of the Note and of
         -------
this Security Agreement in the event:

         (A) Payment of principal or interest on the Note shall be delinquent
for a period of 10 days or more; or

         (B) Pledgor fails to perform any of the covenants set forth in the
Option or contained in this Security Agreement for a period of 10 days after
written notice thereof from Pledgee.

     In the case of an event of Default, as set forth above, Pledgee shall have
the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee
shall thereafter be entitled to pursue its remedies under the California
Commercial Code.

     (G) Release of Collateral.  Subject to any applicable contrary rules under
         ---------------------
Regulation G, there shall be released from this pledge a portion of the pledged
Shares held by Pledgeholder hereunder upon payments of the principal of the
Note.  The number of the pledged Shares which shall be released shall be that
number of full Shares which bears the same proportion to the initial number of
Shares pledged hereunder as the payment of principal bears to the initial full
principal amount of the Note.

                                      -2-
<PAGE>

     (H) Withdrawal or Substitution of Collateral.  Pledgor shall not sell,
         ----------------------------------------
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.

     (I) Term.  The within pledge of Shares shall continue until the payment of
         ----
all indebtedness secured hereby, at which time the remaining pledged stock shall
be promptly delivered to Pledgor, subject to the provisions for prior release of
a portion of the Collateral as provided in paragraph 7 above.

     (J) Insolvency.  Pledgor agrees that if a bankruptcy or insolvency
         ----------
proceeding is instituted by or against it, or if a receiver is appointed for the
property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall become immediately due and
payable, and Pledgee may proceed as provided in the case of default.

     (K) Pledgeholder Liability.  In the absence of willful or gross negligence,
         ----------------------
Pledgeholder shall not be liable to any party for any of his acts, or omissions
to act, as Pledgeholder.

     (L) Invalidity of Particular Provisions.  Pledgor and Pledgee agree that
         -----------------------------------
the enforceability or invalidity of any provision or provisions of this Security
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.

     (M) Successors or Assigns.  Pledgor and Pledgee agree that all of the terms
         ---------------------
of this Security Agreement shall be binding on their respective successors and
assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall
be deemed to include, for all purposes, the respective designees, successors,
assigns, heirs, executors and administrators.

     (N) Governing Law.  This Security Agreement shall be interpreted and
         -------------
governed under the internal substantive laws, but not the choice of law rules,
of California.

                                      -3-
<PAGE>

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


     "PLEDGOR"                     /s/ Yagyensh C. Pati
                                   --------------------------------
                                   Signature

                                   Yagyensh C. Pati
                                   --------------------------------
                                   Print Name

                                   Address:  816 Amber Lane
                                           ------------------------
                                   Los Altos, CA 94024
                                   --------------------------------

     "PLEDGEE"                     NUMERICAL TECHNOLOGIES, INC.
                                   a California corporation

                                   /s/ Richard Mora
                                   --------------------------------
                                   Signature

                                   Richard Mora
                                   --------------------------------
                                   Print Name

                                   VP, Finance and Operations
                                   --------------------------------
                                   Title

     "PLEDGEHOLDER"                /s/ Yagyensh C. Pati
                                   --------------------------------
                                   Secretary of Numerical Technologies, Inc.
<PAGE>

                                   EXHIBIT D
                                   ---------

                                      NOTE

$1,600,000.00                                            Santa Clara, California

                                                               February 10, 2000

     FOR VALUE RECEIVED, Yagyensh C. Pati promises to pay to Numerical
Technologies, Inc., a California corporation (the "Company"), or order, the
principal sum of One Million Six Hundred Thousand Dollars ($1,600,000.00),
together with interest on the unpaid principal hereof from the date hereof at
the rate of 6.20% per annum, compounded annually.

     Principal and interest shall be due and payable on February 10, 2002.
Payment of principal and interest shall be made in lawful money of the United
States of America.

     The undersigned may at any time prepay all or any portion of the principal
or interest owing hereunder.

     This Note is subject to the terms of the Option, dated as of February 1,
2000.  This Note is secured in part by a pledge of the Company's Common Stock
under the terms of a Security Agreement of even date herewith and is subject to
all the provisions thereof.

     The holder of this Note shall have full recourse against the undersigned,
and shall not be required to proceed against the collateral securing this Note
in the event of default.

     In the event the undersigned shall cease to be an employee, director or
consultant of the Company for any reason, this Note shall, at the option of the
Company, be accelerated, and the whole unpaid balance on this Note of principal
and accrued interest shall be immediately due and payable.

     Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by the
undersigned.


                                    /s/ Yagyensh C. Pati
                                    ------------------------------------
                                    Yagyensh C. Pati
<PAGE>

                                  EXHIBIT E-1
                                  -----------

                         NUMERICAL TECHNOLOGIES, INC.

                                2000 STOCK PLAN

                      RESTRICTED STOCK PURCHASE AGREEMENT


     THIS AGREEMENT is made between Yagyensh C. Pati (the "Purchaser") and
Numerical Technologies, Inc. (the "Company") as of February 10, 2000.

                                    RECITALS
                                    --------

     (1) Pursuant to the exercise of the stock option granted to Purchaser under
the Company's 2000 Stock Plan (the "Plan") and pursuant to the Stock Option
Agreement (the "Option Agreement") dated February 1, 2000 by and between the
Company and Purchaser with respect to such grant, which Plan and Option
Agreement are hereby incorporated by reference, Purchaser has elected to
purchase 400,000 of those shares which have not become vested under the vesting
schedule set forth in the Option Agreement ("Unvested Shares").  The Unvested
Shares and the shares subject to the Option Agreement which have become vested
are sometimes collectively referred to herein as the "Shares".

     (2) As required by the Option Agreement, as a condition to Purchaser's
election to exercise the option, Purchaser must execute this Restricted Stock
Purchase Agreement, which sets forth the rights and obligations of the parties
with respect to Shares acquired upon exercise of the Option.

     1.  Repurchase Option.
         -----------------

         (a)  If Purchaser's status as a Service Provider is terminated for any
reason, including for cause, death, and disability, the Company shall have the
right and option to purchase from Purchaser, or Purchaser's personal
representative, as the case may be, all of the Purchaser's Unvested Shares as of
the date of such termination at the price paid by the Purchaser for such Shares
(the "Repurchase Option").

          (b) Upon the occurrence of a termination, the Company may exercise its
Repurchase Option by delivering personally or by registered mail, to Purchaser
(or his transferee or legal representative, as the case may be), within ninety
(90) days of the termination, a notice in writing indicating the Company's
intention to exercise the Repurchase Option and setting forth a date for closing
not later than thirty (30) days from the mailing of such notice. The closing
shall take place at the Company's office. At the closing, the holder of the
certificates for the Unvested Shares being transferred shall deliver the stock
certificate or certificates evidencing the Unvested Shares, and the Company
shall deliver the purchase price therefor.
<PAGE>

          (c)  At its option, the Company may elect to make payment for the
Unvested Shares to a bank selected by the Company. The Company shall avail
itself of this option by a notice in writing to Purchaser stating the name and
address of the bank, date of closing, and waiving the closing at the Company's
office.

          (d)  If the Company does not elect to exercise the Repurchase Option
conferred above by giving the requisite notice within ninety (90) days following
the termination, the Repurchase Option shall terminate.

          (e)  The Repurchase Option shall terminate in accordance with the
Vesting Schedule in Optionee's Option Agreement.

     2.   Transferability of the Shares; Escrow.
          -------------------------------------

          (a)  Purchaser hereby authorizes and directs the secretary of the
Company, or such other person designated by the Company, to transfer the
Unvested Shares as to which the Repurchase Option has been exercised from
Purchaser to the Company.


          (b)  To insure the availability for delivery of Purchaser's Unvested
Shares upon repurchase by the Company pursuant to the Repurchase Option under
Section 1, Purchaser hereby appoints the secretary, or any other person
designated by the Company as escrow agent, as its attorney-in-fact to sell,
assign and transfer unto the Company, such Unvested Shares, if any, repurchased
by the Company pursuant to the Repurchase Option and shall, upon execution of
this Agreement, deliver and deposit with the secretary of the Company, or such
other person designated by the Company, the share certificates representing the
Unvested Shares, together with the stock assignment duly endorsed in blank,
attached hereto as Exhibit E-2. The Unvested Shares and stock
                   -----------
assignment shall be held by the secretary in escrow, pursuant to the Joint
Escrow Instructions of the Company and Purchaser attached as Exhibit E-3
                                                             -----------
hereto, until the Company exercises its purchase right as provided in Section 1,
until such Unvested Shares are vested, or until such time as this Agreement no
longer is in effect. As a further condition to the Company's obligations under
this Agreement, the spouse of the Purchaser, if any, shall execute and deliver
to the Company the Consent of Spouse attached hereto as Exhibit E-4. Upon
                                                        -----------
vesting of the Unvested Shares, the escrow agent shall promptly deliver to the
Purchaser the certificate or certificates representing such Shares in the escrow
agent's possession belonging to the Purchaser, and the escrow agent shall be
discharged of all further obligations hereunder; provided, however, that the
escrow agent shall nevertheless retain such certificate or certificates as
escrow agent if so required pursuant to other restrictions imposed pursuant to
this Agreement.

          (c)  The Company, or its designee, shall not be liable for any act it
may do or omit to do with respect to holding the Shares in escrow and while
acting in good faith and in the exercise of its judgment.

          (d)  Transfer or sale of the Shares is subject to restrictions on
transfer imposed by any applicable state and federal securities laws. Any
transferee shall hold such Shares subject to all the provisions hereof and the
Exercise Notice executed by the Purchaser with respect to any

                                      -2-
<PAGE>

Unvested Shares purchased by Purchaser and shall acknowledge the same by signing
a copy of this Agreement.

     3.   Ownership, Voting Rights, Duties.  This Agreement shall not affect
          --------------------------------
in any way the ownership, voting rights or other rights or duties of Purchaser,
except as specifically provided herein.

     4.   Legends.  The share certificate evidencing the Shares issued
          -------
hereunder shallhereunder shallbe endorsed with the following legend (in addition
to any legend required under applicable state securities laws):

     THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT
BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.

     5.   Adjustment for Stock Split.  All references to the number of Shares
          --------------------------
and the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.

     6.   Notices.  Notices required hereunder shall be given in person or by
          -------
registered mail to the address of Purchaser shown on the records of the Company,
and to the Company at their respective principal executive offices.

     7.   Survival of Terms.  This Agreement shall apply to and bind Purchaser
          -----------------
and the Company and their respective permitted assignees and transferees, heirs,
legatees, executors, administrators and legal successors.

     8.   Section 83(b) Election.  Purchaser hereby acknowledges that he or
          ----------------------
she has been informed that, with respect to the exercise of an Option for
unvested Shares, an election may be filed by the Purchaser with the Internal
Revenue Service, within 30 days of the purchase of the Shares, electing pursuant
                 --------------
to Section 83(b) of the Code to be taxed currently on any difference between the
purchase price of the Shares and their Fair Market Value on the date of
purchase. In the case of a Nonstatutory Stock Option, this will result in a
recognition of taxable income to the Purchaser on the date of exercise, measured
by the excess, if any, of the fair market value of the Shares, at the time the
Option is exercised over the purchase price for the Shares. Absent such an
election, taxable income will be measured and recognized by Purchaser at the
time or times on which the Company's Repurchase Option lapses. In the case of an
Incentive Stock Option, such an election will result in a recognition of income
to the Purchaser for alternative minimum tax purposes on the date of exercise,
measured by the excess, if any, of the fair market value of the Shares, at the
time the option is exercised, over the purchase price for the Shares. Absent
such an election, alternative minimum taxable income will be measured and
recognized by Purchaser at the time or times on which the Company's Repurchase
Option lapses. Purchaser is strongly encouraged to seek the advice of his or her
own tax consultants in connection with the purchase of the Shares and the
advisability of filing

                                      -3-
<PAGE>

of the Election under Section 83(b) of the Code. A form of Election under
Section 83(b) is attached hereto as Exhibit E-5 for reference
                                    -----------

     PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE RESPONSIBILITY AND NOT
THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF PURCHASER
REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON PURCHASER'S
BEHALF.

     9.   Representations.  Purchaser has reviewed with his own tax advisors the
          ---------------
federal, state, local and foreign tax consequences of this investment and the
transactions contemplated by this Agreement.  Purchaser is relying solely on
such advisors and not on any statements or representations of the Company or any
of its agents.  Purchaser understands that he (and not the Company) shall be
responsible for his own tax liability that may arise as a result of this
investment or the transactions contemplated by this Agreement.

     10.  Governing Law.  This Agreement shall be governed by the internal
          -------------
substantive laws, but not the choice of law rules, of California.

     Purchaser represents that he has read this Agreement and is familiar with
its terms and provisions.  Purchaser hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board upon any
questions arising under this Agreement.

                                      -4-
<PAGE>

     IN WITNESS WHEREOF, this Agreement is deemed made as of the date first set
forth above.

                                   "COMPANY"

                                   NUMERICAL TECHNOLOGIES, INC.

                                   /s/ Richard Mora
                                   --------------------------------
                                   By

                                   VP, Finance and Operations
                                   --------------------------------
                                   Title

                                   "PURCHASER"

                                   /s/ Yagyensh C. Pati
                                   --------------------------------
                                   Signature

                                   Yagyensh C. Pati
                                   --------------------------------
                                   Printed Name
                                   ------------

                                   ###-##-####
                                   --------------------------------
                                   Soc. Sec. No.

                                   Address:
                                   -------

                                   816 Amber Lane
                                   ---------------------------------

                                   Los Altos, CA 94024
                                   ---------------------------------
<PAGE>

                                  EXHIBIT E-2
                                  -----------

                     ASSIGNMENT SEPARATE FROM CERTIFICATE

     FOR VALUE RECEIVED I, __________________________, hereby sell, assign and
transfer unto Numerical Technologies, Inc. (__________) shares of the Common
Stock of Numerical Technologies, Inc. standing in my name of the books of said
corporation represented by Certificate No. _____ herewith and do hereby
irrevocably constitute and appoint _______________________ to transfer the said
stock on the books of the within named corporation with full power of
substitution in the premises.

     This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between Numerical Technologies, Inc. and the
undersigned dated ______________, 20___.


Dated:__________, ____


     Signature: /s/ Yagyensh C. Pati
               -----------------------------



     INSTRUCTIONS: Please do not fill in any blanks other than the signature
line.  The purpose of this assignment is to enable the Company to exercise its
"repurchase option," as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE>

                                  EXHIBIT E-3
                                 ------------

                           JOINT ESCROW INSTRUCTIONS
                           -------------------------

                                                            February 10, 2000
Numerical Technologies, Inc.
70 West Plumeria Drive
San Jose, CA  95134-2134

Attention:  Secretary

Dear ___________:

     As Escrow Agent for both Numerical Technologies, Inc. (the "Company"), and
the undersigned purchaser of stock of the Company (the "Purchaser"), you are
hereby authorized and directed to hold the documents delivered to you pursuant
to the terms of that certain Restricted Stock Purchase Agreement ("Agreement")
between the Company and the undersigned, in accordance with the following
instructions:

     1.   In the event the Company and/or any assignee of the Company (referred
to collectively for convenience herein as the "Company") exercises the Company's
repurchase option set forth in the Agreement, the Company shall give to
Purchaser and you a written notice specifying the number of shares of stock to
be purchased, the purchase price, and the time for a closing hereunder at the
principal office of the Company. Purchaser and the Company hereby irrevocably
authorize and direct you to close the transaction contemplated by such notice in
accordance with the terms of said notice.

     2.   At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, cancellation of indebtedness, or some combination thereof) for
the number of shares of stock being purchased pursuant to the exercise of the
Company's repurchase option.

     3.   Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities.  Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a stockholder of the Company while the
stock is held by you.
<PAGE>

     4.   Provided the Promissory Note dated February 10, 2000 in the principal
amount of $1,600,000.00 and issued by the Purchaser to the Company (the "Note")
has been paid in full, upon written request of the Purchaser, but no more than
once per calendar year, unless the Company's repurchase option has been
exercised, you will deliver to Purchaser a certificate or certificates
representing so many shares of stock as are not then subject to the Company's
repurchase option. Provided the Note has been paid in full, within 120 days
after cessation of Purchaser's continuous employment by or services to the
Company, or any parent or subsidiary of the Company, you will deliver to
Purchaser a certificate or certificates representing the aggregate number of
shares held or issued pursuant to the Agreement and not purchased by the Company
or its assignees pursuant to exercise of the Company's repurchase option.

     5.   If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.

     6.   Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.

     7.   You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties.
You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in
good faith, and any act done or omitted by you pursuant to the advice of your
own attorneys shall be conclusive evidence of such good faith.

     8.   You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court. In
case you obey or comply with any such order, judgment or decree, you shall not
be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.

     9.   You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.

     10.  You shall not be liable for the outlawing of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.

     11.  You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.

                                      -2-
<PAGE>

     12.  Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be an officer or agent of the Company or if you shall resign by
written notice to each party.  In the event of any such termination, the Company
shall appoint a successor Escrow Agent.

     13.  If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.

     14.  It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.

     15.  Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.

          COMPANY:            Numerical Technologies, Inc.
                              70 West Plumeria Drive
                              San Jose, CA  95134-2134
                              Attention:  Secretary

          PURCHASER:          Yagyensh C. Pati
                              816 Amber Lane
                              Los Altos, CA  94024

          ESCROW AGENT:       Wilson Sonsini, Goodrich & Rosati
                              650 Page Mill Road
                              Palo Alto, CA  94304

     16.  By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.

     17.  This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted
assigns.

                                      -3-
<PAGE>

     18.  These Joint Escrow Instructions shall be governed by the internal
substantive laws, but not the choice of law rules, of California.

                                    NUMERICAL TECHNOLOGIES, INC.

                                    /s/ Richard Mora
                                    -----------------------------------
                                    By

                                    VP, Finance and Operations
                                    -----------------------------------
                                    Title

                                    PURCHASER

                                    /s/ Yagyensh C. Pati
                                    -----------------------------------
                                    Signature

                                    Yagyensh C. Pati
                                    -----------------------------------
                                    Typed or Printed Name

                                    ESCROW AGENT

                                    WILSON SONSINI GOODRICH & ROSATI

                                    /s/ John V. Roos
                                    -----------------------------------
                                    By

                                    Member
                                    -----------------------------------
                                    Title
<PAGE>

                                  EXHIBIT E-4
                                  -----------

                               CONSENT OF SPOUSE
                               -----------------

     I, Sushma Pati, spouse of Yagyensh C. Pati, have read and approve
the foregoing Agreement.  In consideration of granting of the right to my spouse
to purchase shares of Numerical Technologies, Inc., as set forth in the
Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the
exercise of any rights under the Agreement and agree to be bound by the
provisions of the Agreement insofar as I may have any rights in said Agreement
or any shares issued pursuant thereto under the community property laws or
similar laws relating to marital property in effect in the state of our
residence as of the date of the signing of the foregoing Agreement.

Dated: February 10, 2000

                                       /s/ Sushma Pati
                                       ---------------------------------------
<PAGE>

                                  EXHIBIT E-5
                                  -----------

                         ELECTION UNDER SECTION 83(b)
                         ----------------------------
                     OF THE INTERNAL REVENUE CODE OF 1986
                     ------------------------------------

The undersigned taxpayer hereby elects, pursuant to Sections 55 and 83(b) of the
Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income
or alternative minimum taxable income, as the case may be, for the current
taxable year the amount of any compensation taxable to taxpayer in connection
with taxpayer's receipt of the property described below:

1.   The name, address, taxpayer identification number and taxable year of the
     undersigned are as follows:

     NAME:               TAXPAYER: Yagyensh C. Pati      SPOUSE: Sushma Pati

     ADDRESS:    816 Amber Lane, Los  Altos, CA  94024

     IDENTIFICATION NO.: TAXPAYER: ###-##-####           SPOUSE: ###-##-####

     TAXABLE YEAR:      2000

2.   The property with respect to which the election is made is described as
follows: 400,000 shares (the "Shares") of the Common Stock of Numerical
Technologies, Inc. (the "Company").

3.   The date on which the property was transferred is: Feb. 10, 2000.

4.   The property is subject to the following restrictions:

     The Shares may not be transferred and are subject to forfeiture under the
     terms of an agreement between the taxpayer and the Company.  These
     restrictions lapse upon the satisfaction of certain conditions contained in
     such agreement.

5.   The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never lapse, of
such property is:

     $4.00 per share.

6.   The amount (if any) paid for such property is:

     $4.00 per share.

The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property.  The transferee of such property is the person
performing the services in connection with the transfer of said property.

The undersigned understands that the foregoing election may not be revoked
- --------------------------------------------------------------------------
except with the consent of the Commissioner.
- -------------------------------------------

Dated:  Feb. 10, 2000                  /s/ Yagyensh C. Pati
                                       ---------------------------------------
                                                  Taxpayer

The undersigned spouse of taxpayer joins in this election.

Dated:  Feb. 10, 2000                  /s/ Sushma Pati
                                       ---------------------------------------

<PAGE>
                                                                  Exhibit 10.31
                         NUMERICAL TECHNOLOGIES, INC.

                                2000 STOCK PLAN

                   STOCK OPTION AGREEMENT -- EARLY EXERCISE

     Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.

I.   NOTICE OF STOCK OPTION GRANT
     ----------------------------

     Yao-Ting Wang

     You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:

     Date of Grant:                           February 1, 2000

     Vesting Commencement Date:               February 1, 2000

     Exercise Price per Share:                   $        4.00

     Total Number of Shares Granted:                   333,333

     Total Exercise Price:                       $1,333,332.00

     Type of Option:            _____   Incentive Stock Option

                                X    Nonstatutory Stock Option
                              -----

     Term/Expiration Date:           Ten Years/February 1, 2010*

_______________
*  Or earlier, pursuant to the termination period set forth below.

     Exercise and Vesting Schedule:
     -----------------------------

     This Option is exercisable immediately, in whole or in part, and shall vest
according to the following vesting schedule:

     One-fourth (1/4th) of the Shares subject to the Option shall vest twelve
months after the Vesting Commencement Date, and one-sixteenth (1/16th) of the
Shares subject to the Option shall vest on the last day of each three month
anniversary thereafter, subject to your continuing to be a Service Provider on
such dates.
<PAGE>

     Change of Control; Constructive Termination:
     -------------------------------------------

     Notwithstanding the provisions of Section 14(c) of the Plan, if the Company
merges with or into another entity, sells all or substantially all of its
assets, or enters into any other similar transaction or reorganization
(including without limitation, a sale of stock of the Company) as a result of
which the shareholders of the Company immediately prior to such transaction will
not hold at least 50% of the voting power of the surviving, purchasing or
continuing entity, as applicable (taking into account any securities issued to
the shareholders of the Company in the transaction) (a "Change of Control
Transaction"), then on the six month anniversary of the Change of Control
Transaction (the "Anniversary Date") fifty percent (50%) of the Shares subject
to the Option which have not vested as of the Anniversary Date shall become
fully vested and exercisable.  The Board shall notify the Optionee at least
fifteen (15) days prior to the closing of a Change of Control Transaction, and
such notification shall include a statement as to whether or not the Option will
be assumed by the surviving or purchasing entity or whether an equivalent
substitute option will be provided by such entity.

     Following an assumption or substitution of the Option in connection with a
Change of Control Transaction, if the Optionee's status as an Employee of the
successor corporation is terminated by the successor corporation as a result of
an Involuntary Termination (as defined below) within twelve months following the
Change of Control Transaction, the Optionee shall fully vest in and have the
right to exercise the Option as to all of the Shares, including Shares as to
which the Option would not otherwise be vested or exercisable.

     Any of the following events shall constitute an "Involuntary Termination":
(i) without the Optionee's express written consent, a significant reduction of
the Optionee's duties, authority and responsibilities, relative to the
Optionee's duties, authority and responsibilities as in effect immediately prior
to the Change of Control Transaction; (ii) a material reduction in the base
salary of the Optionee as in effect immediately prior to the Change of Control
Transaction; (iii) a material reduction in the kind or level of employee
benefits, including bonuses, to which the Optionee was entitled immediately
prior to the Change of Control Transaction with the result that the Optionee's
overall benefits package is significantly reduced; (iv) the relocation of the
Optionee to a facility or a location more than sixty (60) miles from the
Optionee's then present location, without the Optionee's express written
consent; (v) any purported termination of the Optionee which is not effected for
Disability or for Cause (as defined below), or any purported termination for
which the grounds relied upon are not valid; (vi) or any act or set of facts or
circumstances which would, under California case law or statute, constitute a
constructive termination of the Optionee.

     "Cause" shall mean (i) any act of personal dishonesty taken by the Optionee
in connection with his responsibilities as a Service Provider and intended to
result in substantial personal enrichment of the Optionee, (ii) Optionee's
conviction of a felony, (iii) a willful act by the Optionee which constitutes
gross misconduct and which is injurious to the Successor Corporation, and (iv)
following delivery to the Optionee of a written demand for performance from the
Successor Corporation which describes the basis for the Successor Corporation's
belief that the Optionee has not substantially performed his duties, continued
violations by the Optionee of the Optionee's

                                      -2-
<PAGE>

obligations to the Successor Corporation which are demonstrably willful and
deliberate on the Optionee's part.

     Termination Period:
     ------------------

     You may exercise this Option for thirty days after you cease to be a
Service Provider.  Upon your death or disability, this Option may be exercised
for one year after you cease to be a Service Provider.  In no event may you
exercise this Option after the Term/Expiration Date as provided above.

II.  AGREEMENT
     ---------

     1.   Grant of Option. The Plan Administrator of the Company hereby grants
          ---------------
to the Optionee named in the Notice of Grant (the "Optionee"), an option (the
"Option") to purchase the number of Shares set forth in the Notice of Grant, at
the exercise price per Share set forth in the Notice of Grant (the "Exercise
Price"), and subject to the terms and conditions of the Plan, which is
incorporated herein by reference. Subject to Section 17(c) of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this Option
Agreement, the terms and conditions of the Plan shall prevail.

          If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option as
defined in Section 422 of the Code.  Nevertheless, to the extent that it exceeds
the $100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").

     2.   Exercise of Option.  This Option shall be exercisable during its term
          ------------------
in accordance with the provisions of Section 10 of the Plan as follows:

          (a)  Right to Exercise.
               -----------------

                    (i)    Subject to subsections 2(a)(ii) and 2(a)(iii) below,
this Option shall be exercisable cumulatively according to the vesting schedule
set forth in the Notice of Grant. Alternatively, at the election of the
Optionee, this option may be exercised in whole or in part at any time as to
Shares which have not yet vested. For purposes of this Stock Option Agreement,
Shares subject to the Option shall vest based on continued employment of
Optionee with the Company. Vested Shares shall not be subject to the Company's
repurchase right (as set forth in the Restricted Stock Purchase Agreement,
attached hereto as Exhibit E-1).
                   -----------

                    (ii)   As a condition to exercising this Option for unvested
Shares, the Optionee shall execute the Restricted Stock Purchase Agreement.

                    (iii)  This Option may not be exercised for a fraction of a
Share.

          (b)  Method of Exercise.  This Option shall be exercisable by
               ------------------
delivery of an exercise notice in the form attached as Exhibit A (the
                                                       ---------
"Exercise Notice") which shall state the election to exercise the Option, the
number of Shares with respect to which the Option is being exercised (the
"Exercised Shares"), and such other representations and agreements as may be
required by the

                                      -3-
<PAGE>

Company. The Exercise Notice shall be accompanied by payment of the aggregate
Exercise Price as to all Exercised Shares. This Option shall be deemed to be
exercised upon receipt by the Company of such fully executed Exercise Notice
accompanied by the aggregate Exercise Price.

          No Shares shall be issued pursuant to the exercise of an Option unless
such issuance and such exercise complies with Applicable Laws.  Assuming such
compliance, for income tax purposes the Shares shall be considered transferred
to the Optionee on the date on which the Option is exercised with respect to
such Shares.

     3.   Optionee's Representations.  In the event the Shares have not been
          --------------------------
registered under the Securities Act of 1933, as amended, at the time this Option
is exercised, the Optionee shall, if required by the Company, concurrently with
the exercise of all or any portion of this Option, deliver to the Company his or
her Investment Representation Statement in the form attached hereto as Exhibit
                                                                       -------
B.
- -

     4.   Lock-Up Period.  Optionee hereby agrees that, if so requested by the
          --------------
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
the effective date of a registration statement of the Company filed under the
Securities Act. Such restriction shall apply only to the first registration
statement of the Company to become effective under the Securities Act that
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.

     5.   Method of Payment.  Payment of the aggregate Exercise Price shall be
          -----------------
by any of the following, or a combination thereof, at the election of the
Optionee:

          (a)  cash;

          (b)  check;

          (c)  consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan;

          (d)  surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares; or

          (e)  with the Administrator's consent, delivery of Optionee's
promissory note (the "Note") in the form attached hereto as Exhibit D, in the
amount of the aggregate Exercise Price of the Exercised Shares together with the
execution and delivery by the Optionee of the Security Agreement attached hereto
as Exhibit C. The Note shall bear interest at the "applicable federal rate"

                                      -4-
<PAGE>

prescribed under the Code and its regulations at time of purchase, and shall be
secured by a pledge of the Shares purchased by the Note pursuant to the Security
Agreement.

     6.   Restrictions on Exercise.  This Option may not be exercised until
          ------------------------
such time as the Plan has been approved by the shareholders of the Company, or
if the issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any Applicable
Law.

     7.   Non-Transferability of Option.  This Option may not be transferred in
          -----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.

     8.   Term of Option.  This Option may be exercised only within the term
          --------------
set out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.

     9.   Tax Consequences.  Set forth below is a brief summary as of the date
          ----------------
of this Option of some of the federal tax consequences of exercise of this
Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE,
AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD
CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

          (a)  Exercise of ISO.  If this Option qualifies as an ISO, there will
               ---------------
be no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price will be treated as an adjustment to the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.

          (b)  Exercise of ISO Following Disability.  If the Optionee ceases to
               ------------------------------------
be an Employee as a result of a disability that is not a total and permanent
disability as defined in Section 22(e)(3) of the Code, to the extent permitted
on the date of termination, the Optionee must exercise an ISO within three
months of such termination for the ISO to be qualified as an ISO.

          (c)  Exercise of Nonstatutory Stock Option.  There may be a regular
               -------------------------------------
federal income tax liability upon the exercise of a Nonstatutory Stock Option.
The Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market Value
of the Shares on the date of exercise over the Exercise Price. If Optionee is an
Employee or a former Employee, the Company will be required to withhold from
Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount in cash equal to a percentage of this compensation
income at the time of exercise, and may refuse to honor the exercise and refuse
to deliver Shares if such withholding amounts are not delivered at the time of
exercise.

          (d)  Disposition of Shares.  In the case of an NSO, if Shares are
               ---------------------
held for at least one year, any gain realized on disposition of the Shares will
be treated as long-term capital gain for

                                      -5-
<PAGE>

federal income tax purposes. In the case of an ISO, if Shares transferred
pursuant to the Option are held for at least one year after exercise and at
least two years after the Date of Grant, any gain realized on disposition of the
Shares will also be treated as long-term capital gain for federal income tax
purposes. If Shares purchased under an ISO are disposed of within one year after
exercise or two years after the Date of Grant, any gain realized on such
disposition will be treated as compensation income (taxable at ordinary income
rates) to the extent of the difference between the Exercise Price and the lesser
of (i) the Fair Market Value of the Shares on the date of exercise, or (ii) the
sale price of the Shares. Any additional gain will be taxed as capital gain,
short-term depending on the period that the ISO Shares were held.

          (e)  Notice of Disqualifying Disposition of ISO Shares.  If the
               -------------------------------------------------
Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (i) the date two years after the Date of Grant, or (ii) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.

          (f)  Section 83(b) Election for Unvested Shares Purchased Pursuant to
               -----------------------------------------------------------------
Options.  With respect to the exercise of an Option for unvested Shares, an
- -------
election may be filed by the Optionee with the Internal Revenue Service, within
                                                                         ------
30 days of the purchase of the Shares, electing pursuant to Section 83(b) of the
- -------
Code to be taxed currently on any difference between the purchase price of the
Shares and their Fair Market Value on the date of purchase. In the case of a
Nonstatutory Stock Option, this will result in a recognition of taxable income
to the Optionee on the date of exercise, measured by the excess, if any, of the
fair market value of the Shares, at the time the Option is exercised over the
purchase price for the Shares. Absent such an election, taxable income will be
measured and recognized by Optionee at the time or times on which the Company's
Repurchase Option lapses. In the case of an Incentive Stock Option, such an
election will result in a recognition of income to the Optionee for alternative
minimum tax purposes on the date of exercise, measured by the excess, if any, of
the fair market value of the Shares, at the time the option is exercised, over
the purchase price for the Shares. Absent such an election, alternative minimum
taxable income will be measured and recognized by Optionee at the time or times
on which the Company's Repurchase Option lapses. Optionee is strongly encouraged
to seek the advice of his or her own tax consultants in connection with the
purchase of the Shares and the advisability of filing of the Election under
Section 83(b) of the Code. A form of Election under Section 83(b) is attached
hereto as Exhibit E-5 for reference.
          -----------

     OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY AND NOT THE
COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF OPTIONEE
REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON OPTIONEE'S
BEHALF.

                                      -6-
<PAGE>

     10.  Entire Agreement; Governing Law.  The Plan is incorporated herein by
          -------------------------------
reference.  The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee.  This agreement is governed by the internal substantive laws but not
the choice of law rules of California.

     11.  No Guarantee of Continued Service.  OPTIONEE ACKNOWLEDGES AND AGREES
          ---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH
THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.

     Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof.  Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option.  Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.


OPTIONEE:                          NUMERICAL TECHNOLOGIES, INC.

/s/ Yao-Ting Wang                  /s/ Yagyensh C. Pati
- ------------------------------     --------------------------------------
Signature                          By


Yao-Ting Wang                      President & CEO
- ------------------------------     ______________________________________
Print Name                         Title


970 Corte Madera Avenue, #311
- ------------------------------
Sunnyvale, CA  94086
- ------------------------------
Residence Address
<PAGE>

                                   EXHIBIT A
                                   ---------

                                2000 STOCK PLAN

                                EXERCISE NOTICE

Numerical Technologies, Inc.
70 West Plumeria Drive
San Jose, CA  95134-2134

Attention:  Secretary

     1.   Exercise of Option.  Effective as of today, February 10, 2000, the
          ------------------
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
333,333 shares of the Common Stock (the "Shares") of Numerical Technologies,
Inc. (the "Company") under and pursuant to the 2000 Stock Plan (the "Plan") and
the [ ] Incentive [X] Nonstatutory Stock Option Agreement dated February 1, 2000
(the "Option Agreement").

     2.   Delivery of Payment.  Purchaser herewith delivers to the Company the
          -------------------
full purchase price of the Shares, as set forth in the Option Agreement.

     3.   Representations of Optionee.  Optionee acknowledges that Optionee has
          ---------------------------
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.

     4.   Rights as Shareholder.  Until the issuance of the Shares (as evidenced
          ---------------------
by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Shares shall be issued to the
Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 14 of the Plan.

     5.   Company's Right of First Refusal.  Before any Shares held by Optionee
          --------------------------------
or any transferee (either being sometimes referred to herein as the "Holder")
may be sold or otherwise transferred (including transfer by gift or operation of
law), the Company or its assignee(s) shall have a right of first refusal to
purchase the Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").

          (a)  Notice of Proposed Transfer.  The Holder of the Shares shall
               ---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder proposes to
transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares
at the Offered Price to the Company or its assignee(s).
<PAGE>

          (b)  Exercise of Right of First Refusal.  At any time within thirty
               ----------------------------------
(30) days after receipt of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.

          (c)  Purchase Price.  The purchase price ("Purchase Price") for the
               --------------
Shares purchased by the Company or its assignee(s) under this Section shall be
the Offered Price. If the Offered Price includes consideration other than cash,
the cash equivalent value of the non-cash consideration shall be determined by
the Board of Directors of the Company in good faith.

          (d)  Payment.  Payment of the Purchase Price shall be made, at the
               -------
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.

          (e)  Holder's Right to Transfer.  If all of the Shares proposed in
               --------------------------
the Notice to be transferred to a given Proposed Transferee are not purchased by
the Company and/or its assignee(s) as provided in this Section, then the Holder
may sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice, that any such sale or
other transfer is effected in accordance with any applicable securities laws and
that the Proposed Transferee agrees in writing that the provisions of this
Section shall continue to apply to the Shares in the hands of such Proposed
Transferee. If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.

          (f)  Exception for Certain Family Transfers.  Anything to the
               --------------------------------------
contrary contained in this Section notwithstanding, the transfer of any or all
of the Shares during the Optionee's lifetime or on the Optionee's death by will
or intestacy to the Optionee's immediate family or a trust for the benefit of
the Optionee's immediate family shall be exempt from the provisions of this
Section. "Immediate Family" as used herein shall mean spouse, lineal descendant
or antecedent, father, mother, brother or sister. In such case, the transferee
or other recipient shall receive and hold the Shares so transferred subject to
the provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.

          (g)  Termination of Right of First Refusal.  The Right of First
               -------------------------------------
Refusal shall terminate as to any Shares upon the first sale of Common Stock of
the Company to the general public pursuant to a registration statement filed
with and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.

     6.   Tax Consultation.  Optionee understands that Optionee may suffer
          ----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with

                                      -2-
<PAGE>

the purchase or disposition of the Shares and that Optionee is not relying on
the Company for any tax advice.

     7.   Restrictive Legends and Stop-Transfer Orders.
          --------------------------------------------

          (a)  Legends.  Optionee understands and agrees that the Company shall
               -------
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by the Company or by state or
federal securities laws:

          THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
          REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE
          "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
          TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND
          UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION
          OF COMPANY COUNSEL SATISFACTORY TO THE ISSUER OF
          THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER,
          PLEDGE OR HYPOTHECATION IS IN COMPLIANCE
          THEREWITH.

          THE SHARES REPRESENTED BY THIS CERTIFICATE ARE
          SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND
          RIGHT OF FIRST REFUSAL OPTIONS HELD BY THE ISSUER
          OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE
          NOTICE BETWEEN THE ISSUER AND THE ORIGINAL HOLDER
          OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED
          AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH
          TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL
          ARE BINDING ON TRANSFEREES OF THESE SHARES.

          (b)  Stop-Transfer Notices.  Optionee agrees that, in order to ensure
               ---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.

          (c)  Refusal to Transfer.  The Company shall not be required (i) to
               -------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.

     8.   Successors and Assigns.  The Company may assign any of its rights
          ----------------------
under this Agreement to single or multiple assignees, and this Agreement shall
inure to the benefit of the successors and assigns of the Company. Subject to
the restrictions on transfer herein set forth, this Agreement shall be binding
upon Optionee and his or her heirs, executors, administrators, successors and
assigns.

                                      -3-
<PAGE>

     9.   Interpretation.  Any dispute regarding the interpretation of this
          --------------
Agreement shall be submitted by Optionee or by the Company forthwith to the
Administrator which shall review such dispute at its next regular meeting. The
resolution of such a dispute by the Administrator shall be final and binding on
all parties.

     10.  Governing Law; Severability.  This Agreement is governed by the
          ---------------------------
internal substantive laws, but not the choice of law rules, of California.

     11.  Entire Agreement.  The Plan and Option Agreement are incorporated
          ----------------
herein by reference. This Agreement, the Plan, the Restricted Stock Purchase
Agreement, the Option Agreement and the Investment Representation Statement
constitute the entire agreement of the parties with respect to the subject
matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee's interest except by
means of a writing signed by the Company and Optionee.

Submitted by:                      Accepted by:

OPTIONEE:                          NUMERICAL TECHNOLOGIES, INC.

/s/ Yao-Ting Wang                  /s/ Yagyensh C. Pati
_______________________________    _____________________________________________
Signature                          By


Yao-Ting Wang                      President & CEO
- -------------------------------    _____________________________________________
Print Name                         Its


Address:                           Address:
- -------                            -------

970 Corte Madera Avenue, #311      70 West Plumeria Drive
- -------------------------------
                                   San Jose, CA 95134-2134
Sunnyvale, CA  94086
- -------------------------------

_______________________________

                                   February 10, 2000
                                   ---------------------------------------------
                                   Date Received
<PAGE>

                                   EXHIBIT B
                                   ---------

               INVESTMENT REPRESENTATION STATEMENT

OPTIONEE :     YAO-TING WANG

COMPANY  :     NUMERICAL TECHNOLOGIES, INC.

SECURITY :     COMMON STOCK

AMOUNT   :     333,333 SHARES

DATE     :     FEBRUARY 10, 2000

     In connection with the purchase of the above-listed Securities, the
undersigned Optionee represents to the Company the following:

          (a)  Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").

          (b)  Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Optionee's investment intent as expressed herein. In this connection,
Optionee understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Optionee's representation was predicated solely upon a present intention to hold
these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. Optionee further understands that the Securities must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Except as set forth in
the 1999 Second Amended and Restated Shareholder Rights Agreement dated January
1, 2000, as amended January 14, 2000, Optionee further acknowledges and
understands that the Company is under no obligation to register the Securities.
Optionee understands that the certificate evidencing the Securities will be
imprinted with a legend which prohibits the transfer of the Securities unless
they are registered or such registration is not required in the opinion of
counsel satisfactory to the Company, and any other legend required under
applicable state securities laws.

          (c)  Optionee is familiar with the provisions of Rule 144, promulgated
under the Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions, including, among other things: (1)
the
<PAGE>

resale occurring not less than one year after the later of the date the
securities were sold by the Company or the date they were sold by an affiliate
of the Company, within the meaning of Rule 144; and, in the case of an
affiliate, or of a non-affiliate who has held the securities less than two
years, (2) the availability of certain public information about the Company, (3)
the sale being made through a broker in an unsolicited "broker's transaction" or
in transactions directly with a market maker (as said term is defined under the
Securities Exchange Act of 1934), and (4) the amount of securities being sold
during any three month period not exceeding the specified limitations stated
therein, if applicable.

          (d)  Optionee further understands that in the event all of the
applicable requirements of or 144 are not satisfied, registration under the
Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rule 144 is
not exclusive, the Staff of the Securities and Exchange Commission has expressed
its opinion that persons proposing to sell private placement securities other
than in a registered offering and otherwise than pursuant to Rule 144 will have
a substantial burden of proof in establishing that an exemption from
registration is available for such offers or sales, and that such persons and
their respective brokers who participate in such transactions do so at their own
risk. Optionee understands that no assurances can be given that any such other
registration exemption will be available in such event.


                                   Signature of Optionee:

                                   /s/ Yao-Ting Wang
                                   ___________________________________

                                   Date:  February 10, 2000
<PAGE>

                                   EXHIBIT C
                                   ---------

                              SECURITY AGREEMENT

     This Security Agreement is made as of February 10, 2000 between Numerical
Technologies, Inc., a California corporation ("Pledgee"), and Yao-Ting Wang
("Pledgor").

                                   Recitals
                                   --------

     Pursuant to Pledgor's election to purchase Shares under the Option
Agreement dated February 1, 2000 (the "Option"), between Pledgor and Pledgee
under Pledgee's 2000 Stock Plan, and Pledgor's election under the terms of the
Option to pay for such shares with his promissory note (the "Note"), Pledgor has
purchased 333,333 shares of Pledgee's Common Stock (the "Shares") at a price of
$4.00 per share, for a total purchase price of $1,333,332.00.  The Note and the
obligations thereunder are as set forth in Exhibit D to the Option.

     NOW, THEREFORE, it is agreed as follows:

     A.   Creation and Description of Security Interest. In consideration of the
          ---------------------------------------------
transfer of the Shares to Pledgor under the Option Agreement, Pledgor, pursuant
to the California Commercial Code, hereby pledges all of such Shares (herein
sometimes referred to as the "Collateral") represented by certificate number
242, duly endorsed in blank or with executed stock powers, and herewith delivers
said certificate to the Secretary of Pledgee ("Pledgeholder"), who shall hold
said certificate subject to the terms and conditions of this Security Agreement.

     The pledged stock (together with an executed blank stock assignment for use
in transferring all or a portion of the Shares to Pledgee if, as and when
required pursuant to this Security Agreement) shall be held by the Pledgeholder
as security for the repayment of the Note, and any extensions or renewals
thereof, to be executed by Pledgor pursuant to the terms of the Option, and the
Pledgeholder shall not encumber or dispose of such Shares except in accordance
with the provisions of this Security Agreement.

     B.   Pledgor's Representations and Covenants.  To induce Pledgee to enter
          ---------------------------------------
into this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:

          (A) Payment of Indebtedness.  Pledgor will pay the principal sum of
              -----------------------
the Note secured hereby, together with interest thereon, at the time and in the
manner provided in the Note.

          (B) Encumbrances.  The Shares are free of all other encumbrances,
              ------------
defenses and liens, and Pledgor will not further encumber the Shares without the
prior written consent of Pledgee.

          (C) Margin Regulations.  In the event that Pledgee's Common Stock is
              ------------------
now or later becomes margin-listed by the Federal Reserve Board and Pledgee is
                                          -------
classified as a "lender" within the meaning of the regulations under Part 207 of
Title 12 of the Code of Federal Regulations
<PAGE>

("Regulation G"), Pledgor agrees to cooperate with Pledgee in making any
amendments to the Note or providing any additional collateral as may be
necessary to comply with such regulations.

     C.  Voting Rights.  During the term of this pledge and so long as all
         -------------
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.

     D.  Stock Adjustments.  In the event that during the term of the pledge any
         -----------------
stock dividend, reclassification, readjustment or other changes are declared or
made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgee under the terms of this Security Agreement
in the same manner as the Shares originally pledged hereunder.  In the event of
substitution of such securities, Pledgor, Pledgee and Pledgeholder shall
cooperate and execute such documents as are reasonable so as to provide for the
substitution of such Collateral and, upon such substitution, references to
"Shares" in this Security Agreement shall include the substituted shares of
capital stock of Pledgor as a result thereof.

     E.  Options and Rights.  In the event that, during the term of this pledge,
         ------------------
subscription Options or other rights or options shall be issued in connection
with the pledged Shares, such rights, Options and options shall be the property
of Pledgor and, if exercised by Pledgor, all new stock or other securities so
acquired by Pledgor as it relates to the pledged Shares then held by
Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.

     F  Default.  Pledgor shall be deemed to be in default of the Note and of
        -------
this Security Agreement in the event:

        (A) Payment of principal or interest on the Note shall be delinquent for
a period of 10 days or more; or

        (B) Pledgor fails to perform any of the covenants set forth in the
Option or contained in this Security Agreement for a period of 10 days after
written notice thereof from Pledgee.

     In the case of an event of Default, as set forth above, Pledgee shall have
the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee
shall thereafter be entitled to pursue its remedies under the California
Commercial Code.

     (G) Release of Collateral.  Subject to any applicable contrary rules under
         ---------------------
Regulation G, there shall be released from this pledge a portion of the pledged
Shares held by Pledgeholder hereunder upon payments of the principal of the
Note.  The number of the pledged Shares which shall be released shall be that
number of full Shares which bears the same proportion to the initial number of
Shares pledged hereunder as the payment of principal bears to the initial full
principal amount of the Note.

                                      -2-
<PAGE>

     (H) Withdrawal or Substitution of Collateral.  Pledgor shall not sell,
         ----------------------------------------
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.

     (I) Term.  The within pledge of Shares shall continue until the payment of
         ----
all indebtedness secured hereby, at which time the remaining pledged stock shall
be promptly delivered to Pledgor, subject to the provisions for prior release of
a portion of the Collateral as provided in paragraph 7 above.

     (J) Insolvency.  Pledgor agrees that if a bankruptcy or insolvency
         ----------
proceeding is instituted by or against it, or if a receiver is appointed for the
property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall become immediately due and
payable, and Pledgee may proceed as provided in the case of default.

     (K) Pledgeholder Liability.  In the absence of willful or gross negligence,
         ----------------------
Pledgeholder shall not be liable to any party for any of his acts, or omissions
to act, as Pledgeholder.

     (L) Invalidity of Particular Provisions.  Pledgor and Pledgee agree that
         -----------------------------------
the enforceability or invalidity of any provision or provisions of this Security
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.

     (M) Successors or Assigns.  Pledgor and Pledgee agree that all of the terms
         ---------------------
of this Security Agreement shall be binding on their respective successors and
assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall
be deemed to include, for all purposes, the respective designees, successors,
assigns, heirs, executors and administrators.

     (N) Governing Law.  This Security Agreement shall be interpreted and
         -------------
governed under the internal substantive laws, but not the choice of law rules,
of California.

                                      -3-
<PAGE>

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

                                       /s/ Yao-Ting Wang
     "PLEDGOR"                         _____________________________________
                                       Signature

                                       Yao-Ting Wang
                                       --------------------------------------
                                       Print Name

                                                970 Corte Madera Avenue, #311
                                       Address: _____________________________

                                                Sunnyvale, CA 94086
                                                _____________________________


     "PLEDGEE"                         NUMERICAL TECHNOLOGIES, INC.
                                       a California corporation

                                       /s/ Yagyensh C. Pati
                                       __________________________________
                                       Signature

                                       Yagyensh C. Pati
                                       __________________________________
                                       Print Name

                                       President & CEO
                                       __________________________________
                                       Title

                                       /s/ Yagyensh C. Pati
     "PLEDGEHOLDER"                    __________________________________
                                       Secretary of Numerical Technologies, Inc.
<PAGE>

                                   EXHIBIT D
                                   ---------

                                     NOTE

$1,333,332.00                                            Santa Clara, California

                                                               February 10, 2000


     FOR VALUE RECEIVED, Yao-Ting Wang promises to pay to Numerical
Technologies, Inc., a California corporation (the "Company"), or order, the
principal sum of One Million Three Hundred Thirty-Three Thousand Three Hundred
Thirty-Two Dollars ($1,333,332.00), together with interest on the unpaid
principal hereof from the date hereof at the rate of 6.20% per annum, compounded
annually.

     Principal and interest shall be due and payable on February 10, 2002.
Payment of principal and interest shall be made in lawful money of the United
States of America.

     The undersigned may at any time prepay all or any portion of the principal
or interest owing hereunder.

     This Note is subject to the terms of the Option, dated as of February 1,
2000.  This Note is secured in part by a pledge of the Company's Common Stock
under the terms of a Security Agreement of even date herewith and is subject to
all the provisions thereof.

     The holder of this Note shall have full recourse against the undersigned,
and shall not be required to proceed against the collateral securing this Note
in the event of default.

     In the event the undersigned shall cease to be an employee, director or
consultant of the Company for any reason, this Note shall, at the option of the
Company, be accelerated, and the whole unpaid balance on this Note of principal
and accrued interest shall be immediately due and payable.

     Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by the
undersigned.

                                    /s/ Yao-Ting Wang
                                    ____________________________________
                                    Yao-Ting Wang
<PAGE>

                                  EXHIBIT E-1
                                  -----------

                         NUMERICAL TECHNOLOGIES, INC.

                                2000 STOCK PLAN

                      RESTRICTED STOCK PURCHASE AGREEMENT


     THIS AGREEMENT is made between Yao-Ting Wang (the "Purchaser") and
Numerical Technologies, Inc. (the "Company") as of February 10, 2000.

                                   RECITALS
                                   --------

     (1) Pursuant to the exercise of the stock option granted to Purchaser under
the Company's 2000 Stock Plan (the "Plan") and pursuant to the Stock Option
Agreement (the "Option Agreement") dated February 1, 2000 by and between the
Company and Purchaser with respect to such grant, which Plan and Option
Agreement are hereby incorporated by reference, Purchaser has elected to
purchase 333,333 of those shares which have not become vested under the vesting
schedule set forth in the Option Agreement ("Unvested Shares").  The Unvested
Shares and the shares subject to the Option Agreement which have become vested
are sometimes collectively referred to herein as the "Shares".

     (2) As required by the Option Agreement, as a condition to Purchaser's
election to exercise the option, Purchaser must execute this Restricted Stock
Purchase Agreement, which sets forth the rights and obligations of the parties
with respect to Shares acquired upon exercise of the Option.

     1.  Repurchase Option.
         -----------------
         (a)  If Purchaser's status as a Service Provider is terminated for any
reason, including for cause, death, and disability, the Company shall have the
right and option to purchase from Purchaser, or Purchaser's personal
representative, as the case may be, all of the Purchaser's Unvested Shares as of
the date of such termination at the price paid by the Purchaser for such Shares
(the "Repurchase Option").

         (b)  Upon the occurrence of a termination, the Company may exercise its
Repurchase Option by delivering personally or by registered mail, to Purchaser
(or his transferee or legal representative, as the case may be), within ninety
(90) days of the termination, a notice in writing indicating the Company's
intention to exercise the Repurchase Option and setting forth a date for closing
not later than thirty (30) days from the mailing of such notice. The closing
shall take place at the Company's office. At the closing, the holder of the
certificates for the Unvested Shares being transferred shall deliver the stock
certificate or certificates evidencing the Unvested Shares, and the Company
shall deliver the purchase price therefor.
<PAGE>

         (c)  At its option, the Company may elect to make payment for the
Unvested Shares to a bank selected by the Company. The Company shall avail
itself of this option by a notice in writing to Purchaser stating the name and
address of the bank, date of closing, and waiving the closing at the Company's
office.

         (d)  If the C ompany does not elect to exercise the Repurchase Option
conferred above by giving the requisite notice within ninety (90) days following
the termination, the Repurchase Option shall terminate.

         (e)  The Repurchase Option shall terminate in accordance with the
Vesting Schedule in Optionee's Option Agreement.

     2.  Transferability of the Shares; Escrow.
         -------------------------------------

         (a)  Purchaser hereby authorizes and directs the secretary of the
Company, or such other person designated by the Company, to transfer the
Unvested Shares as to which the Repurchase Option has been exercised from
Purchaser to the Company.

         (b)  To insure the availability for delivery of Purchaser's Unvested
Shares upon repurchase by the Company pursuant to the Repurchase Option under
Section 1, Purchaser hereby appoints the secretary, or any other person
designated by the Company as escrow agent, as its attorney-in-fact to sell,
assign and transfer unto the Company, such Unvested Shares, if any, repurchased
by the Company pursuant to the Repurchase Option and shall, upon execution of
this Agreement, deliver and deposit with the secretary of the Company, or such
other person designated by the Company, the share certificates representing the
Unvested Shares, together with the stock assignment duly endorsed in blank,
attached hereto as Exhibit E-2. The Unvested Shares and stock assignment shall
                   -----------
be held by the secretary in escrow, pursuant to the Joint Escrow Instructions of
the Company and Purchaser attached as Exhibit E-3 hereto, until the Company
                                      -----------
exercises its purchase right as provided in Section 1, until such Unvested
Shares are vested, or until such time as this Agreement no longer is in effect.
As a further condition to the Company's obligations under this Agreement, the
spouse of the Purchaser, if any, shall execute and deliver to the Company the
Consent of Spouse attached hereto as Exhibit E-4. Upon vesting of the Unvested
                                     -----------
Shares, the escrow agent shall promptly deliver to the Purchaser the certificate
or certificates representing such Shares in the escrow agent's possession
belonging to the Purchaser, and the escrow agent shall be discharged of all
further obligations hereunder; provided, however, that the escrow agent shall
nevertheless retain such certificate or certificates as escrow agent if so
required pursuant to other restrictions imposed pursuant to this Agreement.

         (c)  The Company, or its designee, shall not be liable for any act it
may do or omit to do with respect to holding the Shares in escrow and while
acting in good faith and in the exercise of its judgment.

         (d)  Transfer or sale of the Shares is subject to restrictions on
transfer imposed by any applicable state and federal securities laws. Any
transferee shall hold such Shares subject to all the provisions hereof and the
Exercise Notice executed by the Purchaser with respect to any

                                      -2-
<PAGE>

Unvested Shares purchased by Purchaser and shall acknowledge the same by signing
a copy of this Agreement.

     3.  Ownership, Voting Rights, Duties. This Agreement shall not affect in
         --------------------------------
any way the ownership, voting rights or other rights or duties of Purchaser,
except as specifically provided herein.

     4.  Legends.  The share certificate evidencing the Shares issued hereunder
         -------
shall be endorsed with the following legend (in addition to any legend required
under applicable state securities laws):

     THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT
BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.

     5.  Adjustment for Stock Split.  All references to the number of Shares
         --------------------------
and the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.

     6.  Notices.  Notices required hereunder shall be given in person or by
         -------
registered mail to the address of Purchaser shown on the records of the Company,
and to the Company at their respective principal executive offices.

     7.  Survival of Terms.  This Agreement shall apply to and bind Purchaser
         -----------------
and the Company and their respective permitted assignees and transferees, heirs,
legatees, executors, administrators and legal successors.

     8.  Section 83(b) Election.  Purchaser hereby acknowledges that he or she
         ----------------------
has been informed that, with respect to the exercise of an Option for unvested
Shares, an election may be filed by the Purchaser with the Internal Revenue
Service, within 30 days of the purchase of the Shares, electing pursuant to
         --------------
Section 83(b) of the Code to be taxed currently on any difference between the
purchase price of the Shares and their Fair Market Value on the date of
purchase.  In the case of a Nonstatutory Stock Option, this will result in a
recognition of taxable income to the Purchaser on the date of exercise, measured
by the excess, if any, of the fair market value of the Shares, at the time the
Option is exercised over the purchase price for the Shares.  Absent such an
election, taxable income will be measured and recognized by Purchaser at the
time or times on which the Company's Repurchase Option lapses.  In the case of
an Incentive Stock Option, such an election will result in a recognition of
income to the Purchaser for alternative minimum tax purposes on the date of
exercise, measured by the excess, if any, of the fair market value of the
Shares, at the time the option is exercised, over the purchase price for the
Shares.  Absent such an election, alternative minimum taxable income will be
measured and recognized by Purchaser at the time or times on which the Company's
Repurchase Option lapses.   Purchaser is strongly encouraged to seek the advice
of his or her own tax consultants in connection with the purchase of the Shares
and the advisability of filing

                                      -3-
<PAGE>

of the Election under Section 83(b) of the Code. A form of Election under
Section 83(b) is attached hereto as Exhibit E-5 for reference.
                                    -----------

     PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE RESPONSIBILITY AND NOT
THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF PURCHASER
REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON PURCHASER'S
BEHALF.

     9.  Representations.  Purchaser has reviewed with his own tax advisors the
         ---------------
federal, state, local and foreign tax consequences of this investment and the
transactions contemplated by this Agreement.  Purchaser is relying solely on
such advisors and not on any statements or representations of the Company or any
of its agents.  Purchaser understands that he (and not the Company) shall be
responsible for his own tax liability that may arise as a result of this
investment or the transactions contemplated by this Agreement.

     10. Governing Law.  This Agreement shall be governed by the internal
         -------------
substantive laws, but not the choice of law rules, of California.

     Purchaser represents that he has read this Agreement and is familiar with
its terms and provisions.  Purchaser hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board upon any
questions arising under this Agreement.

                                      -4-
<PAGE>

     IN WITNESS WHEREOF, this Agreement is deemed made as of the date first set
forth above.

                                    "COMPANY"

                                    NUMERICAL TECHNOLOGIES, INC.

                                    /s/ Yagyensh C. Pati
                                    __________________________________
                                    By

                                    President & CEO
                                    __________________________________
                                    Title

                                    "PURCHASER"

                                    /s/ Yao-Ting Wang
                                    __________________________________
                                    Signature

                                    Yao-Ting Wang
                                    ----------------------------------
                                    Printed Name

                                    ###-##-####
                                    __________________________________
                                    Soc. Sec. No.

                                    Address:
                                    -------

                                    970 Corte Madera Avenue, #311
                                    ----------------------------------

                                    Sunnyvale, CA  94086
                                    -----------------------------------
<PAGE>

                                  EXHIBIT E-2
                                  -----------

                     ASSIGNMENT SEPARATE FROM CERTIFICATE

     FOR VALUE RECEIVED I, __________________________, hereby sell, assign and
transfer unto Numerical Technologies, Inc. (__________) shares of the Common
Stock of Numerical Technologies, Inc. standing in my name of the books of said
corporation represented by Certificate No. _____ herewith and do hereby
irrevocably constitute and appoint _______________________ to transfer the said
stock on the books of the within named corporation with full power of
substitution in the premises.

     This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between Numerical Technologies, Inc. and the
undersigned dated ______________, 20___.


Dated: _________________, ____


               /s/ Yao-Ting Wang
     Signature:___________________________________






     INSTRUCTIONS: Please do not fill in any blanks other than the signature
line.  The purpose of this assignment is to enable the Company to exercise its
"repurchase option," as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE>

                                  EXHIBIT E-3
                                  -----------

                           JOINT ESCROW INSTRUCTIONS
                           -------------------------

                                                               February 10, 2000

Numerical Technologies, Inc.
70 West Plumeria Drive
San Jose, CA  95134-2134

Attention:  Secretary

Dear ___________:

     As Escrow Agent for both Numerical Technologies, Inc. (the "Company"), and
the undersigned purchaser of stock of the Company (the "Purchaser"), you are
hereby authorized and directed to hold the documents delivered to you pursuant
to the terms of that certain Restricted Stock Purchase Agreement ("Agreement")
between the Company and the undersigned, in accordance with the following
instructions:

     1.  In the event the Company and/or any assignee of the Company (referred
to collectively for convenience herein as the "Company") exercises the Company's
repurchase option set forth in the Agreement, the Company shall give to
Purchaser and you a written notice specifying the number of shares of stock to
be purchased, the purchase price, and the time for a closing hereunder at the
principal office of the Company. Purchaser and the Company hereby irrevocably
authorize and direct you to close the transaction contemplated by such notice in
accordance with the terms of said notice.

     2.  At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, cancellation of indebtedness, or some combination thereof) for
the number of shares of stock being purchased pursuant to the exercise of the
Company's repurchase option.

     3.  Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a stockholder of the Company while the
stock is held by you.
<PAGE>

     4.  Provided the Promissory Note dated February 10, 2000 in the principal
amount of $1,333,332.00 and issued by the Purchaser to the Company (the "Note")
has been paid in full, upon written request of the Purchaser, but no more than
once per calendar year, unless the Company's repurchase option has been
exercised, you will deliver to Purchaser a certificate or certificates
representing so many shares of stock as are not then subject to the Company's
repurchase option. Provided the Note has been paid in full, within 120 days
after cessation of Purchaser's continuous employment by or services to the
Company, or any parent or subsidiary of the Company, you will deliver to
Purchaser a certificate or certificates representing the aggregate number of
shares held or issued pursuant to the Agreement and not purchased by the Company
or its assignees pursuant to exercise of the Company's repurchase option.

     5.  If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.

     6.  Your duties hereunder may be altered, amended, modified or revoked only
by a writing signed by all of the parties hereto.

     7.  You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties.
You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in
good faith, and any act done or omitted by you pursuant to the advice of your
own attorneys shall be conclusive evidence of such good faith.

     8.  You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court. In
case you obey or comply with any such order, judgment or decree, you shall not
be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.

     9.  You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.

     10. You shall not be liable for the outlawing of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.

     11. You shall be entitled to employ such legal counsel and other experts as
you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.

                                      -2-
<PAGE>

     12.  Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be an officer or agent of the Company or if you shall resign by
written notice to each party.  In the event of any such termination, the Company
shall appoint a successor Escrow Agent.

     13.  If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.

     14.  It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.

     15.  Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.

          COMPANY:            Numerical Technologies, Inc.
                              70 West Plumeria Drive
                              San Jose, CA  95134-2134
                              Attention:  Secretary

          PURCHASER:          Yao-Ting Wang
                              970 Corte Madera Avenue, #311
                              Sunnyvale, CA  94086

          ESCROW AGENT:       Wilson Sonsini, Goodrich & Rosati
                              650 Page Mill Road
                              Palo Alto, CA  94304

     16.  By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.

     17.  This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted
assigns.

                                      -3-
<PAGE>

     18.  These Joint Escrow Instructions shall be governed by the internal
substantive laws, but not the choice of law rules, of California.

                                    NUMERICAL TECHNOLOGIES, INC.

                                    /s/ Yagyensh C. Pati
                                    ____________________________________
                                    By

                                    President & CEO
                                    ____________________________________
                                    Title


                                    PURCHASER

                                    /s/ Yao-Ting Wang
                                    ____________________________________
                                    Signature

                                    Yao-Ting Wang
                                    ------------------------------------
                                    Typed or Printed Name


                                    ESCROW AGENT

                                    WILSON SONSINI GOODRICH & ROSATI

                                    /s/ John V. Roos
                                    ____________________________________
                                    By

                                    Member
                                    ____________________________________
                                    Title
<PAGE>

                                  EXHIBIT E-4
                                  -----------

                               CONSENT OF SPOUSE
                               -----------------

     I, ____________________, spouse of ___________________, have read and
approve the foregoing Agreement.  In consideration of granting of the right to
my spouse to purchase shares of Numerical Technologies, Inc., as set forth in
the Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to
the exercise of any rights under the Agreement and agree to be bound by the
provisions of the Agreement insofar as I may have any rights in said Agreement
or any shares issued pursuant thereto under the community property laws or
similar laws relating to marital property in effect in the state of our
residence as of the date of the signing of the foregoing Agreement.

Dated: ________________, 2000

                                      N/A
                                      -----------------------------------
<PAGE>

                                  EXHIBIT E-5
                                  -----------

                         ELECTION UNDER SECTION 83(b)
                         ----------------------------
                     OF THE INTERNAL REVENUE CODE OF 1986
                     ------------------------------------

The undersigned taxpayer hereby elects, pursuant to Sections 55 and 83(b) of the
Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income
or alternative minimum taxable income, as the case may be, for the current
taxable year the amount of any compensation taxable to taxpayer in connection
with taxpayer's receipt of the property described below:

1.   The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:

     NAME:                   TAXPAYER:       Yao-Ting Wang       SPOUSE:  N/A

     ADDRESS:      970 Corte Madera Avenue, #311, Sunnyvale, CA 94086

     IDENTIFICATION NO.:     TAXPAYER:       ###-##-####         SPOUSE:  N/A

     TAXABLE YEAR:       2000

2.   The property with respect to which the election is made is described as
follows: 333,333 shares (the "Shares") of the Common Stock of Numerical
Technologies, Inc. (the "Company").

3.   The date on which the property was transferred is: Feb. 10, 2000.

4.   The property is subject to the following restrictions:

     The Shares may not be transferred and are subject to forfeiture under the
     terms of an agreement between the taxpayer and the Company.  These
     restrictions lapse upon the satisfaction of certain conditions contained in
     such agreement.

5.   The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never lapse, of
such property is:

     $4.00 per share.

6.   The amount (if any) paid for such property is:

     $4.00 per share.

The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property.  The transferee of such property is the person
performing the services in connection with the transfer of said property.

The undersigned understands that the foregoing election may not be revoked
- --------------------------------------------------------------------------
except with the consent of the Commissioner.
- -------------------------------------------

                              /s/ Yao-Ting Wang
Dated:  Feb. 10, 2000         ______________________________________________
                                   Taxpayer

The undersigned spouse of taxpayer joins in this election.

Dated:                        N/A
                              ----------------------------------------------

<PAGE>
                                                                  Exhibit 10.32

                          NUMERICAL TECHNOLOGIES, INC.

                                1997 STOCK PLAN

                    STOCK OPTION AGREEMENT -- EARLY EXERCISE

     Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.

I.   NOTICE OF STOCK OPTION GRANT
     ----------------------------
     Atul Sharan

     You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:

     Date of Grant:                     October 23, 1998

     Vesting Commencement Date:         October 15, 1998

     Exercise Price per Share:          $0.50

     Total Number of Shares Granted:    90,000

     Total Exercise Price:              $45,000

     Type of Option:                     X   Incentive Stock Option
                                       -----

                                       _____ Nonstatutory Stock Option

     Term/Expiration Date:             Ten Years/ October 23, 2008*


_______________
*  Or earlier, pursuant to the termination period set forth below.

     Exercise and Vesting Schedule:
     -----------------------------

     This Option is exercisable immediately, in whole or in part, and shall vest
according to the following vesting schedule:

     One-sixteenth (1/16th) of the Shares subject to the Option shall vest three
months after the Vesting Commencement Date and on the last day of each three
month anniversary thereafter, subject to your continuing to be a Service
Provider on such dates.
<PAGE>

     Termination Period:
     ------------------

     You may exercise this Option for thirty days after you cease to be a
Service Provider.  Upon your death or disability, this Option may be exercised
for one year after you cease to be a Service Provider.  In no event may you
exercise this Option after the Term/Expiration Date as provided above.

II.  AGREEMENT
     ---------

     1.   Grant of Option.  The Plan Administrator of the Company hereby grants
          ---------------
to the Optionee named in the Notice of Grant (the "Optionee"), an option (the
"Option") to purchase the number of Shares set forth in the Notice of Grant, at
the exercise price per Share set forth in the Notice of Grant (the "Exercise
Price"), and subject to the terms and conditions of the Plan, which is
incorporated herein by reference. Subject to Section 14(c) of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this Option
Agreement, the terms and conditions of the Plan shall prevail.

     If designated in the Notice of Grant as an Incentive Stock Option ("ISO"),
this Option is intended to qualify as an Incentive Stock Option as defined in
Section 422 of the Code.  Nevertheless, to the extent that it exceeds the
$100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").

     2.   Exercise of Option.  This Option shall be exercisable during its term
          ------------------
in accordance with the provisions of Section 9 of the Plan as follows:

          (a)  Right to Exercise.
               -----------------

               (i)  Subject to subsections 2(a)(ii) and 2(a)(iii) below, this
Option shall be exercisable cumulatively according to the vesting schedule set
forth in the Notice of Grant. Alternatively, at the election of the Optionee,
this option may be exercised in whole or in part at any time as to Shares which
have not yet vested. For purposes of this Stock Option Agreement, Shares subject
to the Option shall vest based on continued employment of Optionee with the
Company. Vested Shares shall not be subject to the Company's repurchase right
(as set forth in the Restricted Stock Purchase Agreement, attached hereto as
Exhibit C-1).
- -----------

               (ii)  As a condition to exercising this Option for unvested
Shares, the Optionee shall execute the Restricted Stock Purchase Agreement.

               (iii) This Option may not be exercised for a fraction of a Share.

          (b)  Method of Exercise.  This Option shall be exercisable by
               ------------------
delivery of an exercise notice in the form attached as Exhibit A (the "Exercise
                                                       ---------
Notice") which shall state the election to exercise the Option, the number of
Shares with respect to which the Option is being exercised, and such other
representations and agreements as may be required by the Company. The Exercise
Notice shall be accompanied by payment of the aggregate Exercise Price as to all
Exercised

                                      -2-
<PAGE>

Shares. This Option shall be deemed to be exercised upon receipt by the Company
of such fully executed Exercise Notice accompanied by the aggregate Exercise
Price.

     No Shares shall be issued pursuant to the exercise of an Option unless such
issuance and such exercise complies with Applicable Laws.  Assuming such
compliance, for income tax purposes the Shares shall be considered transferred
to the Optionee on the date on which the Option is exercised with respect to
such Shares.

     3.   Optionee's Representations.  In the event the Shares have not been
          --------------------------
registered under the Securities Act of 1933, as amended, at the time this Option
is exercised, the Optionee shall, if required by the Company, concurrently with
the exercise of all or any portion of this Option, deliver to the Company his or
her Investment Representation Statement in the form attached hereto as Exhibit
                                                                       -------
B.
- -

     4.   Lock-Up Period.  Optionee hereby agrees that, if so requested by the
          --------------
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
the effective date of a registration statement of the Company filed under the
Securities Act. Such restriction shall apply only to the first registration
statement of the Company to become effective under the Securities Act that
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.

     5.   Method of Payment.  Payment of the aggregate Exercise Price shall be
          -----------------
by any of the following, or a combination thereof, at the election of the
Optionee:

          (a)  cash;

          (b)  check;

          (c)  consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan; or

          (d)  surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares.

     6.   Restrictions on Exercise.  This Option may not be exercised until
          ------------------------
such time as the Plan has been approved by the shareholders of the Company, or
if the issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any Applicable
Law.

                                      -3-
<PAGE>

     7.   Non-Transferability of Option.  This Option may not be transferred
          -----------------------------
in any manner otherwise than by will or by the laws of descent or distribution
and may be exercised during the lifetime of Optionee only by Optionee. The terms
of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.

     8.   Term of Option.  This Option may be exercised only within the term
          --------------
set out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.

     9.   Tax Consequences.  Set forth below is a brief summary as of the date
          ----------------
of this Option of some of the federal tax consequences of exercise of this
Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE,
AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD
CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

          (a)  Exercise of ISO.  If this Option qualifies as an ISO, there will
               ---------------
be no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price will be treated as an adjustment to the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.

          (b)  Exercise of ISO Following Disability.  If the Optionee ceases to
               ------------------------------------
be an Employee as a result of a disability that is not a total and permanent
disability as defined in Section 22(e)(3) of the Code, to the extent permitted
on the date of termination, the Optionee must exercise an ISO within three
months of such termination for the ISO to be qualified as an ISO.

          (c)  Exercise of Nonstatutory Stock Option.  There may be a regular
               -------------------------------------
federal income tax liability upon the exercise of a Nonstatutory Stock Option.
The Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market Value
of the Shares on the date of exercise over the Exercise Price. If Optionee is an
Employee or a former Employee, the Company will be required to withhold from
Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount in cash equal to a percentage of this compensation
income at the time of exercise, and may refuse to honor the exercise and refuse
to deliver Shares if such withholding amounts are not delivered at the time of
exercise.

          (d)  Disposition of Shares.  In the case of an NSO, if Shares are
               ---------------------
held for at least one year, any gain realized on disposition of the Shares will
be treated as long-term capital gain for federal income tax purposes. In the
case of an ISO, if Shares transferred pursuant to the Option are held for at
least one year after exercise and at least two years after the Date of Grant,
any gain realized on disposition of the Shares will also be treated as long-term
capital gain for federal income tax purposes. If Shares purchased under an ISO
are disposed of within one year after exercise or two years after the Date of
Grant, any gain realized on such disposition will be treated as compensation
income (taxable at ordinary income rates) to the extent of the difference
between the Exercise Price and the lesser of (i) the Fair Market Value of the
Shares on the date of exercise, or (ii) the sale price

                                      -4-
<PAGE>

of the Shares. Any additional gain will be taxed as capital gain, short-term
depending on the period that the ISO Shares were held.

          (e)  Notice of Disqualifying Disposition of ISO Shares.  If the
               -------------------------------------------------
to Optionee herein is an ISO, and if Optionee sells or otherwise disposes of any
of the Shares acquired pursuant to the ISO on or before the later of (i) the
date two years after the Date of Grant, or (ii) the date one year after the date
of exercise, the Optionee shall immediately notify the Company in writing of
such disposition. Optionee agrees that Optionee may be subject to income tax
withholding by the Company on the compensation income recognized by the
Optionee.

          (f)  Section 83(b) Election for Unvested Shares Purchased Pursuant
               -------------------------------------------------------------
to Options.    With respect to the exercise of an Option for unvested Shares,
an election may be filed by the Optionee with the Internal Revenue Service,
within 30 days of the purchase of the Shares, electing pursuant to Section 83(b)
- --------------
of the Code to be taxed currently on any difference between the purchase price
of the Shares and their Fair Market Value on the date of purchase. In the case
of a Nonstatutory Stock Option, this will result in a recognition of taxable
income to the Optionee on the date of exercise, measured by the excess, if any,
of the fair market value of the Shares, at the time the Option is exercised over
the purchase price for the Shares. Absent such an election, taxable income will
be measured and recognized by Optionee at the time or times on which the
Company's Repurchase Option lapses. In the case of an Incentive Stock Option,
such an election will result in a recognition of income to the Optionee for
alternative minimum tax purposes on the date of exercise, measured by the
excess, if any, of the fair market value of the Shares, at the time the option
is exercised, over the purchase price for the Shares. Absent such an election,
alternative minimum taxable income will be measured and recognized by Optionee
at the time or times on which the Company's Repurchase Option lapses. Optionee
is strongly encouraged to seek the advice of his or her own tax consultants in
connection with the purchase of the Shares and the advisability of filing of the
Election under Section 83(b) of the Code. A form of Election under Section 83(b)
is attached hereto as Exhibit C-5 for reference.
                      -----------

     OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY AND NOT THE
COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF OPTIONEE
REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON OPTIONEE'S
BEHALF.

     10.  Entire Agreement; Governing Law.  The Plan is incorporated herein by
          -------------------------------
reference.  The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee.  This agreement is governed by the internal substantive laws but not
the choice of law rules of California.

     11.  No Guarantee of Continued Service.  OPTIONEE ACKNOWLEDGES AND AGREES
          ---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH
THE ACT OF BEING HIRED, BEING GRANTED THIS

                                      -5-
<PAGE>

OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES
THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING
SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF
CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY
PERIOD, OR AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR
THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER
AT ANY TIME, WITH OR WITHOUT CAUSE.

     Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof.  Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option.  Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.

OPTIONEE:                               NUMERICAL TECHNOLOGIES, INC.

/s/ Atul Sharan                         /s/ Yagyensh C. Pati
________________________________        ________________________________
Signature                               By

Atul Sharan                             President & CEO
________________________________        ________________________________
Print Name                              Title

21490 Via Avenue
________________________________
Cupertino, CA 95014-4935
________________________________
Residence Address

                                      -6-
<PAGE>

                                   EXHIBIT A
                                   ---------

                                1997 STOCK PLAN

                                EXERCISE NOTICE

Numerical Technologies, Inc.
70 West Plumeria Drive
San Jose, CA  95134-2134

Attention:  Secretary

     1.   Exercise of Option.  Effective as of today, October 25, 1999,the
          ------------------
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
30,000 shares of the Common Stock (the "Shares") of Numerical Technologies,
Inc. (the "Company") under and pursuant to the 1997 Stock Plan (the "Plan") and
the [X] Incentive [ ] Nonstatutory Stock Option Agreement dated October 23,
1998 (the "Option Agreement").

     2.   Delivery of Payment.  Purchaser herewith delivers to the Company the
          -------------------
full purchase price of the Shares, as set forth in the Option Agreement.

     3.   Representations of Optionee.  Optionee acknowledges that Optionee has
          ---------------------------
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.

     4.   Rights as Shareholder.  Until the issuance of the Shares (as
          ---------------------
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company), no right to vote or receive dividends
or any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares shall be issued to
the Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 12 of the Plan.

     5.   Company's Right of First Refusal.  Before any Shares held by
          --------------------------------
Optionee or any transferee (either being sometimes referred to herein as the
"Holder") may be sold or otherwise transferred (including transfer by gift or
operation of law), the Company or its assignee(s) shall have a right of first
refusal to purchase the Shares on the terms and conditions set forth in this
Section (the "Right of First Refusal").

          (a)  Notice of Proposed Transfer.  The Holder of the Shares shall
               ---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder proposes to
transfer the
<PAGE>

Shares (the "Offered Price"), and the Holder shall offer the Shares at the
Offered Price to the Company or its assignee(s).

          (b)  Exercise of Right of First Refusal.  At any time within thirty
               ----------------------------------
(30) days after receipt of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.

          (c)  Purchase Price.  The purchase price ("Purchase Price") for the
               --------------
Shares purchased by the Company or its assignee(s) under this Section shall be
the Offered Price. If the Offered Price includes consideration other than cash,
the cash equivalent value of the non-cash consideration shall be determined by
the Board of Directors of the Company in good faith.

          (d)  Payment.  Payment of the Purchase Price shall be made, at the
               -------
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.

          (e)  Holder's Right to Transfer.  If all of the Shares proposed in
               --------------------------
the Notice to be transferred to a given Proposed Transferee are not purchased by
the Company and/or its assignee(s) as provided in this Section, then the Holder
may sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice, that any such sale or
other transfer is effected in accordance with any applicable securities laws and
that the Proposed Transferee agrees in writing that the provisions of this
Section shall continue to apply to the Shares in the hands of such Proposed
Transferee. If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.

          (f)  Exception for Certain Family Transfers.  Anything to the
               --------------------------------------
contrary contained in this Section notwithstanding, the transfer of any or all
of the Shares during the Optionee's lifetime or on the Optionee's death by will
or intestacy to the Optionee's immediate family or a trust for the benefit of
the Optionee's immediate family shall be exempt from the provisions of this
Section. "Immediate Family" as used herein shall mean spouse, lineal descendant
or antecedent, father, mother, brother or sister. In such case, the transferee
or other recipient shall receive and hold the Shares so transferred subject to
the provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.

          (g)  Termination of Right of First Refusal.  The Right of First
               -------------------------------------
Refusal shall terminate as to any Shares upon the first sale of Common Stock of
the Company to the general public pursuant to a registration statement filed
with and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.

                                      -2-
<PAGE>

     6.   Tax Consultation.  Optionee understands that Optionee may suffer
          ----------------
adverse taxconsequences as a result of Optionee's purchase or disposition of the
Shares. Optionee represents that Optionee has consulted with any tax consultants
Optionee deems advisable in connection with the purchase or disposition of the
Shares and that Optionee is not relying on the Company for any tax advice.

     7.   Restrictive Legends and Stop-Transfer Orders.
          --------------------------------------------

          (a)  Legends.  Optionee understands and agrees that the Company shall
               -------
legends set forth below or legends substantially equivalent thereto, to be
placed upon any certificate(s) evidencing ownership of the Shares together with
any other legends that may be required by the Company or by state or federal
securities laws:

          THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
          SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR
          OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
          REGISTERED UNDER THE ACT OR, IN THE OPINION OF COMPANY COUNSEL
          SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR
          TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.

          THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
          RESTRICTIONS ON TRANSFER AND RIGHT OF FIRST REFUSAL OPTIONS HELD BY
          THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE
          BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF
          WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER.  SUCH
          TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON
          TRANSFEREES OF THESE SHARES.

          (b)  Stop-Transfer Notices.  Optionee agrees that, in order to
               ---------------------
ensure compliance with the restrictions referred to herein, the Company may
issue appropriate "stop transfer" instructions to its transfer agent, if any,
and that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.

          (c)  Refusal to Transfer.  The Company shall not be required (i) to
               -------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.

     8.   Successors and Assigns.  The Company may assign any of its rights
          ----------------------
under this Agreement to single or multiple assignees, and this Agreement shall
inure to the benefit of the successors and assigns of the Company. Subject to
the restrictions on transfer herein set forth, this Agreement shall be binding
upon Optionee and his or her heirs, executors, administrators, successors and
assigns.

                                      -3-
<PAGE>

     9.   Interpretation.  Any dispute regarding the interpretation of this
          --------------
Agreement shall be submitted by Optionee or by the Company forthwith to the
Administrator which shall review such dispute at its next regular meeting. The
resolution of such a dispute by the Administrator shall be final and binding on
all parties.

     10.  Governing Law; Severability.  This Agreement is governed by the
          ---------------------------
internal substantive laws, but not the choice of law rules, of California.

     11.  Entire Agreement.  The Plan and Option Agreement are incorporated
          ----------------
herein by reference. This Agreement, the Plan, the Restricted Stock Purchase
Agreement, the Option Agreement and the Investment Representation Statement
constitute the entire agreement of the parties with respect to the subject
matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee's interest except by
means of a writing signed by the Company and Optionee.

Submitted by:                           Accepted by:

OPTIONEE:                               NUMERICAL TECHNOLOGIES, INC.

/s/ Atul Sharan                         /s/ Yagyensh C. Pati
________________________________        ________________________________
Signature                               By

Atul Sharan                             President & CEO
________________________________        ________________________________
Print Name                              Title

Address:                                Address:
- -------                                 -------

21490 Via Avenue                        70 West Plumeria Drive
Cupertino, CA 95014-4935                San Jose, CA  95134-2134

                                        October 25, 1999
                                        _________________________________
                                        Date Received

                                      -4-
<PAGE>

                                   EXHIBIT B
                                   ---------

                      INVESTMENT REPRESENTATION STATEMENT

OPTIONEE       :    Atul Sharan

COMPANY        :    NUMERICAL TECHNOLOGIES, INC.

SECURITY       :    COMMON STOCK

AMOUNT         :    30,000 Shares

DATE           :    October 25, 1999

     In connection with the purchase of the above-listed Securities, the
undersigned Optionee represents to the Company the following:

          (a)  Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").

          (b)  Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Optionee's investment intent as expressed herein. In this connection,
Optionee understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Optionee's representation was predicated solely upon a present intention to hold
these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. Optionee further understands that the Securities must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Optionee further
acknowledges and understands that the Company is under no obligation to register
the Securities. Optionee understands that the certificate evidencing the
Securities will be imprinted with a legend which prohibits the transfer of the
Securities unless they are registered or such registration is not required in
the opinion of counsel satisfactory to the Company, and any other legend
required under applicable state securities laws.

          (c)  Optionee is familiar with the provisions of Rule 701 and Rule
144, each promulgated under the Securities Act, which, in substance, permit
limited public resale of "restricted securities" acquired, directly or
indirectly from the issuer thereof, in a non-public offering subject to
<PAGE>

the satisfaction of certain conditions. Rule 701 provides that if the issuer
qualifies under Rule 701 at the time of the grant of the Option to the Optionee,
the exercise will be exempt from registration under the Securities Act. In the
event the Company becomes subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or
such longer period as any market stand-off agreement may require) the Securities
exempt under Rule 701 may be resold, subject to the satisfaction of certain of
the conditions specified by Rule 144, including: (1) the resale being made
through a broker in an unsolicited "broker's transaction" or in transactions
directly with a market maker (as said term is defined under the Securities
Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of
certain public information about the Company, (3) the amount of Securities being
sold during any three month period not exceeding the limitations specified in
Rule 144(e), and (4) the timely filing of a Form 144, if applicable.

     In the event that the Company does not qualify under Rule 701 at the time
of grant of the Option, then the Securities may be resold in certain limited
circumstances subject to the provisions of Rule 144, which requires the resale
to occur not less than two years after the later of the date the Securities were
sold by the Company or the date the Securities were sold by an affiliate of the
Company, within the meaning of Rule 144; and, in the case of acquisition of the
Securities by an affiliate, or by a non-affiliate who subsequently holds the
Securities less than three years, the satisfaction of the conditions set forth
in sections (1), (2), (3) and (4) of the paragraph immediately above.

          (d)  Optionee further understands that in the event all of the
applicable requirements of Rule 701 or 144 are not satisfied, registration under
the Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk. Optionee understands that no assurances can be given that any
such other registration exemption will be available in such event.

                                    Signature of Optionee:

                                    /s/ Atul Sharan
                                    _________________________________

                                    Date: October 25           1999
                                          ___________________, ______

                                      -2-
<PAGE>

                                  EXHIBIT C-1
                                  -----------

                         NUMERICAL TECHNOLOGIES, INC.

                                1997 STOCK PLAN

                      RESTRICTED STOCK PURCHASE AGREEMENT

     THIS AGREEMENT is made between Atul Sharan (the "Purchaser") and Numerical
Technologies, Inc. (the "Company") as of October 25, 1999.

                                   RECITALS
                                   --------

     (1) Pursuant to the exercise of the stock option granted to Purchaser under
the Company's 1997 Stock Plan (the "Plan") and pursuant to the Stock Option
Agreement (the "Option Agreement") dated October 23, 1998 by and between the
Company and Purchaser with respect to such grant, which Plan and Option
Agreement are hereby incorporated by reference, Purchaser has elected to
purchase 30,000 of those shares which have not become vested under the
vesting schedule set forth in the Option Agreement ("Unvested Shares").  The
Unvested Shares and the shares subject to the Option Agreement which have become
vested are sometimes collectively referred to herein as the "Shares".

     (2) As required by the Option Agreement, as a condition to Purchaser's
election to exercise the option, Purchaser must execute this Restricted Stock
Purchase Agreement, which sets forth the rights and obligations of the parties
with respect to Shares acquired upon exercise of the Option.

     1.  Repurchase Option.
         -----------------

         (a)  If Purchaser's status as a Service Provider is terminated for any
reason, including for cause, death, and disability, the Company shall have the
right and option to purchase from Purchaser, or Purchaser's personal
representative, as the case may be, all of the Purchaser's Unvested Shares as of
the date of such termination at the price paid by the Purchaser for such Shares
(the "Repurchase Option").

         (b)  Upon the occurrence of a termination, the Company may exercise its
Repurchase Option by delivering personally or by registered mail, to Purchaser
(or his transferee or legal representative, as the case may be), within ninety
(90) days of the termination, a notice in writing indicating the Company's
intention to exercise the Repurchase Option and setting forth a date for closing
not later than thirty (30) days from the mailing of such notice. The closing
shall take place at the Company's office. At the closing, the holder of the
certificates for the Unvested Shares being transferred shall deliver the stock
certificate or certificates evidencing the Unvested Shares, and the Company
shall deliver the purchase price therefor.
<PAGE>

          (c)  At its option, the Company may elect to make payment for the
Unvested Shares to a bank selected by the Company. The Company shall avail
itself of this option by a notice in writing to Purchaser stating the name and
address of the bank, date of closing, and waiving the closing at the Company's
office.

          (d)  If the Company does not elect to exercise the Repurchase Option
conferred above by giving the requisite notice within ninety (90) days following
the termination, the Repurchase Option shall terminate.

          (e)  The Repurchase Option shall terminate in accordance with the
Vesting Schedule in Optionee's Option Agreement.

     2.   Transferability of the Shares; Escrow.
          -------------------------------------

          (a)  Purchaser hereby authorizes and directs the secretary of the
Company, or such other person designated by the Company, to transfer the
Unvested Shares as to which the Repurchase Option has been exercised from
Purchaser to the Company.

          (b)  To insure the availability for delivery of Purchaser's Unvested
Shares upon repurchase by the Company pursuant to the Repurchase Option under
Section 1, Purchaser hereby appoints the secretary, or any other person
designated by the Company as escrow agent, as its attorney-in-fact to sell,
assign and transfer unto the Company, such Unvested Shares, if any, repurchased
by the Company pursuant to the Repurchase Option and shall, upon execution of
this Agreement, deliver and deposit with the secretary of the Company, or such
other person designated by the Company, the share certificates representing the
Unvested Shares, together with the stock assignment duly endorsed in blank,
attached hereto as Exhibit C-2. The Unvested Shares and stock assignment shall
                   -----------
be held by the secretary in escrow, pursuant to the Joint Escrow Instructions of
the Company and Purchaser attached as Exhibit C-3 hereto, until the Company
                                      -----------
exercises its purchase right as provided in Section 1, until such Unvested
Shares are vested, or until such time as this Agreement no longer is in effect.
As a further condition to the Company's obligations under this Agreement, the
spouse of the Purchaser, if any, shall execute and deliver to the Company the
Consent of Spouse attached hereto as Exhibit C-4. Upon vesting of the Unvested
                                     -----------
Shares, the escrow agent shall promptly deliver to the Purchaser the certificate
or certificates representing such Shares in the escrow agent's possession
belonging to the Purchaser, and the escrow agent shall be discharged of all
further obligations hereunder; provided, however, that the escrow agent shall
nevertheless retain such certificate or certificates as escrow agent if so
required pursuant to other restrictions imposed pursuant to this Agreement.

          (c)  The Company, or its designee, shall not be liable for any act it
may do or omit to do with respect to holding the Shares in escrow and while
acting in good faith and in the exercise of its judgment.

          (d)  Transfer or sale of the Shares is subject to restrictions on
transfer imposed by any applicable state and federal securities laws. Any
transferee shall hold such Shares subject to all the provisions hereof and the
Exercise Notice executed by the Purchaser with respect to any

                                      -2-
<PAGE>

Unvested Shares purchased by Purchaser and shall acknowledge the same by signing
a copy of this Agreement.

     3.   Ownership, Voting Rights, Duties.  This Agreement shall not affect in
          --------------------------------
any way the ownership, voting rights or other rights or duties of Purchaser,
except as specifically provided herein.

     4.   Legends.  The share certificate evidencing the Shares issued hereunder
          -------
shall be endorsed with the following legend (in addition to any legend required
under applicable state securities laws):

     THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT
BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.

     5.   Adjustment for Stock Split.  All references to the number of Shares
          --------------------------
and the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.

     6.   Notices.  Notices required hereunder shall be given in person or by
          -------
registered mail to the address of Purchaser shown on the records of the Company,
and to the Company at their respective principal executive offices.

     7.   Survival of Terms.  This Agreement shall apply to and bind Purchaser
          -----------------
and the Company and their respective permitted assignees and transferees, heirs,
legatees, executors, administrators and legal successors.

     8.   Section 83(b) Election.  Purchaser hereby acknowledges that he or she
          ----------------------
has been informed that, with respect to the exercise of an Option for unvested
Shares, an election may be filed by the Purchaser with the Internal Revenue
Service, within 30 days of the purchase of the Shares, electing pursuant to
         ---------
Section 83(b) of the Code to be taxed currently on any difference between the
purchase price of the Shares and their Fair Market Value on the date of
purchase. In the case of a Nonstatutory Stock Option, this will result in a
recognition of taxable income to the Purchaser on the date of exercise, measured
by the excess, if any, of the fair market value of the Shares, at the time the
Option is exercised over the purchase price for the Shares. Absent such an
election, taxable income will be measured and recognized by Purchaser at the
time or times on which the Company's Repurchase Option lapses. In the case of an
Incentive Stock Option, such an election will result in a recognition of income
to the Purchaser for alternative minimum tax purposes on the date of exercise,
measured by the excess, if any, of the fair market value of the Shares, at the
time the option is exercised, over the purchase price for the Shares. Absent
such an election, alternative minimum taxable income will be measured and
recognized by Purchaser at the time or times on which the Company's Repurchase
Option lapses. Purchaser is strongly encouraged to seek the advice of his or her
own tax consultants in connection with the purchase of the Shares and the
advisability of filing
                                      -3-
<PAGE>

of the Election under Section 83(b) of the Code. A form of Election under
Section 83(b) is attached hereto as Exhibit C-5 for reference.
                                    -----------

     PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE RESPONSIBILITY AND NOT
THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF PURCHASER
REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON PURCHASER'S
BEHALF.

     9.   Representations.  Purchaser has reviewed with his own tax advisors the
          ---------------
federal, state, local and foreign tax consequences of this investment and the
transactions contemplated by this Agreement. Purchaser is relying solely on such
advisors and not on any statements or representations of the Company or any of
its agents. Purchaser understands that he (and not the Company) shall be
responsible for his own tax liability that may arise as a result of this
investment or the transactions contemplated by this Agreement.

     10.  Governing Law.  This Agreement shall be governed by the internal
          -------------
substantive laws, but not the choice of law rules, of California.

     Purchaser represents that he has read this Agreement and is familiar with
its terms and provisions.  Purchaser hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board upon any
questions arising under this Agreement.

                                      -4-
<PAGE>

     IN WITNESS WHEREOF, this Agreement is deemed made as of the date first set
forth above.

                                    "COMPANY"

                                    NUMERICAL TECHNOLOGIES, INC

                                    /s/ Yagyensh C. Pati
                                    __________________________________
                                    By

                                    President & CEO
                                    __________________________________
                                    Title


                                    "PURCHASER"

                                    /s/ Atul Sharan
                                    __________________________________
                                    Signature

                                    Atul Sharan
                                    __________________________________
                                    Printed Name

                                    ###-##-####
                                    __________________________________
                                    Soc. Sec. No.

                                    Address:
                                    -------

                                    21490 Via Avenue
                                    __________________________________

                                    Cupertino, CA 94015-4935
                                    __________________________________

                                      -5-
<PAGE>

                                  EXHIBIT C-2
                                  -----------

                     ASSIGNMENT SEPARATE FROM CERTIFICATE

     FOR VALUE RECEIVED I, __________________________, hereby sell, assign and
transfer unto Numerical Technologies, Inc. (__________) shares of the Common
Stock of Numerical Technologies, Inc. standing in my name of the books of said
corporation represented by Certificate No. _____ herewith and do hereby
irrevocably constitute and appoint
___________________________________________________________  to transfer the
said stock on the books of the within named corporation with full power of
substitution in the premises.

     This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between Numerical Technologies, Inc. and the
undersigned dated ______________, _____.

Dated: _______________, ______

     Signature: /s/ Atul Sharan
                __________________________________







INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise its
"repurchase option," as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE>

                                  EXHIBIT C-3
                                  -----------

                           JOINT ESCROW INSTRUCTIONS

                                                             October 25, 1999

Numerical Technologies, Inc.
70 West Plumeria Drive
San Jose, CA  95134-2134
Attention:  Secretary

Dear:

     As Escrow Agent for both Numerical Technologies, Inc. (the "Company"), and
the undersigned purchaser of stock of the Company (the "Purchaser"), you are
hereby authorized and directed to hold the documents delivered to you pursuant
to the terms of that certain Restricted Stock Purchase Agreement ("Agreement")
between the Company and the undersigned, in accordance with the following
instructions:

     1.   In the event the Company and/or any assignee of the Company (referred
to collectively for convenience herein as the "Company") exercises the Company's
repurchase option set forth in the Agreement, the Company shall give to
Purchaser and you a written notice specifying the number of shares of stock to
be purchased, the purchase price, and the time for a closing hereunder at the
principal office of the Company. Purchaser and the Company hereby irrevocably
authorize and direct you to close the transaction contemplated by such notice in
accordance with the terms of said notice.

     2.   At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, or some combination thereof) for the number of shares of stock
being purchased pursuant to the exercise of the Company's repurchase option.

     3.   Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a stockholder of the Company while the
stock is held by you.
<PAGE>

     4.   Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's repurchase option has been exercised, you
will deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the Company's repurchase option.
Within 120 days after cessation of Purchaser's continuous employment by or
services to the Company, or any parent or subsidiary of the Company, you will
deliver to Purchaser a certificate or certificates representing the aggregate
number of shares held or issued pursuant to the Agreement and not purchased by
the Company or its assignees pursuant to exercise of the Company's repurchase
option.

     5.   If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.

     6.   Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.

     7.   You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith,
and any act done or omitted by you pursuant to the advice of your own attorneys
shall be conclusive evidence of such good faith.

     8.   You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court. In
case you obey or comply with any such order, judgment or decree, you shall not
be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.

     9.   You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.

     10.  You shall not be liable for the outlawing of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.

     11.  You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.

                                      -2-
<PAGE>

     12.  Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be an officer or agent of the Company or if you shall resign by
written notice to each party. In the event of any such termination, the Company
shall appoint a successor Escrow Agent.

     13.  If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.

     14.  It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.

     15.  Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.

          COMPANY:       Numerical Technologies, Inc.
                         70 West Plumeria Drive
                         San Jose, CA  95134-2134
                         Attention:  Secretary

          PURCHASER:     Atul Sharan
                         21490 Via Avenue
                         Cupertino, CA 95014-4935

          ESCROW AGENT:  Wilson Sonsini Goodrich & Rosati
                         650 Page Mill Road
                         Palo Alto, CA  94304

     16.  By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.

     17.  This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.

                                      -3-
<PAGE>

     18.  These Joint Escrow Instructions shall be governed by the internal
substantive laws, but not the choice of law rules, of California.

                                    NUMERICAL TECHNOLOGIES, INC

                                    /s/ Yagyensh C. Pati
                                    __________________________________
                                    By

                                    President & CEO
                                    __________________________________
                                    Title


                                    PURCHASER

                                    /s/ Atul Sharan
                                    __________________________________
                                    Signature

                                    Atul Sharan
                                    __________________________________
                                    Typed or Printed Name

                                    ESCROW AGENT

                                    WILSON SONSINI GOODRICH & ROSATI

                                    /s/ John V. Roos
                                    ___________________________________

                                    By

                                    Member
                                    ___________________________________
                                    Title

                                      -4-
<PAGE>

                                 EXHIBIT  C-4
                                 ------------

                               CONSENT OF SPOUSE
                               -----------------

     I,  Preeti Sharan, spouse of Atul Sharan, have read and approve the
foregoing Agreement. In consideration of granting of the right to my spouse to
purchase shares of Numerical Technologies,Inc. as set forth in the Agreement, I
hereby appoint my spouse as my attorney-in-fact in respect to the exercise of
any rights under the Agreement and agree to be bound by the provisions of the
Agreement insofar as I may have any rights in said Agreement or any shares
issued pursuant thereto under the community property laws or similar laws
relating to marital property in effect in the state of our residence as of the
date of the signing of the foregoing Agreement.

Dated: October 25, 1999

                                    /s/ Preeti Sharan
                                    ___________________________________
<PAGE>

                                  EXHIBIT C-5
                                  -----------

                         ELECTION UNDER SECTION 83(b)
                         -----------------------------
                     OF THE INTERNAL REVENUE CODE OF 1986
                     ------------------------------------

The undersigned taxpayer hereby elects, pursuant to Sections 55 and 83(b) of the
Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income
or alternative minimum taxable income, as the case may be, for the current
taxable year the amount of any compensation taxable to taxpayer in connection
with taxpayer's receipt of the property described below:

1.   The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:

     NAME:                  TAXPAYER: Atul Sharan         SPOUSE: Preeti Sharan

     ADDRESS: 21490 Via Avenue, Cupertino, CA 95014-4935

     IDENTIFICATION NO.:      TAXPAYER: ###-##-####       SPOUSE: ###-##-####

     TAXABLE YEAR:  1999

2.   The property with respect to which the election is made is described as
follows: 11,500 (the "Shares") of the Common Stock of Numerical Technologies,
Inc. (the "Company").

3.   The date on which the property was transferred is: October 25, 1999

4.   The property is subject to the following restrictions:

     The Shares may not be transferred and are subject to forfeiture under the
terms of an agreement between the taxpayer and the Company.  These restrictions
lapse upon the satisfaction of certain conditions contained in such agreement.

5.   The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never lapse, of
such property is:

     $17,250.00

6.   The amount (if any) paid for such property is:
     $5,750.00

The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property.  The transferee of such property is the person
performing the services in connection with the transfer of said property.

The undersigned understands that the foregoing election may not be revoked
- --------------------------------------------------------------------------
except with the consent of the Commissioner.
- -------------------------------------------

Dated: October 25, 1999                 /s/ Atul Sharan
                                        Taxpayer

The undersigned spouse of taxpayer joins in this election.

Dated: October 25, 1999                 /s/ Preeti Sharan

<PAGE>
                                                                   Exhibit 10.33


                         NUMERICAL TECHNOLOGIES, INC.

       AMENDMENT NO. 1 TO LARS HERLITZ'S STOCK OPTION AGREEMENTS DATED
                    FEBRUARY 3, 1999 AND DECEMBER 27, 1999


     This Agreement is made as of January 24, 2000 by and among Numerical
Technologies, Inc., a California corporation (the "Company"), and Lars Herlitz
("Herlitz").

     WHEREAS, the Company and Herlitz are parties to Stock Option Agreements -
Early Exercise dated February 3, 1999 and December 27, 1999 (individually, an
"Option Agreement" and collectively, the "Option Agreements"), pursuant to which
Herlitz was granted options purchase 115,000 shares and 55,000 shares,
respectively, of the Company's Common Stock.

     WHEREAS, on January 24, 2000, the Board of Directors of the Company
approved amendments to the Option Agreements to (i) provide for payment of the
exercise price by, among other methods, promissory note and (ii) add a section
entitled "Change of Control; Constructive Termination", which shall provide for
accelerated vesting in the event of a change of control of the Company or in
connection with "involuntary termination" of employment of such individuals
following a change of control.

     NOW, THEREFORE, in consideration of the foregoing, the parties agree as
follows:


                                   AGREEMENT

     1.  Amendment to Option Agreements.  The following paragraphs are hereby
         ------------------------------
inserted into Part I of each Option Agreement, between the paragraphs entitled
"Exercise and Vesting Schedule" and "Termination Period".

     "Change of Control; Constructive Termination:
      -------------------------------------------

     Notwithstanding the provisions of Section 12(c) of the Plan, if the Company
merges with or into another entity, sells all or substantially all of its
assets, or enters into any other similar transaction or reorganization
(including without limitation, a sale of stock of the Company) as a result of
which the shareholders of the Company immediately prior to such transaction will
not hold at least 50% of the voting power of the surviving, purchasing or
continuing entity, as applicable (taking into account any securities issued to
the shareholders of the Company in the transaction) (a "Change of Control
Transaction"), then on the six month anniversary of the Change of Control
Transaction (the "Anniversary Date") fifty percent (50%) of the Shares subject
to the Option which have not vested as of the Anniversary Date shall become
fully vested and exercisable. The Board shall notify the Optionee at least
fifteen (15) days prior to the closing of a Change of Control Transaction, and
such notification shall include a statement as to whether or not the Option will
be assumed by the surviving or purchasing entity or whether an equivalent
substitute option will be provided by such entity.

     Following an assumption or substitution of the Option in connection with a
Change of Control Transaction, if the Optionee's status as an Employee of the
successor corporation is terminated by the successor corporation as a result of
an Involuntary Termination (as defined below) within twelve months
<PAGE>

following the Change of Control Transaction, the Optionee shall fully vest in
and have the right to exercise the Option as to all of the Shares, including
Shares as to which the Option would not otherwise be vested or exercisable.

     Any of the following events shall constitute an "Involuntary Termination":
(i) without the Optionee's express written consent, a significant reduction of
the Optionee's duties, authority and responsibilities, relative to the
Optionee's duties, authority and responsibilities as in effect immediately prior
to the Change of Control Transaction; (ii) a material reduction in the base
salary of the Optionee as in effect immediately prior to the Change of Control
Transaction; (iii) a material reduction in the kind or level of employee
benefits, including bonuses, to which the Optionee was entitled immediately
prior to the Change of Control Transaction with the result that the Optionee's
overall benefits package is significantly reduced; (iv) the relocation of the
Optionee to a facility or a location more than sixty (60) miles from the
Optionee's then present location, without the Optionee's express written
consent; (v) any purported termination of the Optionee which is not effected for
Disability or for Cause (as defined below), or any purported termination for
which the grounds relied upon are not valid; (vi) or any act or set of facts or
circumstances which would, under California case law or statute, constitute a
constructive termination of the Optionee.

     "Cause" shall mean (i) any act of personal dishonesty taken by the Optionee
in connection with his responsibilities as a Service Provider and intended to
result in substantial personal enrichment of the Optionee, (ii) Optionee's
conviction of a felony, (iii) a willful act by the Optionee which constitutes
gross misconduct and which is injurious to the Successor Corporation, and (iv)
following delivery to the Optionee of a written demand for performance from the
Successor Corporation which describes the basis for the Successor Corporation's
belief that the Optionee has not substantially performed his duties, continued
violations by the Optionee of the Optionee's obligations to the Successor
Corporation which are demonstrably willful and deliberate on the Optionee's
part."

     2.   Amendment to Option Agreement re Payment by Note.  The following
          ------------------------------------------------
subparagraph (e) is hereby added to Section 5 of each Option Agreement.

          "(e)  with the Administrator's consent, delivery of Optionee's
promissory note (the "Note") in the form attached hereto as Exhibit D, in the
amount of the aggregate Exercise Price of the Exercised Shares together with the
execution and delivery by the Optionee of the Security Agreement attached hereto
as Exhibit E. The Note shall bear interest at the "applicable federal rate"
prescribed under the Code and its regulations at time of purchase, and shall be
secured by a pledge of the Shares purchased by the Note pursuant to the Security
Agreement."

     3.   Amendment to Option Agreement re Form of Note and Form of Security
          ------------------------------------------------------------------
Agreement.  The form of Note attached hereto as Attachment 1 and the form of
- ---------
Security Agreement attached hereto as Attachment 2 are hereby added to each of
the Option Agreements as Exhibit D and Exhibit E, respectively.

     4.   Miscellaneous.
          -------------

          4.1. Governing Law. This Agreement shall be governed in all respects
               -------------
by the internal laws of the State of California.

                                      -2-
<PAGE>

          4.2.  Successors and Assigns. Except as otherwise provided herein, the
                ----------------------
provisions hereof shall inure to the benefit of and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.

          4.3.  Amendment.  Neither this Agreement nor any term hereof may be
                ---------
amended, waived, discharged or terminated other than by written instrument
signed by the party against whom enforcement of such amendment, waiver,
discharge or termination is sought.

          4.4.  Counterparts.  This Agreement may be executed in any number of
                ------------
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.

     The foregoing Agreement is hereby executed as of the date first written
above.


                                             "COMPANY"

                                             NUMERICAL TECHNOLOGIES, INC.


                                             By: /s/ Yagyenshu C. Pati
                                                --------------------------------

                                             Title: President & CEO
                                                   -----------------------------

                                             "HERLITZ"

                                             /s/ Lars Herlitz
                                             ___________________________________
                                             Lars Herlitz

                                      -3-
<PAGE>

                                 ATTACHMENT 1
                                 ------------


                                   EXHIBIT D

                                     NOTE


$____________                                               San Jose, California

____________, 20___


     FOR VALUE RECEIVED, _____________________ promises to pay to Numerical
Technologies, Inc., a California corporation (the "Company"), or order, the
principal sum of ____________________________________ ($_________), together
with interest on the unpaid principal hereof from the date hereof at the rate of
____% per annum, compounded annually.

     Principal and interest shall be due and payable on ______________, 20___.
Payment of principal and interest shall be made in lawful money of the United
States of America.

     The undersigned may at any time prepay all or any portion of the principal
or interest owing hereunder.

     This Note is subject to the terms of the Option, dated as of ________,
1999. This Note is secured in part by a pledge of the Company's Common Stock
under the terms of a Security Agreement of even date herewith and is subject to
all the provisions thereof.

     The holder of this Note shall have full recourse against the undersigned,
and shall not be required to proceed against the collateral securing this Note
in the event of default.

     In the event the undersigned shall cease to be an employee, director or
consultant of the Company for any reason, this Note shall, at the option of the
Company, be accelerated, and the whole unpaid balance on this Note of principal
and accrued interest shall be immediately due and payable.

     Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by the
undersigned.


                                              _________________________________
<PAGE>

                                  ATTACHMENT 2
                                  ------------


                                   EXHIBIT E

                               SECURITY AGREEMENT


     This Security Agreement is made as of ____________, 20___ between Numerical
Technologies, Inc., a California corporation ("Pledgee"), and _________________
("Pledgor").


                                   Recitals
                                   --------

     Pursuant to Pledgor's election to purchase Shares under the Option
Agreement dated _____________, 1999 (the "Option"), between Pledgor and Pledgee
under Pledgee's 1997 Stock Plan, and Pledgor's election under the terms of the
Option to pay for such shares with his promissory note (the "Note"), Pledgor has
purchased _________ shares of Pledgee's Common Stock (the "Shares") at a price
of $_____ per share, for a total purchase price of $__________. The Note and the
obligations thereunder are as set forth in Exhibit D to the Option.

     NOW, THEREFORE, it is agreed as follows:

     A.   Creation and Description of Security Interest.  In consideration
          ---------------------------------------------
of the transfer of the Shares to Pledgor under the Option Agreement, Pledgor,
pursuant to the California Commercial Code, hereby pledges all of such Shares
(herein sometimes referred to as the "Collateral") represented by certificate
number ______, duly endorsed in blank or with executed stock powers, and
herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"),
who shall hold said certificate subject to the terms and conditions of this
Security Agreement.

     The pledged stock (together with an executed blank stock assignment for use
in transferring all or a portion of the Shares to Pledgee if, as and when
required pursuant to this Security Agreement) shall be held by the Pledgeholder
as security for the repayment of the Note, and any extensions or renewals
thereof, to be executed by Pledgor pursuant to the terms of the Option, and the
Pledgeholder shall not encumber or dispose of such Shares except in accordance
with the provisions of this Security Agreement.

     B.   Pledgor's Representations and Covenants.  To induce Pledgee to enter
          ---------------------------------------
into this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:

          (A)  Payment of Indebtedness.  Pledgor will pay the principal sum of
               -----------------------
the Note secured hereby, together with interest thereon, at the time and in the
manner provided in the Note.

          (B)  Encumbrances.  The Shares are free of all other encumbrances,
               ------------
defenses and liens, and Pledgor will not further encumber the Shares without the
prior written consent of Pledgee.
<PAGE>

          (C)  Margin Regulations.  In the event that Pledgee's Common Stock is
               ------------------
now or later becomes margin-listed by the Federal Reserve Board and Pledgee is
classified as a "lender" within the meaning of the regulations under Part 207 of
Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees to
cooperate with Pledgee in making any amendments to the Note or providing any
additional collateral as may be necessary to comply with such regulations.

     C.   Voting Rights.  During the term of this pledge and so long as all
          -------------
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.

     D.   Stock Adjustments.  In the event that during the term of the pledge
          -----------------
any stock dividend, reclassification, readjustment or other changes are declared
or made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgee under the terms of this Security Agreement
in the same manner as the Shares originally pledged hereunder. In the event of
substitution of such securities, Pledgor, Pledgee and Pledgeholder shall
cooperate and execute such documents as are reasonable so as to provide for the
substitution of such Collateral and, upon such substitution, references to
"Shares" in this Security Agreement shall include the substituted shares of
capital stock of Pledgor as a result thereof.

     E.   Options and Rights.  In the event that, during the term of this
          ------------------
pledge, subscription Options or other rights or options shall be issued in
connection with the pledged Shares, such rights, Options and options shall be
the property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Shares then held
by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.

     F.   Default.  Pledgor shall be deemed to be in default of the Note and of
          -------
this Security Agreement in the event:

          (A)  Payment of principal or interest on the Note shall be delinquent
for a period of 10 days or more; or

          (B)  Pledgor fails to perform any of the covenants set forth in the
Option or contained in this Security Agreement for a period of 10 days after
written notice thereof from Pledgee.

     In the case of an event of Default, as set forth above, Pledgee shall have
the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee
shall thereafter be entitled to pursue its remedies under the California
Commercial Code.

     G.   Release of Collateral.  Subject to any applicable contrary rules under
          ---------------------
Regulation G, there shall be released from this pledge a portion of the pledged
Shares held by Pledgeholder hereunder upon payments of the principal of the
Note. The number of the pledged Shares which shall be released shall be that
number of full Shares which bears the same proportion to the initial number of
Shares pledged hereunder as the payment of principal bears to the initial full
principal amount of the Note.

     H.   Withdrawal or Substitution of Collateral.  Pledgor shall not sell,
          ----------------------------------------
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.

                                      -2-
<PAGE>

     I.   Term.  The within pledge of Shares shall continue until the payment
          ----
of all indebtedness secured hereby, at which time the remaining pledged stock
shall be promptly delivered to Pledgor, subject to the provisions for prior
release of a portion of the Collateral as provided in paragraph 7 above.

     J.   Insolvency.  Pledgor agrees that if a bankruptcy or insolvency
          ----------
proceeding is instituted by or against it, or if a receiver is appointed for the
property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall become immediately due and
payable, and Pledgee may proceed as provided in the case of default.

     K.   Pledgeholder Liability.  In the absence of willful or gross
          ----------------------
negligence, Pledgeholder shall not be liable to any party for any of his acts,
or omissions to act, as Pledgeholder.

     L.   Invalidity of Particular Provisions.  Pledgor and Pledgee agree that
          -----------------------------------
the enforceability or invalidity of any provision or provisions of this Security
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.

     M.   Successors or Assigns.  Pledgor and Pledgee agree that all of the
          ---------------------
terms of this Security Agreement shall be binding on their respective successors
and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein
shall be deemed to include, for all purposes, the respective designees,
successors, assigns, heirs, executors and administrators.

     N.   Governing Law.  This Security Agreement shall be interpreted and
          -------------
governed under the internal substantive laws, but not the choice of law rules,
of California.

                                      -3-
<PAGE>

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


     "PLEDGOR"
                               ________________________________________
                               Signature

                               ________________________________________
                               Print Name

                               Address:
                                         _______________________________________

                                         _______________________________________


     "PLEDGEE"                 NUMERICAL TECHNOLOGIES, INC. a California
                               corporation

                               ________________________________________
                               Signature

                               ________________________________________
                               Print Name

                               ________________________________________
                               Title

     "PLEDGEHOLDER"
                               ________________________________________
                               Secretary of Numerical Technologies, Inc.

                                      -4-

<PAGE>
                                                                  Exhibit 10.34

                         NUMERICAL TECHNOLOGIES, INC.

AMENDMENT NO. 1 TO ATUL SHARAN'S STOCK OPTION AGREEMENTS DATED OCTOBER 23, 1998,
                     MARCH 31, 1999 AND DECEMBER 27, 1999


     This Agreement is made as of January 24, 2000 by and among Numerical
Technologies, Inc., a California corporation (the "Company"), and Atul Sharan
("Sharan").

     WHEREAS, the Company and Sharan are parties to Stock Option Agreements -
Early Exercise dated October 23, 1998, March 31, 1999 and December 27, 1999
(individually, an "Option Agreement" and collectively, the "Option Agreements"),
pursuant to which Sharan was granted options purchase 90,000 shares, 60,000 and
125,000 shares, respectively, of the Company's Common Stock.

     WHEREAS, on January 24, 2000, the Board of Directors of the Company
approved amendments to the Option Agreements to (i) provide for payment of the
exercise price by, among other methods, promissory note and (ii) add a section
entitled "Change of Control; Constructive Termination", which shall provide for
accelerated vesting in the event of a change of control of the Company or in
connection with "involuntary termination" of employment of such individuals
following a change of control.

     NOW, THEREFORE, in consideration of the foregoing, the parties agree as
follows:


                                   AGREEMENT

     1.   Amendment to Option Agreements.  The following paragraphs are hereby
          ------------------------------
inserted into Part I of each Option Agreement, between the paragraphs entitled
"Exercise and Vesting Schedule" and  "Termination Period".

     "Change of Control; Constructive Termination:
      -------------------------------------------

     Notwithstanding the provisions of Section 12(c) of the Plan, if the Company
merges with or into another entity, sells all or substantially all of its
assets, or enters into any other similar transaction or reorganization
(including without limitation, a sale of stock of the Company) as a result of
which the shareholders of the Company immediately prior to such transaction will
not hold at least 50% of the voting power of the surviving, purchasing or
continuing entity, as applicable (taking into account any securities issued to
the shareholders of the Company in the transaction) (a "Change of Control
Transaction"), then on the six month anniversary of the Change of Control
Transaction (the "Anniversary Date") fifty percent (50%) of the Shares subject
to the Option which have not vested as of the Anniversary Date shall become
fully vested and exercisable.  The Board shall notify the Optionee at least
fifteen (15) days prior to the closing of a Change of Control Transaction, and
such notification shall include a statement as to whether or not the Option will
be assumed by the surviving or purchasing entity or whether an equivalent
substitute option will be provided by such entity.

     Following an assumption or substitution of the Option in connection with a
Change of Control Transaction, if the Optionee's status as an Employee of the
successor corporation is terminated by the successor corporation as a result of
an Involuntary Termination (as defined below) within twelve months
<PAGE>

following the Change of Control Transaction, the Optionee shall fully vest in
and have the right to exercise the Option as to all of the Shares, including
Shares as to which the Option would not otherwise be vested or exercisable.

     Any of the following events shall constitute an "Involuntary Termination":
(i) without the Optionee's express written consent, a significant reduction of
the Optionee's duties, authority and responsibilities, relative to the
Optionee's duties, authority and responsibilities as in effect immediately prior
to the Change of Control Transaction; (ii) a material reduction in the base
salary of the Optionee as in effect immediately prior to the Change of Control
Transaction; (iii) a material reduction in the kind or level of employee
benefits, including bonuses, to which the Optionee was entitled immediately
prior to the Change of Control Transaction with the result that the Optionee's
overall benefits package is significantly reduced; (iv) the relocation of the
Optionee to a facility or a location more than sixty (60) miles from the
Optionee's then present location, without the Optionee's express written
consent; (v) any purported termination of the Optionee which is not effected for
Disability or for Cause (as defined below), or any purported termination for
which the grounds relied upon are not valid; (vi) or any act or set of facts or
circumstances which would, under California case law or statute, constitute a
constructive termination of the Optionee.

     "Cause" shall mean (i) any act of personal dishonesty taken by the Optionee
in connection with his responsibilities as a Service Provider and intended to
result in substantial personal enrichment of the Optionee, (ii) Optionee's
conviction of a felony, (iii) a willful act by the Optionee which constitutes
gross misconduct and which is injurious to the Successor Corporation, and (iv)
following delivery to the Optionee of a written demand for performance from the
Successor Corporation which describes the basis for the Successor Corporation's
belief that the Optionee has not substantially performed his duties, continued
violations by the Optionee of the Optionee's obligations to the Successor
Corporation which are demonstrably willful and deliberate on the Optionee's
part."

     2.   Amendment to Option Agreement re Payment by Note.  The following
          ------------------------------------------------
subparagraph (e) is hereby added to Section 5 of each Option Agreement.

          "(e)  with the Administrator's consent, delivery of Optionee's
promissory note (the "Note") in the form attached hereto as Exhibit D, in the
amount of the aggregate Exercise Price of the Exercised Shares together with the
execution and delivery by the Optionee of the Security Agreement attached hereto
as Exhibit E. The Note shall bear interest at the "applicable federal rate"
prescribed under the Code and its regulations at time of purchase, and shall be
secured by a pledge of the Shares purchased by the Note pursuant to the Security
Agreement."

     3.   Amendment to Option Agreement re Form of Note and Form of Security
          ------------------------------------------------------------------
Agreement.  The form of Note attached hereto as Attachment 1 and the form of
- ---------
Security Agreement attached hereto as Attachment 2 are hereby added to each of
the Option Agreements as Exhibit D and Exhibit E, respectively.

     4.   Miscellaneous.
          -------------

          4.1.  Governing Law.  This Agreement shall be governed in all
                -------------
respects by the internal laws of the State of California.

                                      -2-
<PAGE>

          4.2. Successors and Assigns.  Except as otherwise provided herein, the
               ----------------------
provisions hereof shall inure to the benefit of and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.

          4.3. Amendment.  Neither this Agreement nor any term hereof may be
               ---------
amended, waived, discharged or terminated other than by written instrument
signed by the party against whom enforcement of such amendment, waiver,
discharge or termination is sought.

          4.4. Counterparts.  This Agreement may be executed in any number of
               ------------
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.

     The foregoing Agreement is hereby executed as of the date first written
above.


                                             "COMPANY"

                                             NUMERICAL TECHNOLOGIES, INC.


                                             By: /s/ Yagyensh C. Pati
                                                 _______________________________

                                             Title: President & CEO
                                                    ____________________________


                                             "SHARAN"

                                             /s/ Atul Sharan
                                             __________________________________
                                             Atul Sharan

                                      -3-
<PAGE>

                                 ATTACHMENT 1
                                 ------------


                                   EXHIBIT D

                                     NOTE


$____________                                               San Jose, California

____________, 20___


          FOR VALUE RECEIVED, _____________________ promises to pay to Numerical
Technologies, Inc., a California corporation (the "Company"), or order, the
principal sum of ____________________________________ ($_________), together
with interest on the unpaid principal hereof from the date hereof at the rate of
____% per annum, compounded annually.

          Principal and interest shall be due and payable on ______________,
20___.  Payment of principal and interest shall be made in lawful money of the
United States of America.

          The undersigned may at any time prepay all or any portion of the
principal or interest owing hereunder.

          This Note is subject to the terms of the Option, dated as of
______________, 1999.  This Note is secured in part by a pledge of the Company's
Common Stock under the terms of a Security Agreement of even date herewith and
is subject to all the provisions thereof.

          The holder of this Note shall have full recourse against the
undersigned, and shall not be required to proceed against the collateral
securing this Note in the event of default.

          In the event the undersigned shall cease to be an employee, director
or consultant of the Company for any reason, this Note shall, at the option of
the Company, be accelerated, and the whole unpaid balance on this Note of
principal and accrued interest shall be immediately due and payable.

          Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by the
undersigned.


                                            ____________________________________
<PAGE>

                                 ATTACHMENT 2
                                 ------------


                                   EXHIBIT E

                              SECURITY AGREEMENT


          This Security Agreement is made as of ____________, 20___ between
Numerical Technologies, Inc., a California corporation ("Pledgee"), and
_________________ ("Pledgor").


                                   Recitals
                                   --------

          Pursuant to Pledgor's election to purchase Shares under the Option
Agreement dated _____________, 1999 (the "Option"), between Pledgor and Pledgee
under Pledgee's 1997 Stock Plan, and Pledgor's election under the terms of the
Option to pay for such shares with his promissory note (the "Note"), Pledgor has
purchased _________ shares of Pledgee's Common Stock (the "Shares") at a price
of $_____  per share, for a total purchase price of $__________.  The Note and
the obligations thereunder are as set forth in Exhibit D to the Option.

          NOW, THEREFORE, it is agreed as follows:

          A.  Creation and Description of Security Interest.  In consideration
              ---------------------------------------------
of the transfer of the Shares to Pledgor under the Option Agreement, Pledgor,
pursuant to the California Commercial Code, hereby pledges all of such Shares
(herein sometimes referred to as the "Collateral") represented by certificate
number ______, duly endorsed in blank or with executed stock powers, and
herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"),
who shall hold said certificate subject to the terms and conditions of this
Security Agreement.

          The pledged stock (together with an executed blank stock assignment
for use in transferring all or a portion of the Shares to Pledgee if, as and
when required pursuant to this Security Agreement) shall be held by the
Pledgeholder as security for the repayment of the Note, and any extensions or
renewals thereof, to be executed by Pledgor pursuant to the terms of the Option,
and the Pledgeholder shall not encumber or dispose of such Shares except in
accordance with the provisions of this Security Agreement.

          B.  Pledgor's Representations and Covenants.  To induce Pledgee to
              ---------------------------------------
enter into this Security Agreement, Pledgor represents and covenants to Pledgee,
its successors and assigns, as follows:

              (A) Payment of Indebtedness.  Pledgor will pay the principal sum
                  -----------------------
of the Note secured hereby, together with interest thereon, at the time and in
the manner provided in the Note.

              (B) Encumbrances.  The Shares are free of all other encumbrances,
              ------------
defenses and liens, and Pledgor will not further encumber the Shares without the
prior written consent of Pledgee.
<PAGE>

              (C) Margin Regulations.  In the event that Pledgee's Common
                  ------------------
Stock is now or later becomes margin-listed by the Federal Reserve Board and
Pledgee is classified as a "lender" within the meaning of the regulations under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G"),
Pledgor agrees to cooperate with Pledgee in making any amendments to the Note or
providing any additional collateral as may be necessary to comply with such
regulations.

          C.  Voting Rights.  During the term of this pledge and so long as all
              -------------
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.

          D.  Stock Adjustments.  In the event that during the term of the
              -----------------
pledge any stock dividend, reclassification, readjustment or other changes are
declared or made in the capital structure of Pledgee, all new, substituted and
additional shares or other securities issued by reason of any such change shall
be delivered to and held by the Pledgee under the terms of this Security
Agreement in the same manner as the Shares originally pledged hereunder.  In the
event of substitution of such securities, Pledgor, Pledgee and Pledgeholder
shall cooperate and execute such documents as are reasonable so as to provide
for the substitution of such Collateral and, upon such substitution, references
to "Shares" in this Security Agreement shall include the substituted shares of
capital stock of Pledgor as a result thereof.

          E.  Options and Rights.  In the event that, during the term of this
              ------------------
pledge, subscription Options or other rights or options shall be issued in
connection with the pledged Shares, such rights, Options and options shall be
the property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Shares then held
by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.

          F.  Default.  Pledgor shall be deemed to be in default of the Note and
              -------
of this Security Agreement in the event:

              (A) Payment of principal or interest on the Note shall be
delinquent for a period of 10 days or more; or

              (B) Pledgor fails to perform any of the covenants set forth in the
Option or contained in this Security Agreement for a period of 10 days after
written notice thereof from Pledgee.

          In the case of an event of Default, as set forth above, Pledgee shall
have the right to accelerate payment of the Note upon notice to Pledgor, and
Pledgee shall thereafter be entitled to pursue its remedies under the California
Commercial Code.

          G.  Release of Collateral.  Subject to any applicable contrary rules
              ---------------------
under Regulation G, there shall be released from this pledge a portion of the
pledged Shares held by Pledgeholder hereunder upon payments of the principal of
the Note.  The number of the pledged Shares which shall be released shall be
that number of full Shares which bears the same proportion to the initial number
of Shares pledged hereunder as the payment of principal bears to the initial
full principal amount of the Note.

          H.  Withdrawal or Substitution of Collateral.  Pledgor shall not sell,
              ----------------------------------------
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.

                                      -2-
<PAGE>

          I.  Term.  The within pledge of Shares shall continue until the
              ----
payment of all indebtedness secured hereby, at which time the remaining pledged
stock shall be promptly delivered to Pledgor, subject to the provisions for
prior release of a portion of the Collateral as provided in paragraph 7 above.

          J.  Insolvency.  Pledgor agrees that if a bankruptcy or insolvency
              ----------
proceeding is instituted by or against it, or if a receiver is appointed for the
property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall become immediately due and
payable, and Pledgee may proceed as provided in the case of default.

          K.  Pledgeholder Liability.  In the absence of willful or gross
              ----------------------
negligence, Pledgeholder shall not be liable to any party for any of his acts,
or omissions to act, as Pledgeholder.

          L.  Invalidity of Particular Provisions.  Pledgor and Pledgee agree
              -----------------------------------
that the enforceability or invalidity of any provision or provisions of this
Security Agreement shall not render any other provision or provisions herein
contained unenforceable or invalid.

          M.  Successors or Assigns.  Pledgor and Pledgee agree that all of the
              ---------------------
terms of this Security Agreement shall be binding on their respective successors
and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein
shall be deemed to include, for all purposes, the respective designees,
successors, assigns, heirs, executors and administrators.

          N.  Governing Law.  This Security Agreement shall be interpreted and
              -------------
governed under the internal substantive laws, but not the choice of law rules,
of California.

                                      -3-
<PAGE>

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


          "PLEDGOR"                     _________________________________
                                        Signature

                                        _________________________________
                                        Print Name

                                        Address:  ___________________________

                                                  ___________________________

          "PLEDGEE"                     NUMERICAL TECHNOLOGIES, INC.
                                        a California corporation

                                        ________________________________
                                        Signature

                                        ________________________________
                                        Print Name

                                        ________________________________
                                        Title

          "PLEDGEHOLDER"                ________________________________
                                        Secretary of Numerical Technologies,
                                         Inc.

                                      -4-

<PAGE>
                                                                  Exhibit 10.35
                         NUMERICAL TECHNOLOGIES, INC.

        AMENDMENT NO. 1 TO JOHN TRAUB'S STOCK OPTION AGREEMENTS DATED
                    NOVEMBER 17, 1999 AND DECEMBER 27, 1999


     This Agreement is made as of January 24, 2000 by and among Numerical
Technologies, Inc., a California corporation (the "Company"), and John Traub
("Traub").

     WHEREAS, the Company and Traub are parties to Stock Option Agreements -
Early Exercise dated November 17, 1999 and December 27, 1999 (individually, an
"Option Agreement" and collectively, the "Option Agreements"), pursuant to which
Traub was granted options purchase 100,000 shares and 55,000 shares,
respectively, of the Company's Common Stock.

     WHEREAS, on January 24, 2000, the Board of Directors of the Company
approved amendments to the Option Agreements to (i) provide for payment of the
exercise price by, among other methods, promissory note and (ii) add a section
entitled "Change of Control; Constructive Termination", which shall provide for
accelerated vesting in the event of a change of control of the Company or in
connection with "involuntary termination" of employment of such individuals
following a change of control.

     NOW, THEREFORE, in consideration of the foregoing, the parties agree as
follows:


                                   AGREEMENT

     1.  Amendment to Option Agreements.  The following paragraphs are hereby
         ------------------------------
inserted into Part I of each Option Agreement, between the paragraphs entitled
"Exercise and Vesting Schedule" and  "Termination Period".

     "Change of Control; Constructive Termination:
      -------------------------------------------

     Notwithstanding the provisions of Section 12(c) of the Plan, if the Company
merges with or into another entity, sells all or substantially all of its
assets, or enters into any other similar transaction or reorganization
(including without limitation, a sale of stock of the Company) as a result of
which the shareholders of the Company immediately prior to such transaction will
not hold at least 50% of the voting power of the surviving, purchasing or
continuing entity, as applicable (taking into account any securities issued to
the shareholders of the Company in the transaction) (a "Change of Control
Transaction"), then on the six month anniversary of the Change of Control
Transaction (the "Anniversary Date") fifty percent (50%) of the Shares subject
to the Option which have not vested as of the Anniversary Date shall become
fully vested and exercisable. The Board shall notify the Optionee at least
fifteen (15) days prior to the closing of a Change of Control Transaction, and
such notification shall include a statement as to whether or not the Option will
be assumed by the surviving or purchasing entity or whether an equivalent
substitute option will be provided by such entity.

     Following an assumption or substitution of the Option in connection with a
Change of Control Transaction, if the Optionee's status as an Employee of the
successor corporation is terminated by the successor corporation as a result of
an Involuntary Termination (as defined below) within twelve months
<PAGE>

following the Change of Control Transaction, the Optionee shall fully vest in
and have the right to exercise the Option as to all of the Shares, including
Shares as to which the Option would not otherwise be vested or exercisable.

     Any of the following events shall constitute an "Involuntary Termination":
(i) without the Optionee's express written consent, a significant reduction of
the Optionee's duties, authority and responsibilities, relative to the
Optionee's duties, authority and responsibilities as in effect immediately prior
to the Change of Control Transaction; (ii) a material reduction in the base
salary of the Optionee as in effect immediately prior to the Change of Control
Transaction; (iii) a material reduction in the kind or level of employee
benefits, including bonuses, to which the Optionee was entitled immediately
prior to the Change of Control Transaction with the result that the Optionee's
overall benefits package is significantly reduced; (iv) the relocation of the
Optionee to a facility or a location more than sixty (60) miles from the
Optionee's then present location, without the Optionee's express written
consent; (v) any purported termination of the Optionee which is not effected for
Disability or for Cause (as defined below), or any purported termination for
which the grounds relied upon are not valid; (vi) or any act or set of facts or
circumstances which would, under California case law or statute, constitute a
constructive termination of the Optionee.

     "Cause" shall mean (i) any act of personal dishonesty taken by the Optionee
in connection with his responsibilities as a Service Provider and intended to
result in substantial personal enrichment of the Optionee, (ii) Optionee's
conviction of a felony, (iii) a willful act by the Optionee which constitutes
gross misconduct and which is injurious to the Successor Corporation, and (iv)
following delivery to the Optionee of a written demand for performance from the
Successor Corporation which describes the basis for the Successor Corporation's
belief that the Optionee has not substantially performed his duties, continued
violations by the Optionee of the Optionee's obligations to the Successor
Corporation which are demonstrably willful and deliberate on the Optionee's
part."

     2.   Amendment to Option Agreement re Payment by Note.  The following
          ------------------------------------------------
subparagraph (e) is hereby added to Section 5 of each Option Agreement.

          "(e)  with the Administrator's consent, delivery of Optionee's
promissory note (the "Note") in the form attached hereto as Exhibit D, in the
amount of the aggregate Exercise Price of the Exercised Shares together with the
execution and delivery by the Optionee of the Security Agreement attached hereto
as Exhibit E. The Note shall bear interest at the "applicable federal rate"
prescribed under the Code and its regulations at time of purchase, and shall be
secured by a pledge of the Shares purchased by the Note pursuant to the Security
Agreement."

     3.   Amendment to Option Agreement re Form of Note and Form of Security
          ------------------------------------------------------------------
Agreement.  The form of Note attached hereto as Attachment 1 and the form of
- ---------
Security Agreement attached hereto as Attachment 2 are hereby added to each of
the Option Agreements as Exhibit D and Exhibit E, respectively.

     4.   Miscellaneous.
          -------------

          4.1. Governing Law. This Agreement shall be governed in all respects
               -------------
by the internal laws of the State of California.

                                      -2-
<PAGE>

          4.2. Successors and Assigns. Except as otherwise provided herein, the
               ----------------------
provisions hereof shall inure to the benefit of and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.

          4.3. Amendment.  Neither this Agreement nor any term hereof may be
               ---------
amended, waived, discharged or terminated other than by written instrument
signed by the party against whom enforcement of such amendment, waiver,
discharge or termination is sought.

          4.4. Counterparts.  This Agreement may be executed in any number of
               ------------
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.

     The foregoing Agreement is hereby executed as of the date first written
above.

                                    "COMPANY"

                                    NUMERICAL TECHNOLOGIES, INC.


                                    By: /s/ Yagyensh C. Pati
                                       ----------------------------------------

                                    Title: President & CEO
                                          -------------------------------------


                                    "TRAUB"

                                    /s/ John Traub
                                    ___________________________________________
                                    John Traub

                                      -3-
<PAGE>

                                  ATTACHMENT 1
                                  ------------


                                   EXHIBIT D

                                     NOTE


$____________                                               San Jose, California

____________, 20___


     FOR VALUE RECEIVED, _____________________ promises to pay to Numerical
Technologies, Inc., a California corporation (the "Company"), or order, the
principal sum of ____________________________________ ($_________), together
with interest on the unpaid principal hereof from the date hereof at the rate of
____% per annum, compounded annually.

     Principal and interest shall be due and payable on ______________, 20___.
Payment of principal and interest shall be made in lawful money of the United
States of America.

     The undersigned may at any time prepay all or any portion of the principal
or interest owing hereunder.

     This Note is subject to the terms of the Option, dated as of _____________,
1999. This Note is secured in part by a pledge of the Company's Common Stock
under the terms of a Security Agreement of even date herewith and is subject to
all the provisions thereof.

     The holder of this Note shall have full recourse against the undersigned,
and shall not be required to proceed against the collateral securing this Note
in the event of default.

     In the event the undersigned shall cease to be an employee, director or
consultant of the Company for any reason, this Note shall, at the option of the
Company, be accelerated, and the whole unpaid balance on this Note of principal
and accrued interest shall be immediately due and payable.

     Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by the
undersigned.


                                          ____________________________________
<PAGE>

                                 ATTACHMENT 2
                                 ------------


                                   EXHIBIT E

                              SECURITY AGREEMENT


     This Security Agreement is made as of ____________, 20___ between Numerical
Technologies, Inc., a California corporation ("Pledgee"), and _________________
("Pledgor").


                                   Recitals
                                   --------

     Pursuant to Pledgor's election to purchase Shares under the Option
Agreement dated _____________, 1999 (the "Option"), between Pledgor and Pledgee
under Pledgee's 1997 Stock Plan, and Pledgor's election under the terms of the
Option to pay for such shares with his promissory note (the "Note"), Pledgor has
purchased _________ shares of Pledgee's Common Stock (the "Shares") at a price
of $_____ per share, for a total purchase price of $__________. The Note and the
obligations thereunder are as set forth in Exhibit D to the Option.

     NOW, THEREFORE, it is agreed as follows:

     A.  Creation and Description of Security Interest.  In consideration of the
         ---------------------------------------------
transfer of the Shares to Pledgor under the Option Agreement, Pledgor, pursuant
to the California Commercial Code, hereby pledges all of such Shares (herein
sometimes referred to as the "Collateral") represented by certificate number
______, duly endorsed in blank or with executed stock powers, and herewith
delivers said certificate to the Secretary of Pledgee ("Pledgeholder"), who
shall hold said certificate subject to the terms and conditions of this Security
Agreement.

     The pledged stock (together with an executed blank stock assignment for use
in transferring all or a portion of the Shares to Pledgee if, as and when
required pursuant to this Security Agreement) shall be held by the Pledgeholder
as security for the repayment of the Note, and any extensions or renewals
thereof, to be executed by Pledgor pursuant to the terms of the Option, and the
Pledgeholder shall not encumber or dispose of such Shares except in accordance
with the provisions of this Security Agreement.

     B.  Pledgor's Representations and Covenants.  To induce Pledgee to enter
         ---------------------------------------
into this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:

         (A)  Payment of Indebtedness.  Pledgor will pay the principal sum of
              -----------------------
the Note secured hereby, together with interest thereon, at the time and in the
manner provided in the Note.

         (B)  Encumbrances.  The Shares are free of all other encumbrances,
              ------------
defenses and liens, and Pledgor will not further encumber the Shares without the
prior written consent of Pledgee.
<PAGE>

          (C)  Margin Regulations.  In the event that Pledgee's Common Stock is
               ------------------
now or later becomes margin-listed by the Federal Reserve Board and Pledgee is
classified as a "lender" within the meaning of the regulations under Part 207 of
Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees to
cooperate with Pledgee in making any amendments to the Note or providing any
additional collateral as may be necessary to comply with such regulations.

     C.   Voting Rights.  During the term of this pledge and so long as all
          -------------
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.

     D.   Stock Adjustments.  In the event that during the term of the pledge
          -----------------
any stock dividend, reclassification, readjustment or other changes are declared
or made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgee under the terms of this Security Agreement
in the same manner as the Shares originally pledged hereunder. In the event of
substitution of such securities, Pledgor, Pledgee and Pledgeholder shall
cooperate and execute such documents as are reasonable so as to provide for the
substitution of such Collateral and, upon such substitution, references to
"Shares" in this Security Agreement shall include the substituted shares of
capital stock of Pledgor as a result thereof.

     E.   Options and Rights.  In the event that, during the term of this
          ------------------
pledge, subscription Options or other rights or options shall be issued in
connection with the pledged Shares, such rights, Options and options shall be
the property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Shares then held
by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.

     F.   Default. Pledgor shall be deemed to be in default of the Note and of
          -------
this Security Agreement in the event:

          (A)  Payment of principal or interest on the Note shall be delinquent
for a period of 10 days or more; or

          (B)  Pledgor fails to perform any of the covenants set forth in the
Option or contained in this Security Agreement for a period of 10 days after
written notice thereof from Pledgee.

     In the case of an event of Default, as set forth above, Pledgee shall have
the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee
shall thereafter be entitled to pursue its remedies under the California
Commercial Code.

     G.   Release of Collateral.  Subject to any applicable contrary rules
          ---------------------
under Regulation G, there shall be released from this pledge a portion of the
pledged Shares held by Pledgeholder hereunder upon payments of the principal of
the Note. The number of the pledged Shares which shall be released shall be that
number of full Shares which bears the same proportion to the initial number of
Shares pledged hereunder as the payment of principal bears to the initial full
principal amount of the Note.

     H.   Withdrawal or Substitution of Collateral.  Pledgor shall not sell,
          ----------------------------------------
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.

                                      -2-
<PAGE>

     I.   Term.  The within pledge of Shares shall continue until the payment
          ----
of all indebtedness secured hereby, at which time the remaining pledged stock
shall be promptly delivered to Pledgor, subject to the provisions for prior
release of a portion of the Collateral as provided in paragraph 7 above.

     J.   Insolvency.  Pledgor agrees that if a bankruptcy or insolvency
          ----------
proceeding is instituted by or against it, or if a receiver is appointed for the
property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall become immediately due and
payable, and Pledgee may proceed as provided in the case of default.

     K.   Pledgeholder Liability.  In the absence of willful or gross
          ----------------------
negligence, Pledgeholder shall not be liable to any party for any of his acts,
or omissions to act, as Pledgeholder.

     L.   Invalidity of Particular Provisions.  Pledgor and Pledgee agree that
          -----------------------------------
the enforceability or invalidity of any provision or provisions of this Security
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.

     M.   Successors or Assigns.  Pledgor and Pledgee agree that all of the
          ---------------------
terms of this Security Agreement shall be binding on their respective successors
and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein
shall be deemed to include, for all purposes, the respective designees,
successors, assigns, heirs, executors and administrators.

     N.   Governing Law.  This Security Agreement shall be interpreted and
          -------------
governed under the internal substantive laws, but not the choice of law rules,
of California.

                                      -3-
<PAGE>

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

     "PLEDGOR"
                             ________________________________________
                             Signature

                             ________________________________________
                             Print Name

                             Address: ________________________________________

                                      ________________________________________


     "PLEDGEE"               NUMERICAL TECHNOLOGIES, INC.
                             a California corporation


                             ________________________________________
                             Signature

                             ________________________________________
                             Print Name

                             ________________________________________
                             Title

     "PLEDGEHOLDER"
                             ________________________________________
                             Secretary of Numerical Technologies, Inc.

                                      -4-

<PAGE>
                                                                  Exhibit 10.36

                         NUMERICAL TECHNOLOGIES, INC.

                                1997 STOCK PLAN

                   STOCK OPTION AGREEMENT -- EARLY EXERCISE


     Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.

I.   NOTICE OF STOCK OPTION GRANT
     ----------------------------

     Naren Gupta

     You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:

     Date of Grant:                     February 1, 2000

     Vesting Commencement Date:         February 1, 2000

     Exercise Price per Share:          $  4.00

     Total Number of Shares Granted:      5,000

     Total Exercise Price:              $20,000

     Type of Option:                    _____ Incentive Stock Option

                                          X   Nonstatutory Stock Option
                                        -----

     Term/Expiration Date:              Ten Years/

_______________
* Or earlier, pursuant to the termination period set forth below.

     Exercise and Vesting Schedule:
     -----------------------------

     This Option is exercisable immediately, in whole or in part, and shall vest
according to the following vesting schedule:
<PAGE>

     One-sixteenth (1/16th) of the Shares subject to the Option shall vest three
months after the Vesting Commencement Date and on the last day of each three
month anniversary thereafter, subject to your continuing to be a Service
Provider on such dates. Notwithstanding the foregoing, if the Company merges
with or into another entity, sells all or substantially all of its assets, or
enters into any other similar transaction or reorganization as a result of which
the shareholders of the Company immediately prior to such transaction will not
hold at least 50% of the voting power of the surviving, purchasing or continuing
entity, as applicable (taking into account any securities issued to the
shareholders of the Company in the transaction) (a "Change of Control
Transaction"), then the Option shall become fully vested and exercisable
simultaneously with the closing of the Change of Control Transaction (or, in the
case of a merger, as of any earlier date that is necessary to permit the
Optionee, if he exercises the Option in whole or in part, to receive the same
per Share merger consideration (to the extent of Optioned Shares acquired upon
exercise) that will be paid to the other holders of Shares). The Board shall
notify the Optionee at least fifteen (15) days prior to the closing of a Change
of Control Transaction (or at such earlier time as the Board, in its reasonable
judgment, deems necessary to give effect to the intent of this provision), and
such notification shall include a statement as to whether or not the Option will
be assumed by the surviving or purchasing entity or whether an equivalent, fully
vested, substitute option will be provided by such entity.

     Termination Period:
     ------------------

     You may exercise this Option for thirty days after you cease to be a
Service Provider. Upon your death or disability, this Option may be exercised
for one year after you cease to be a Service Provider. In no event may you
exercise this Option after the Term/Expiration Date as provided above.

II.  AGREEMENT
     ---------

     1.   Grant of Option.  The Plan Administrator of the Company hereby grants
          ---------------
to the Optionee named in the Notice of Grant (the "Optionee"), an option (the
"Option") to purchase the number of Shares set forth in the Notice of Grant, at
the exercise price per Share set forth in the Notice of Grant (the "Exercise
Price"), and subject to the terms and conditions of the Plan, which is
incorporated herein by reference. Subject to Section 14(c) of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this Option
Agreement, the terms and conditions of the Plan shall prevail.

     If designated in the Notice of Grant as an Incentive Stock Option ("ISO"),
this Option is intended to qualify as an Incentive Stock Option as defined in
Section 422 of the Code.  Nevertheless, to the extent that it exceeds the
$100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").

     2.   Exercise of Option.  This Option shall be exercisable during its term
          ------------------
in accordance with the provisions of Section 9 of the Plan as follows:

                                      -2-
<PAGE>

          (a)  Right to Exercise.
               -----------------

               (i)    Subject to subsections 2(a)(ii) and 2(a)(iii) below, this
Option shall be exercisable cumulatively according to the vesting schedule set
forth in the Notice of Grant. Alternatively, at the election of the Optionee,
this option may be exercised in whole or in part at any time as to Shares which
have not yet vested. For purposes of this Stock Option Agreement, Shares subject
to the Option shall vest based on continued employment of Optionee with the
Company. Vested Shares shall not be subject to the Company's repurchase right
(as set forth in the Restricted Stock Purchase Agreement, attached hereto as
Exhibit C-1).
- -----------

               (ii)   As a condition to exercising this Option for unvested
Shares, the Optionee shall execute the Restricted Stock Purchase Agreement.

               (iii)  This Option may not be exercised for a fraction of a
Share.

          (b)  Method of Exercise.  This Option shall be exercisable by delivery
               ------------------
of an exercise notice in the form attached as Exhibit A (the "Exercise Notice")
                                              ---------
which shall state the election to exercise the Option, the number of Shares with
respect to which the Option is being exercised, and such other representations
and agreements as may be required by the Company. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Exercised
Shares. This Option shall be deemed to be exercised upon receipt by the Company
of such fully executed Exercise Notice accompanied by the aggregate Exercise
Price.

     No Shares shall be issued pursuant to the exercise of an Option unless such
issuance and such exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Shares shall be considered transferred
to the Optionee on the date on which the Option is exercised with respect to
such Shares.

     3.   Optionee's Representations.  In the event the Shares have not been
          --------------------------
registered under the Securities Act of 1933, as amended, at the time this Option
is exercised, the Optionee shall, if required by the Company, concurrently with
the exercise of all or any portion of this Option, deliver to the Company his or
her Investment Representation Statement in the form attached hereto as Exhibit
                                                                       -------
B.
- -

     4.   Lock-Up Period.  Optionee hereby agrees that, if so requested by the
          --------------
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
the effective date of a registration statement of the Company filed under the
Securities Act. Such restriction shall apply only to the first registration
statement of the Company to become effective under the Securities Act that
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.

                                      -3-
<PAGE>

     5.   Method of Payment.  Payment of the aggregate Exercise Price shall be
          -----------------
by any of the following, or a combination thereof, at the election of the
Optionee:

          (a)  cash;

          (b)  check;

          (c)  consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan; or

          (d)  surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares.

     6.   Restrictions on Exercise.  This Option may not be exercised until such
          ------------------------
time as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any Applicable
Law.

     7.   Non-Transferability of Option.  This Option may not be transferred in
          -----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.

     8.   Term of Option.  This Option may be exercised only within the term set
          --------------
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.

     9.   Tax Consequences.  Set forth below is a brief summary as of the date
          ----------------
of this Option of some of the federal tax consequences of exercise of this
Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE,
AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD
CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

          (a)  Exercise of ISO.  If this Option qualifies as an ISO, there will
               ---------------
be no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price will be treated as an adjustment to the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.

          (b)  Exercise of ISO Following Disability.  If the Optionee ceases to
               ------------------------------------
be an Employee as a result of a disability that is not a total and permanent
disability as defined in Section 22(e)(3) of the Code, to the extent permitted
on the date of termination, the Optionee must exercise an ISO within three
months of such termination for the ISO to be qualified as an ISO.

                                      -4-
<PAGE>

          (c)  Exercise of Nonstatutory Stock Option.  There may be a regular
               -------------------------------------
federal income tax liability upon the exercise of a Nonstatutory Stock Option.
The Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market Value
of the Shares on the date of exercise over the Exercise Price. If Optionee is an
Employee or a former Employee, the Company will be required to withhold from
Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount in cash equal to a percentage of this compensation
income at the time of exercise, and may refuse to honor the exercise and refuse
to deliver Shares if such withholding amounts are not delivered at the time of
exercise.

          (d)  Disposition of Shares.  In the case of an NSO, if Shares are held
               ---------------------
for at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes. In the case
of an ISO, if Shares transferred pursuant to the Option are held for at least
one year after exercise and at least two years after the Date of Grant, any gain
realized on disposition of the Shares will also be treated as long-term capital
gain for federal income tax purposes. If Shares purchased under an ISO are
disposed of within one year after exercise or two years after the Date of Grant,
any gain realized on such disposition will be treated as compensation income
(taxable at ordinary income rates) to the extent of the difference between the
Exercise Price and the lesser of (i) the Fair Market Value of the Shares on the
date of exercise, or (ii) the sale price of the Shares. Any additional gain will
be taxed as capital gain, short-term depending on the period that the ISO Shares
were held.

          (e)  Notice of Disqualifying Disposition of ISO Shares.  If the Option
               -------------------------------------------------
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (i) the date two years after the Date of Grant, or (ii) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.

          (f)  Section 83(b) Election for Unvested Shares Purchased Pursuant to
               ----------------------------------------------------------------
Options. With respect to the exercise of an Option for unvested Shares, an
- -------
election may be filed by the Optionee with the Internal Revenue Service, within
                                                                         ------
30 days of the purchase of the Shares, electing pursuant to Section 83(b) of the
- -------
Code to be taxed currently on any difference between the purchase price of the
Shares and their Fair Market Value on the date of purchase. In the case of a
Nonstatutory Stock Option, this will result in a recognition of taxable income
to the Optionee on the date of exercise, measured by the excess, if any, of the
fair market value of the Shares, at the time the Option is exercised over the
purchase price for the Shares. Absent such an election, taxable income will be
measured and recognized by Optionee at the time or times on which the Company's
Repurchase Option lapses. In the case of an Incentive Stock Option, such an
election will result in a recognition of income to the Optionee for alternative
minimum tax purposes on the date of exercise, measured by the excess, if any, of
the fair market value of the Shares, at the time the option is exercised, over
the purchase price for the Shares. Absent such an election, alternative minimum
taxable income will be measured and recognized by Optionee at the time or times
on which the Company's Repurchase Option lapses. Optionee is strongly encouraged
to seek the advice of his or her own tax consultants in connection with the
purchase of the Shares and the advisability of filing

                                      -5-
<PAGE>

of the Election under Section 83(b) of the Code. A form of Election under
Section 83(b) is attached hereto as Exhibit C-5 for reference.
                                    -----------

     OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY AND NOT THE
COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF OPTIONEE
REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON OPTIONEE'S
BEHALF.

     10.  Entire Agreement; Governing Law.  The Plan is incorporated herein by
          -------------------------------
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws but not
the choice of law rules of California.

     11.  No Guarantee of Continued Service.  OPTIONEE ACKNOWLEDGES AND AGREES
          ---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH
THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.

     Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.

OPTIONEE:                               NUMERICAL TECHNOLOGIES, INC.

/s/ Naren Gupta                            /s/ Yagyensh C. Pati
__________________________________      ________________________________________
Signature                               By

  Naren Gupta                              President & CEO
__________________________________      ________________________________________
Print Name                              Title


                                      -6-
<PAGE>
1252 Canada Road
__________________________________

Woodside, CA 94062
__________________________________
Residence Address

                                      -7-
<PAGE>

                                   EXHIBIT A
                                   ---------

                                1997 STOCK PLAN

                                EXERCISE NOTICE

Numerical Technologies, Inc.
80 West Plumeria Drive
San Jose, CA 95134-2134

Attention: Secretary

     1.   Exercise of Option.  Effective as of today, February 10, 2000, the
          ------------------
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
5,000 shares of the Common Stock (the "Shares") of Numerical Technologies,Inc.
(the "Company") under and pursuant to the 1997 Stock Plan (the "Plan") and
the [ ] Incentive [X] Nonstatutory Stock Option Agreement dated February 1,
2000 (the "Option Agreement").

     2.   Delivery of Payment.  Purchaser herewith delivers to the Company the
          -------------------
full purchase price of the Shares, as set forth in the Option Agreement.

     3.   Representations of Optionee.  Optionee acknowledges that Optionee has
          ---------------------------
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.

     4.   Rights as Shareholder.  Until the issuance of the Shares (as evidenced
          ---------------------
by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Shares shall be issued to the
Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 12 of the Plan.

     5.   Company's Right of First Refusal.  Before any Shares held by Optionee
          --------------------------------
or any transferee (either being sometimes referred to herein as the "Holder")
may be sold or otherwise transferred (including transfer by gift or operation of
law), the Company or its assignee(s) shall have a right of first refusal to
purchase the Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").

          (a)  Notice of Proposed Transfer.  The Holder of the Shares shall
               ---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder proposes to
transfer the
<PAGE>

Shares (the "Offered Price"), and the Holder shall offer the Shares at the
Offered Price to the Company or its assignee(s).


          (b)  Exercise of Right of First Refusal.  At any time within thirty
               ----------------------------------
(30) days after receipt of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.

          (c)  Purchase Price.  The purchase price ("Purchase Price") for the
               --------------
Shares purchased by the Company or its assignee(s) under this Section shall be
the Offered Price. If the Offered Price includes consideration other than cash,
the cash equivalent value of the non-cash consideration shall be determined by
the Board of Directors of the Company in good faith.

          (d)  Payment.  Payment of the Purchase Price shall be made, at the
               -------
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.

          (e)  Holder's Right to Transfer.  If all of the Shares proposed in the
               --------------------------
Notice to be transferred to a given Proposed Transferee are not purchased by the
Company and/or its assignee(s) as provided in this Section, then the Holder may
sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice, that any such sale or
other transfer is effected in accordance with any applicable securities laws and
that the Proposed Transferee agrees in writing that the provisions of this
Section shall continue to apply to the Shares in the hands of such Proposed
Transferee. If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.

          (f)  Exception for Certain Family Transfers.  Anything to the contrary
               --------------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Optionee's lifetime or on the Optionee's death by will or
intestacy to the Optionee's immediate family or a trust for the benefit of the
Optionee's immediate family shall be exempt from the provisions of this Section.
"Immediate Family" as used herein shall mean spouse, lineal descendant or
antecedent, father, mother, brother or sister. In such case, the transferee or
other recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.

          (g)  Termination of Right of First Refusal.  The Right of First
               -------------------------------------
Refusal shall terminate as to any Shares upon the first sale of Common Stock of
the Company to the general public pursuant to a registration statement filed
with and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.

                                      -2-
<PAGE>

     6.   Tax Consultation.  Optionee understands that Optionee may suffer
          ----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.

     7.   Restrictive Legends and Stop-Transfer Orders.
          --------------------------------------------

          (a)  Legends.  Optionee understands and agrees that the Company shall
               -------
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by the Company or by state or
federal securities laws:

          THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
          SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR
          OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
          REGISTERED UNDER THE ACT OR, IN THE OPINION OF COMPANY COUNSEL
          SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR
          TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.

          THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
          RESTRICTIONS ON TRANSFER AND RIGHT OF FIRST REFUSAL OPTIONS HELD BY
          THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE
          BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF
          WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER.  SUCH
          TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON
          TRANSFEREES OF THESE SHARES.

          (b)  Stop-Transfer Notices.  Optionee agrees that, in order to ensure
               ---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.

          (c)  Refusal to Transfer.  The Company shall not be required (i) to
               -------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.

     8.   Successors and Assigns.  The Company may assign any of its rights
          ----------------------
under this Agreement to single or multiple assignees, and this Agreement shall
inure to the benefit of the successors and assigns of the Company. Subject to
the restrictions on transfer herein set forth, this Agreement shall be binding
upon Optionee and his or her heirs, executors, administrators, successors and
assigns.

                                      -3-
<PAGE>

     9.   Interpretation.  Any dispute regarding the interpretation of this
          --------------
Agreement shall be submitted by Optionee or by the Company forthwith to the
Administrator which shall review such dispute at its next regular meeting. The
resolution of such a dispute by the Administrator shall be final and binding on
all parties.

     10.  Governing Law; Severability.  This Agreement is governed by the
          ---------------------------
internal substantive laws, but not the choice of law rules, of California.

     11.  Entire Agreement.  The Plan and Option Agreement are incorporated
          ----------------
herein by reference. This Agreement, the Plan, the Restricted Stock Purchase
Agreement, the Option Agreement and the Investment Representation Statement
constitute the entire agreement of the parties with respect to the subject
matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee's interest except by
means of a writing signed by the Company and Optionee.

Submitted by:                           Accepted by:

OPTIONEE:                               NUMERICAL TECHNOLOGIES, INC.

/s/ Naren Gupta                            /s/ Yagyensh C. Pati
________________________________        ________________________________________
Signature                               By

  Naren Gupta                              President & CEO
________________________________        ________________________________________
Print Name                              Its

Address:                                Address:
- -------                                 -------

1252 Canada Road
________________________________        80 West Plumeria Drive
                                        San Jose, CA 95134-2134
Woodside, CA 94062
________________________________
                                        February 10, 2000
                                        ________________________________________
                                        Date Received

                                      -4-
<PAGE>

                                   EXHIBIT B
                                   ---------

                      INVESTMENT REPRESENTATION STATEMENT

OPTIONEE  :  Naren Gupta

COMPANY   :  NUMERICAL TECHNOLOGIES, INC.

SECURITY  :  COMMON STOCK

AMOUNT    :  5,000 Shares

DATE      :  February 10, 2000

     In connection with the purchase of the above-listed Securities, the
undersigned Optionee represents to the Company the following:

          (a)  Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").

          (b)  Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Optionee's investment intent as expressed herein. In this connection,
Optionee understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Optionee's representation was predicated solely upon a present intention to hold
these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. Optionee further understands that the Securities must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Optionee further
acknowledges and understands that the Company is under no obligation to register
the Securities. Optionee understands that the certificate evidencing the
Securities will be imprinted with a legend which prohibits the transfer of the
Securities unless they are registered or such registration is not required in
the opinion of counsel satisfactory to the Company, and any other legend
required under applicable state securities laws.

          (c)  Optionee is familiar with the provisions of Rule 701 and Rule
144, each promulgated under the Securities Act, which, in substance, permit
limited public resale of "restricted securities" acquired, directly or
indirectly from the issuer thereof, in a non-public offering subject to
<PAGE>

the satisfaction of certain conditions. Rule 701 provides that if the issuer
qualifies under Rule 701 at the time of the grant of the Option to the Optionee,
the exercise will be exempt from registration under the Securities Act. In the
event the Company becomes subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or
such longer period as any market stand-off agreement may require) the Securities
exempt under Rule 701 may be resold, subject to the satisfaction of certain of
the conditions specified by Rule 144, including: (1) the resale being made
through a broker in an unsolicited "broker's transaction" or in transactions
directly with a market maker (as said term is defined under the Securities
Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of
certain public information about the Company, (3) the amount of Securities being
sold during any three month period not exceeding the limitations specified in
Rule 144(e), and (4) the timely filing of a Form 144, if applicable.

     In the event that the Company does not qualify under Rule 701 at the time
of grant of the Option, then the Securities may be resold in certain limited
circumstances subject to the provisions of Rule 144, which requires the resale
to occur not less than two years after the later of the date the Securities were
sold by the Company or the date the Securities were sold by an affiliate of the
Company, within the meaning of Rule 144; and, in the case of acquisition of the
Securities by an affiliate, or by a non-affiliate who subsequently holds the
Securities less than three years, the satisfaction of the conditions set forth
in sections (1), (2), (3) and (4) of the paragraph immediately above.

          (d)  Optionee further understands that in the event all of the
applicable requirements of Rule 701 or 144 are not satisfied, registration under
the Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk. Optionee understands that no assurances can be given that any
such other registration exemption will be available in such event.


                                        Signature of Optionee:

                                        /s/ Naren Gupta
                                        ______________________________________

                                        Date: February 10, 2000
                                             ---------------------------------

                                      -2-
<PAGE>

                                  EXHIBIT C-1
                                  -----------

                         NUMERICAL TECHNOLOGIES, INC.

                                1997 STOCK PLAN

                      RESTRICTED STOCK PURCHASE AGREEMENT

     THIS AGREEMENT is made between Naren Gupta (the "Purchaser") and Numerical
Technologies, Inc. (the "Company") as of February 10, 2000.

                                   RECITALS
                                   --------

     (1)  Pursuant to the exercise of the stock option granted to Purchaser
under the Company's 1997 Stock Plan (the "Plan") and pursuant to the Stock
Option Agreement (the "Option Agreement") dated February 1, 2000 by and between
the Company and Purchaser with respect to such grant, which Plan and Option
Agreement are hereby incorporated by reference, Purchaser has elected to
purchase 5,000 of those shares which have not become vested under the vesting
schedule set forth in the Option Agreement ("Unvested Shares"). The Unvested
Shares and the shares subject to the Option Agreement which have become vested
are sometimes collectively referred to herein as the "Shares".

     (2)  As required by the Option Agreement, as a condition to Purchaser's
election to exercise the option, Purchaser must execute this Restricted Stock
Purchase Agreement, which sets forth the rights and obligations of the parties
with respect to Shares acquired upon exercise of the Option.

     1.   Repurchase Option.
          -----------------

          (a)  If Purchaser's status as a Service Provider is terminated for any
reason, including for cause, death, and disability, the Company shall have the
right and option to purchase from Purchaser, or Purchaser's personal
representative, as the case may be, all of the Purchaser's Unvested Shares as of
the date of such termination at the price paid by the Purchaser for such Shares
(the "Repurchase Option").

          (b)  Upon the occurrence of a termination, the Company may exercise
its Repurchase Option by delivering personally or by registered mail, to
Purchaser (or his transferee or legal representative, as the case may be),
within ninety (90) days of the termination, a notice in writing indicating the
Company's intention to exercise the Repurchase Option and setting forth a date
for closing not later than thirty (30) days from the mailing of such notice. The
closing shall take place at the Company's office. At the closing, the holder of
the certificates for the Unvested Shares being transferred shall deliver the
stock certificate or certificates evidencing the Unvested Shares, and the
Company shall deliver the purchase price therefor.
<PAGE>

          (c)  At its option, the Company may elect to make payment for the
Unvested Shares to a bank selected by the Company. The Company shall avail
itself of this option by a notice in writing to Purchaser stating the name and
address of the bank, date of closing, and waiving the closing at the Company's
office.

          (d)  If the Company does not elect to exercise the Repurchase Option
conferred above by giving the requisite notice within ninety (90) days following
the termination, the Repurchase Option shall terminate.

          (e)  The Repurchase Option shall terminate in accordance with the
Vesting Schedule in Optionee's Option Agreement.

     2.   Transferability of the Shares; Escrow.
          -------------------------------------

          (a)  Purchaser hereby authorizes and directs the secretary of the
Company, or such other person designated by the Company, to transfer the
Unvested Shares as to which the Repurchase Option has been exercised from
Purchaser to the Company.

          (b)  To insure the availability for delivery of Purchaser's Unvested
Shares upon repurchase by the Company pursuant to the Repurchase Option under
Section 1, Purchaser hereby appoints the secretary, or any other person
designated by the Company as escrow agent, as its attorney-in-fact to sell,
assign and transfer unto the Company, such Unvested Shares, if any, repurchased
by the Company pursuant to the Repurchase Option and shall, upon execution of
this Agreement, deliver and deposit with the secretary of the Company, or such
other person designated by the Company, the share certificates representing the
Unvested Shares, together with the stock assignment duly endorsed in blank,
attached hereto as Exhibit C-2. The Unvested Shares and stock assignment shall
                   -----------
be held by the secretary in escrow, pursuant to the Joint Escrow Instructions of
the Company and Purchaser attached as Exhibit C-3 hereto, until the Company
                                      -----------
exercises its purchase right as provided in Section 1, until such Unvested
Shares are vested, or until such time as this Agreement no longer is in effect.
As a further condition to the Company's obligations under this Agreement, the
spouse of the Purchaser, if any, shall execute and deliver to the Company the
Consent of Spouse attached hereto as Exhibit C-4. Upon vesting of the Unvested
                                     -----------
Shares, the escrow agent shall promptly deliver to the Purchaser the certificate
or certificates representing such Shares in the escrow agent's possession
belonging to the Purchaser, and the escrow agent shall be discharged of all
further obligations hereunder; provided, however, that the escrow agent shall
nevertheless retain such certificate or certificates as escrow agent if so
required pursuant to other restrictions imposed pursuant to this Agreement.

          (c)  The Company, or its designee, shall not be liable for any act it
may do or omit to do with respect to holding the Shares in escrow and while
acting in good faith and in the exercise of its judgment.

          (d)  Transfer or sale of the Shares is subject to restrictions on
transfer imposed by any applicable state and federal securities laws. Any
transferee shall hold such Shares subject to all the provisions hereof and the
Exercise Notice executed by the Purchaser with respect to any

                                      -2-
<PAGE>

Unvested Shares purchased by Purchaser and shall acknowledge the same by signing
a copy of this Agreement.

     3.   Ownership, Voting Rights, Duties.  This Agreement shall not affect
          --------------------------------
in any way the ownership, voting rights or other rights or duties of Purchaser,
except as specifically provided herein.

     4.   Legends. The share certificate evidencing the Shares issued hereunder
          -------
shall be endorsed with the following legend (in addition to any legend required
under applicable state securities laws):

     THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT
BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.

     5.   Adjustment for Stock Split. All references to the number of Shares and
          --------------------------
the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.

     6.   Notices. Notices required hereunder shall be given in person or by
          -------
registered mail to the address of Purchaser shown on the records of the Company,
and to the Company at their respective principal executive offices.

     7.   Survival of Terms. This Agreement shall apply to and bind Purchaser
          -----------------
and the Company and their respective permitted assignees and transferees, heirs,
legatees, executors, administrators and legal successors.

     8.   Section 83(b) Election. Purchaser hereby acknowledges that he or she
          ----------------------
has been informed that, with respect to the exercise of an Option for unvested
Shares, an election may be filed by the Purchaser with the Internal Revenue
Service, within 30 days of the purchase of the Shares, electing pursuant to
         --------------
Section 83(b) of the Code to be taxed currently on any difference between the
purchase price of the Shares and their Fair Market Value on the date of
purchase. In the case of a Nonstatutory Stock Option, this will result in a
recognition of taxable income to the Purchaser on the date of exercise, measured
by the excess, if any, of the fair market value of the Shares, at the time the
Option is exercised over the purchase price for the Shares. Absent such an
election, taxable income will be measured and recognized by Purchaser at the
time or times on which the Company's Repurchase Option lapses. In the case of an
Incentive Stock Option, such an election will result in a recognition of income
to the Purchaser for alternative minimum tax purposes on the date of exercise,
measured by the excess, if any, of the fair market value of the Shares, at the
time the option is exercised, over the purchase price for the Shares. Absent
such an election, alternative minimum taxable income will be measured and
recognized by Purchaser at the time or times on which the Company's Repurchase
Option lapses. Purchaser is strongly encouraged to seek the advice of his or her
own tax consultants in connection with the purchase of the Shares and the
advisability of filing

                                      -3-
<PAGE>

of the Election under Section 83(b) of the Code. A form of Election under
Section 83(b) is attached hereto as Exhibit C-5 for reference.
                                    -----------

     PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE RESPONSIBILITY AND NOT
THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF PURCHASER
REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON PURCHASER'S
BEHALF.

     9.   Representations.  Purchaser has reviewed with his own tax advisors the
          ---------------
federal, state, local and foreign tax consequences of this investment and the
transactions contemplated by this Agreement. Purchaser is relying solely on such
advisors and not on any statements or representations of the Company or any of
its agents. Purchaser understands that he (and not the Company) shall be
responsible for his own tax liability that may arise as a result of this
investment or the transactions contemplated by this Agreement.

     10.  Governing Law.  This Agreement shall be governed by the internal
          -------------
substantive laws, but not the choice of law rules, of California.

     Purchaser represents that he has read this Agreement and is familiar with
its terms and provisions. Purchaser hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board upon any
questions arising under this Agreement.

                                      -4-
<PAGE>

     IN WITNESS WHEREOF, this Agreement is deemed made as of the date first set
forth above.

                                    "COMPANY"

                                    NUMERICAL TECHNOLOGIES, INC

                                       /s/ Yagyensh C. Pati
                                    __________________________________________
                                    By
                                       President & CEO
                                    __________________________________________
                                    Title

                                    "PURCHASER"

                                       /s/ Naren Gupta
                                    __________________________________________
                                    Signature

                                       Naren Gupta
                                    __________________________________________
                                    Printed Name

                                       ###-##-####
                                    __________________________________________
                                    Soc. Sec. No.

                                    Address:
                                    -------

                                       1252 Canada Road
                                    __________________________________________

                                       Woodside, CA 94062
                                    __________________________________________

                                      -5-
<PAGE>

                                  EXHIBIT C-2
                                  -----------

                     ASSIGNMENT SEPARATE FROM CERTIFICATE

     FOR VALUE RECEIVED I, __________________________, hereby sell, assign and
transfer unto Numerical Technologies, Inc. (__________) shares of the Common
Stock of Numerical Technologies, Inc. standing in my name of the books of said
corporation represented by Certificate No. _____ herewith and do hereby
irrevocably constitute and appoint _____________________________to transfer the
said stock on the books of the within named corporation with full power of
substitution in the premises.

     This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between Numerical Technologies, Inc. and the
undersigned dated ______________, _____.

Dated: _______________, ______

     Signature:  /s/ Naren Gupta
               ----------------------------



INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise its
"repurchase option," as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE>

                                  EXHIBIT C-3
                                  -----------

                           JOINT ESCROW INSTRUCTIONS

                                                             February 10, 2000

Numerical Technologies, Inc.
80 West Plumeria Drive
San Jose, CA 95134-2134
Attention: Secretary

Dear:

     As Escrow Agent for both Numerical Technologies, Inc. (the "Company"), and
the undersigned purchaser of stock of the Company (the "Purchaser"), you are
hereby authorized and directed to hold the documents delivered to you pursuant
to the terms of that certain Restricted Stock Purchase Agreement ("Agreement")
between the Company and the undersigned, in accordance with the following
instructions:

     1.   In the event the Company and/or any assignee of the Company (referred
to collectively for convenience herein as the "Company") exercises the Company's
repurchase option set forth in the Agreement, the Company shall give to
Purchaser and you a written notice specifying the number of shares of stock to
be purchased, the purchase price, and the time for a closing hereunder at the
principal office of the Company. Purchaser and the Company hereby irrevocably
authorize and direct you to close the transaction contemplated by such notice in
accordance with the terms of said notice.

     2.   At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, or some combination thereof) for the number of shares of stock
being purchased pursuant to the exercise of the Company's repurchase option.

     3.   Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a stockholder of the Company while the
stock is held by you.
<PAGE>

     4.   Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's repurchase option has been exercised, you
will deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the Company's repurchase option.
Within 120 days after cessation of Purchaser's continuous employment by or
services to the Company, or any parent or subsidiary of the Company, you will
deliver to Purchaser a certificate or certificates representing the aggregate
number of shares held or issued pursuant to the Agreement and not purchased by
the Company or its assignees pursuant to exercise of the Company's repurchase
option.

     5.   If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.

     6.   Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.

     7.   You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith,
and any act done or omitted by you pursuant to the advice of your own attorneys
shall be conclusive evidence of such good faith.

     8.   You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court. In
case you obey or comply with any such order, judgment or decree, you shall not
be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.

     9.   You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.

     10.  You shall not be liable for the outlawing of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.

     11.  You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.

                                      -2-
<PAGE>

     12.  Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be an officer or agent of the Company or if you shall resign by
written notice to each party. In the event of any such termination, the Company
shall appoint a successor Escrow Agent.

     13.  If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.

     14.  It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.

     15.  Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.

          COMPANY:       Numerical Technologies, Inc.
                         80 West Plumeria Drive
                         San Jose, CA 95134-2134
                         Attention: Secretary

          PURCHASER:     Naren Gupta
                         _______________________________________

                         1252 Canada Road
                         _______________________________________

                         Woodside, CA 94062
                         _______________________________________

          ESCROW AGENT:  Wilson Sonsini Goodrich & Rosati
                         650 Page Mill Road
                         Palo Alto, CA 94304

     16.  By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.

     17.  This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.

                                      -3-
<PAGE>

     18.  These Joint Escrow Instructions shall be governed by the internal
substantive laws, but not the choice of law rules, of California.

                                    NUMERICAL TECHNOLOGIES, INC.

                                       /s/ Yagyensh C. Pati
                                    _______________________________________
                                    By
                                       President & CEO
                                    _______________________________________
                                    Title

                                    PURCHASER

                                       /s/ Naren Gupta
                                    _______________________________________
                                    Signature

                                       Naren Gupta
                                    _______________________________________
                                    Typed or Printed Name

                                    ESCROW AGENT

                                    WILSON SONSINI GOODRICH & ROSATI

                                       John V. Roos
                                    _______________________________________
                                    By

                                       Member
                                    _______________________________________
                                    Title

                                      -4-
<PAGE>

                                 EXHIBIT  C-4
                                 ------------

                               CONSENT OF SPOUSE
                               -----------------

     I, Vinita Gupta, spouse of Naren Gupta, have read and approve the foregoing
Agreement. In consideration of granting of the right to my spouse to purchase
shares of Numerical Technologies, Inc., as set forth in the Agreement, I hereby
appoint my spouse as my attorney-in-fact in respect to the exercise of any
rights under the Agreement and agree to be bound by the provisions of the
Agreement insofar as I may have any rights in said Agreement or any shares
issued pursuant thereto under the community property laws or similar laws
relating to marital property in effect in the state of our residence as of the
date of the signing of the foregoing Agreement.

Dated: February 10, 2000

                                             /s/ Vinita Gupta
                                             __________________________________
<PAGE>

                                  EXHIBIT C-5
                                  -----------

                         ELECTION UNDER SECTION 83(b)
                         -----------------------------
                     OF THE INTERNAL REVENUE CODE OF 1986
                     ------------------------------------

The undersigned taxpayer hereby elects, pursuant to Sections 55 and 83(b) of the
Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income
or alternative minimum taxable income, as the case may be, for the current
taxable year the amount of any compensation taxable to taxpayer in connection
with taxpayer's receipt of the property described below:

1.   The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:

NAME:                      TAXPAYER: Naren Gupta         SPOUSE: Vinita Gupta

ADDRESS: 1252 Canada Road, Woodside, CA 94062

IDENTIFICATION NO.:        TAXPAYER: ###-##-####         SPOUSE: ###-##-####

TAXABLE YEAR: 2000

2.   The property with respect to which the election is made is described as
follows: 5,000 shares (the "Shares") of the Common Stock of Numerical
Technologies, Inc. (the "Company").

3.   The date on which the property was transferred is:  10-Feb-, 2000

4.   The property is subject to the following restrictions:

     The Shares may not be transferred and are subject to forfeiture under the
terms of an agreement between the taxpayer and the Company. These restrictions
lapse upon the satisfaction of certain conditions contained in such agreement.

5.   The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never lapse, of
such property is:
     $20,000.00.

6.   The amount (if any) paid for such property is:
     $20,000.00.

The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.

The undersigned understands that the foregoing election may not be revoked
- --------------------------------------------------------------------------
except with the consent of the Commissioner.
- -------------------------------------------

Dated:  10-Feb-, 2000                        /s/ Naren Gupta
                                          -------------------------------------
                                          Taxpayer

The undersigned spouse of taxpayer joins in this election.

Dated:  10-Feb-, 2000                        /s/ Vinita Gupta
                                          -------------------------------------

<PAGE>

                                                                  EXHIBIT 10.37

                 [***] SOFTWARE DEVELOPMENT AND LICENSE AGREEMENT

     This [***] 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 [***] software
design tools for subwavelength integrated circuit technologies. Cadence and NTI
desire to develop the [***] design methodology [***] jointly, using each
company's relevant expertise, technology, and industry experience, to create
an integrated design solution [***]. 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 [***]


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

<PAGE>

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, [***].

          (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


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                                      -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. [***]
          --------------------------


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                                      -8-
<PAGE>

     4.2  Permitted NTI Activities.  [***]
          ------------------------

     4.3  Limits on Cadence's Activities.  [***]
          ------------------------------



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                                      -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.  [***]
          ------------

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                                     -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  [***].


     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


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                                      -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.

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                                      -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.   [***].

     9.1  [***].

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

                                      -14-
<PAGE>

[***].

     9.2  [***].

     9.3  Assignability.  The right [***] 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.

[***]=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.

                                      -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 [***]; provided, that the Indemnifying

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

                                      -17-
<PAGE>

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. [***]

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;


[***]=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.


                                      -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 [***] 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.

[***]=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.

                                      -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  [***].

[***]=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.

                                      -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  [***].

     14.8  [***].

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

                                      -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 [***] 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:__________________________

[***]=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.

                                      -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.


<PAGE>

                                                                    Exhibit 23.2

                       Consent of Independent Accountants

   We hereby consent to the use in this Registration Statement on Form S-1 of
both our report dated February 2, 2000 relating to the financial statements of
Numerical Technologies, Inc. and our report dated January 21, 2000 relating to
Transcription Enterprises Limited. We also consent to the reference to us under
the headings "Experts" in such Registration Statement.

/s/ PricewaterhouseCoopers LLP
San Jose, California

March 17, 2000


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