Edgar Filing: NUMERICAL TECHNOLOGIES INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____

Commission file number: 000-30005

NUMERICAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Delaware 94-3232104
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

70 West Plumeria Drive 95134-2134
San Jose, California (Zip Code)
(Address of principal executive offices)

Registrant's telephone number, including area code: (408) 919-1910

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such
reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]

The number of shares outstanding of the registrant's Common Stock, par value
$.0001, per share as of April 16, 2001 was 32,966,914.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

NUMERICAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)

March 31, December 31,
2001 2000
------------ ------------

ASSETS
Current assets:
Cash and cash equivalents $ 29,869 $ 30,607
Short-term investments 24,821 23,281
Accounts receivable 6,002 4,983
Prepaid and other 2,902 3,177
--------- ---------
Total current assets 63,594 62,048

Property and equipment, net 3,282 3,209
Goodwill and other intangible assets 163,775 175,402
Other assets 422 315
--------- ---------
$ 231,073 $ 240,974
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 3,057 $ 3,208
Accrued expenses and other liabilities 4,493 4,608
Deferred revenue 7,700 6,320
--------- ---------
Total current liabilities 15,250 14,136
--------- ---------

Deferred tax liability 6,789 7,704
--------- ---------

Stockholders' equity:
Convertible preferred stock, $0.0001 par value:
Authorized: 5,000 shares;
Issued and outstanding: none -- --
Common stock, $0.0001 par value:
Authorized: 100,000 shares;
Issued and outstanding: 32,962 and 32,834 shares in
2001 and 2000, respectively 3 3
Additional paid in capital 319,879 319,541
Receivable from stockholders (3,965) (4,050)
Deferred stock compensation (24,840) (30,572)
Accumulated deficit (81,947) (65,751)
Accumulated other comprehensive loss (96) (37)
--------- ---------
Total stockholder's equity 209,034 219,134
--------- ---------
$ 231,073 $ 240,974
========= =========

See the accompanying condensed notes to these consolidated financial
statements.

NUMERICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

For the Three Months Ended
March 31,
---------------------------

2001 2000
---- ----

Revenue $ 10,320 $ 3,456
-------- --------
Costs and expenses:
Cost of revenue 923 334
Research and development 3,893 2,592
Sales and marketing 3,622 1,798
General and administrative 1,647 885
Depreciation and amortization 12,370 5,012
Amortization of deferred stock compensation(*) 5,732 5,217
-------- --------
Total cost and expenses 28,187 15,838
-------- --------

Loss from operations (17,867) (12,382)

Interest expense -- (700)
Interest income 860 143
-------- --------
Loss before provision for income taxes (17,007) (12,939)

Benefit from income taxes (811) --
-------- --------
Net loss $(16,196) $(12,939)
======== ========

Net loss per common share basic and diluted $ (0.55) $ (1.71)
======== ========

Weighted average common shares basic and diluted 29,657 7,570
======== ========

(*)Amortization of deferred stock compensation
Cost of sales $ 230 $ 195
Research and development 3,217 2,442
Marketing and sales 1,358 1,256
General and administrative 927 1,324
-------- --------
$ 5,732 $ 5,217
======== ========

See the accompanying condensed notes to these consolidated
financial statements

NUMERICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, except per share data)
(unaudited)

For the Three Months Ended
March 31,
--------------------------
2001 2000
---- ----

Cash flows from operating activities:
Net loss $(16,196) $(12,939)
Adjustments to reconcile net loss to net provided by (cash used)
in operating activities:
Depreciation 443 219
Amortization of deferred stock compensation 5,732 5,217
Amortization of acquired intangibles 11,927 4,793
Changes in assets and liabilities:
Accounts receivable (1,019) (1,554)
Prepaid and other 275 147
Other assets (107) 132
Accounts payable (151) 154
Accrued expenses and other liabilities (415) 541
Deferred revenue 1,380 915
Deferred tax (915) --
-------- --------
Net cash provided by (used in) operating activities 954 (2,375)
-------- --------

Cash flows from investing activities:
Proceeds from sales of short-term investments 23,169 --
Purchase of short-term investments (24,709) --
Purchase of property and equipment (516) (327)
-------- --------
Net cash used in investing activities (2,056) (327)
-------- --------

Cash flows from financing activities:
Repayment on notes payable -- (5,000)
Proceeds from exercise of common stock options 338 1,092
Repurchase of common stock -- (13)
Repayment of notes receivable for common stock 85 --
-------- --------
Net cash provided by (used in) financing activities 423 (3,921)
-------- --------

Effect of foreign currency translation on cash flows (59) --
-------- --------

Net decrease in cash and cash equivalents (738) (6,632)

Cash and cash equivalents at beginning of period 30,607 13,486
-------- --------
Cash and cash equivalents at end of period $ 29,869 $ 6,863
======== ========

Supplemental disclosure of cash flow information:
Stockholder notes receivable exchanged for common stock $ -- $ 3,771

See the accompanying condensed notes to these consolidated
financial tatements.

NUMERICAL TECHNOLOGIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1 - GENERAL

The unaudited consolidated financial statements have been prepared by
Numerical Technologies, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the consolidated financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the financial position, operating results and cash flows for
those periods presented. These consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto for
the years ended December 31, 2000, 1999 and 1998, included in the Company's form
10-K filed with the SEC on March 27, 2001. The results of operations for the
interim periods are not necessarily indicative of the results that may be
expected for any other period or for the fiscal year, which ends December 31,
2001.

NOTE 2 - ACQUISITION

On October 27, 2000, the Company acquired Cadabra Design Automation Inc.
(Cadabra), a limited liability company incorporated in Nova Scotia, Canada.
Under the terms of the acquisition, the Company issued approximately 2,671,000
shares and 528,000 options to purchase the Company's common stock in exchange
for all of the outstanding stock and as the assumption of all the outstanding
options of Cadabra. The total purchase price was approximately $110.6 million,
including acquisition costs of approximately $3.0 million. The acquisition was
accounted for using the purchase method of accounting.

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

Net tangible assets ................................................. $ 1,964
In process research and development.................................. 1,630
Developed technology ................................................ 660
Customer base ....................................................... 5,040
Covenants not to compete ............................................ 2,290
Work force .......................................................... 1,800
Goodwill ............................................................ 97,244
--------
Total consideration .............................................. 110,628
Deferred Stock Compensation ......................................... 12,594
--------
Total ............................................................ $123,222
========

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.

Had the acquisition of Cadabra occurred on January 1, 2000, pro forma
combined revenues would have been $4,650 for the three months ended March 31,
2000. Pro forma net loss would have been $22,339,000 or $(2.39) per share. Pro
forma adjustments have been added to record the amortization of identifiable
intangible assets and goodwill and amortization of deferred stock compensation
related to the acquisition of Cadabra as if the transaction occurred on January
1, 2000.

NOTE 3 - NET LOSS PER SHARE

Net income per share is computed in accordance with Financial Accounting
Standards Board Statement No. 128 (SFAS 128), "Earnings Per Share," which
requires the presentation of basic and diluted net income per share. Basic net
income per share is calculated using the weighted average number of common
shares outstanding during the period. Diluted net income per share is calculated
using the weighted average number of common shares and common stock equivalents,
if dilutive, outstanding during the period. Common stock equivalents includes
common shares issuable upon exercise of common stock, conversion of preferred
stock and warrants. For the periods presented the Company had losses and
therefore all common stock equivalents are excluded from the computation of
diluted net loss per share because their effect is antidilutive.

NOTE 4 - COMPREHENSIVE INCOME (LOSS)

The Company adopted Statement of Financial Accounting Standards No. 130,
("FAS 130") "Reporting Comprehensive Income". FAS 130 establishes standards for
reporting comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income includes net earnings
and other comprehensive income. Other comprehensive income includes accumulated
translation adjustments. For the three month period ended March 31, 2001 and
2000, the components of comprehensive income are as follows:

For the Three Months Ended
March 31,
(unaudited)
-------------------------

2001 2000
---- ----

Net loss $(16,196) $(12,939)
-------- --------
Foreign currency translation adjustments (59) --
-------- --------
Total comprehensive loss $(16,255) $(12,939)
======== ========

NOTE 5 - LITIGATION

The Company is subject to various legal proceedings and claims, either
asserted or unasserted, that arise in the ordinary course of business. 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. The Company is currently investigating
the patents and allegations. This lawsuit is in early stages of discovery and no
trial date has been set. Although the outcome of these claims cannot be
predicted with certainty, management does not believe that any of these legal
matters will have a material adverse effect on the Company's financial
condition. Were an unfavorable ruling to occur, there exists the possibility of
a material impact on the net income of the period in which ruling occurs.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

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

General

Certain information contained or incorporated by reference in this Quarterly
Report on Form 10-Q is forward-looking in nature. All statements included or
incorporated by reference in this Quarterly Report on Form 10-Q or made by our
management, other than statements of historical fact, are forward-looking
statements. Examples of forward-looking statements include statements regarding
our future financial results, operating results, business strategies, projected
costs, products, competitive positions and plans and objectives of management
for future operations. In some cases, forward-looking statements can be
identified by terminology such as "may," "will," "should," "would," "expects,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential,"
"continue," or the negative of these terms or other comparable terminology. Any
expectations based on these forward-looking statements are subject to risks and
uncertainties and other important factors, including without limitation those
discussed in the section entitled "Factors That May Affect Our Future Results".
These and many other factors could affect our future financial and operating
results, and could cause actual results to differ materially from current
expectations.

Results of Operations

Revenue. Revenue was $10.3 million for the three months ended March 31, 2001,
representing an increase of 199% above the $3.5 million in the comparable
three-month period in 2000. The increase was primarily due to the continued
adoption of our software and proprietary technology solution by customers
throughout the design-to-silicon flow, which was aided by our acquisition of
Cadabra Design Automation, Inc., in October 2000.

Costs and Expenses

Cost of revenue. Cost of revenue for the three months ended March 31, 2001
increased 176% to $923,000 from $334,000 in the comparable three-month period in
2000. The increase was primarily due to increased cost for engineers associated
with maintenance and technical services resulting from our increased customer
base. Cost of revenue decreased as a percent of revenue from 10% to 9% for the
three months ended March 31, 2000 and 2001 respectively. 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. To the extent our revenue increases or
decreases due to, among other factors, those described above, our cost of
revenue may increase or decrease.

Research and development. Research and development expenses for the three
months ended March 31, 2001 increased 50% to $3.9 million from $2.6 million in
the comparable three-month period in 2000. The increase was primarily due to
increased cost associated with additional personnel acquired in the acquisition
of Cadabra in October 2000 and, to a lesser degree, our expanding research and
development efforts in subwavelength technologies and products. Research and
development expenses decreased as a percent of revenues from 75% to 38% for the
three months ended March 31, 2000 and 2001, respectively. 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. Our research and development expenses,
as a percentage of revenue, are dependent in part on our revenue. To the extent
our revenue increases or decreases due to, among other factors, those described
above, our research and development expenses as a percentage of revenue may
increase or decrease.

Sales and marketing. Sales and marketing expenses for the three months ended
March 31, 2001 increased 101% to $3.6 million from $1.8 million in the
comparable three-month period in 2000. The increase was primarily due to the
addition of sales and marketing personnel, increased sales commissions and
higher trade show expenses, and to a lesser degree, the cost associated with
additional personnel acquired in the acquisition of Cadabra in October 2000.
Sales and marketing expenses decreased as a percent of revenue from 52% to 35%
for the three months ended March 31, 2000 and 2001, respectively. 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. Our sales and marketing expenses, as a percentage of revenue, are
dependent in part on our revenue. To the extent our revenue increases or
decreases due to, among other factors, those described above, our research and
development expenses as a percentage of revenue may increase or decrease.

General and administrative. General and administrative expenses for the three
months ended March 31, 2001 increased 86% to $1.6 million from $885,000 in the
comparable three-month period in 2000. The increase was primarily the result of
increased spending in personnel, personnel-related costs, professional fees and
cost associated with being a public company, and to a lesser degree, the cost
associated with additional personnel acquired in the acquisition of Cadabra in
October 2000. General and administrative expenses decreased as a percent of
revenues from 26% to 16% for the three months ended March 31, 2000 and 2001,
respectively. 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. Our general and administrative expenses, as a
percentage of revenue, are dependent in part on our revenue. To the extent our
revenue increases or decreases due to, among other factors, those described
above, our research and development expenses as a percentage of revenue may
increase or decrease.

Depreciation and amortization. Depreciation and amortization expenses for the
three months ended March 31, 2001 increased 147% to $12.4 million from $5.0
million in the comparable three-month period in 2000. The increase was primarily
the result of amortization of goodwill and other intangible assets associated
with the acquisition of Cadabra in October 2000.

Amortization of deferred stock compensation. Amortization of deferred stock
was $5.2 million and $5.7 million for the three months ended March 31, 2000 and
2001, respectively. Deferred stock compensation represents 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 and to the
deferred stock charge associated with the options assumed and shares issued
subject to repurchase in connection with the acquisition of Cadabra in October
2000. Deferred stock compensation is being amortized over the vesting periods of
the individual options or restricted stock using the multiple option method.

Interest Expense. Interest expense for the three months ended March 31, 2001
was $0 compared to $700,000 in the comparable three-month period in 2000.
Interest expense related to the notes payable associated with the acquisition of
Transcription Enterprises Limited in January 2000. We paid in full the
outstanding principal and interest of these notes in the second quarter of 2000.

Interest income. Interest income for the three months ended March 31, 2001
increased 501% to $860,000 from $143,000 in the comparable three-month period in
2000. The increase was primarily due to higher average cash and short-term
investment balances as a result of proceeds from our initial public offering in
April 2000.

Benefit from income taxes. We recorded benefit for income taxes of $811,000
for the three months ended March 31, 2001, compared to $0 for the comparable
three-month period in 2000. The tax benefit in 2001 is the result of the
utilization of deferred tax liabilities associated with the amortization of
intangible assets established as of result of acquisitions done in 2000.

Liquidity and Capital Resources

As of March 31, 2001, we had cash and cash equivalents and short term
investments of $54.7 million. As of the same date, the we had working capital of
$48.3 million, including deferred revenue of $7.7 million. Deferred revenue
represents the excess of cash received from licensees over revenue recognized on
license and maintenance contracts.

Net cash provided by operating activities was $954,000 during the three-month
period ended March 31, 2001, compared with cash used in operating activities of
$2.4 million in the comparable period in 2000. Net cash provided by operating
activities in the three month period ended March 31, 2001 primarily reflects a
net loss of $16.2 million, increases in accounts receivable of $1.0 million and
decreases in deferred taxes of $915,000, offset by amortization of deferred
stock compensation and intangibles of $17.7 million and increase in deferred
revenue of $1.4 million.

Net cash used in investing activities was $2.1 million during the three month
period ended March 31, 2001, compared with cash used in investing activities of
$327,000 in the comparable period in 2000. Net cash used in the three month
period ended March 31, 2001 consisted of net purchases of short term investments
of $1.5 million and purchases of computer hardware and software, office
furniture and equipment of $516,000. We expect to invest approximately $3.0
million in 2001 mainly for computer equipment, facilities and business systems
upgrades.

Net cash provided by financing activities was $423,000 during the three month
period ended March 31, 2001, compared with cash used in financing activities of
$3.9 million in the comparable period in 2000. Net cash provided by financing
activities in the three month period ended March 31, 2001 consisted of proceeds
from common stock option activity of $338,000 and $85,000 from repayment of
notes receivable from stockholders.

We are subject to various legal proceedings and claims, either asserted or
unasserted, that arise in the ordinary course of business. 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. This lawsuit is in early stages of discovery and no trial date has
been set. Although the outcome of these claims cannot be predicted with
certainty, management does not believe that any of these legal matters will have
a material adverse effect on our financial condition. Were an unfavorable ruling
to occur, there exists the possibility of a material impact on the net income of
the period in which ruling occurs.

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. Our expenses
are dependent in part on our level of revenue. 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 our initial public offering completed in April 2000,
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.

Factors Which May Affect Our Future Results

If 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.

If the four key markets within the semiconductor industry, which we believe
are semiconductor manufacturing, semiconductor equipment manufacturing,
photomask manufacturers and design, do not adopt our proprietary technologies
and software products, our revenue could decline. We believe 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, we believe the
efficiency of the manufacturing process with respect to such designers, mask
manufacturers and equipment manufacturers is 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;

. the semiconductor industry 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.

We depend on the growth of the semiconductor industry and the current economic
slowdown in this industry may cause a decrease in the demand for our proprietary
technologies and software products and revenue.

We are dependent upon the general economic cycles of the semiconductor
industry. Our ability to increase or even maintain our current revenue is
largely dependent upon the continued demand by semiconductor manufacturers and
each other key market within the semiconductor industry for integrated circuits,
or ICs, and IC-related technologies. The semiconductor industry has from time to
time experienced economic downturns characterized by decreased product demand,
production over-capacity, price erosion, work slowdowns and layoffs. We believe
the semiconductor industry is currently experiencing such an economic downturn
and, as a result, the sales of our proprietary technologies and software
products may decrease.

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. Our
sales and marketing expenses increased to $1.6 million in the first quarter of
2001 from $885,000 in the first quarter of 2000. 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 valuation
of our business. We face a number of risks as an emerging company in a new
market. For example, the key markets within the 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 109 employees as of March 31, 2000 to
207 employees as of March 31, 2001.

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 $81.9 as of March 31, 2001. 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.

We recently acquired Cadabra Design Automation Inc. If we are not successful in
integrating Cadabra's products and operations with ours, our revenue and
operating results could decline.

Our acquisition of Cadabra 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 our company could decline. We must successfully integrate
Cadabra's products with ours. One of the elements of our strategy is to
integrate our subwavelength solution with the Cadabra solution in order to offer
design teams fast access to the processes that incorporate our subwavelength
technologies. We must also focus our research and development and sales and
marketing efforts to realize the technological benefits of this combination. If
we are not able to integrate these solutions effectively or successfully,
research and development and sales and marketing expenses could increase with no
corresponding increase in revenue and our reputation could be harmed.

In addition, the process of combining our company with Cadabra could
interrupt the activities of any or all of the companies' businesses. It is
possible that we will not be able to retain Cadabra's key management, technical
and sales personnel. The acquisition of Cadabra could also cause our industry
partners and customers to be uncertain about our ability to support the combined
companies' products and technologies and the direction of the combined
companies' development efforts. In particular, semiconductor manufacturers,
which have previously relied on and endorsed the Cadabra solution, must continue
to rely on and endorse this solution under our combined company. As a result,
these semiconductor manufacturers, as well as our other industry partners and
customers, may delay or cancel these orders, which could significantly decrease
our revenue and limit our ability to implement our combined business strategy.

Our acquisition of Transcription Enterprises Limited 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 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.

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 semiconductor
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.

We rely on Cadence Design Systems, Inc. for a substantial amount of our revenue,
and if our contracts with Cadence were terminated or not extended or renewed, or
if the fees we are to receive are reduced, we would need to replace this revenue
through other sources.

We have two agreements with Cadence with initial two-year terms that run
through 2002 to 2003, respectively. If these contracts were to be terminated or
not extended or renewed, or if the fees we are to receive are reduced, we could
lose a material portion of our revenue. We would need to replace this revenue
with revenue from other customers by increasing the sale of our proprietary
technologies and software products to our current customers and industry
partners, or by entering into new contracts with new customers either of which
would result in an unexpected diversion of management efforts and possible
increases to operating expenses, with no immediate increase in revenue. For
2000, Cadence was responsible for approximately 24% of our total revenue.

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:

. our recent acquisition of Transcription and Cadabra, as well as future
potential acquisitions by us;

. the timing and structure of our product license agreements; and

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

The accounting rules regarding revenue recognition may cause fluctuations in our
revenue independent of our booking position.

The accounting rules we are required to follow require us to recognize
revenue only when certain criteria are met. As a result, for a given quarter it
is possible for us to fall short in our revenue and/or earnings estimates even
though total orders are according to our plan or, conversely, to meet our
revenue and/or earnings estimates even though total orders fall short of our
plan, due to revenue produced by deferred revenue. Orders for software support
and professional services yield revenue over multiple quarters, often extending
beyond the current fiscal year, or upon completion of performance rather than at
the time of sale. The specific terms agreed to with a customer and/or any
changes to the rules interpreting such terms may have the effect of requiring
deferral of product revenue in whole or in part or, alternatively, of requiring
us to accelerate the recognition of such revenue for products to be used over
multiple years.

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.

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 additional suitable industry partners.

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, optical proximity correction, or OPC, manufacturing data and automated
cell generation technologies. These competitors include such companies as
Avant!, Mentor Graphics and Prolific, Inc. 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.

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, including those employees added as a result of our
acquisition of Cadabra, into our operations, we may be unable to implement our
business strategy in the time frame we anticipate, or at all. 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 our headquarters are located.

Our chief executive officer and chief technology officer, as well as the
co-founders of Transcription and the key executive officers of Cadabra, 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 and Senior Vice President of
Engineering; Roger Sturgeon, one of our directors and a senior executive of
Transcription; Kevin MacLean, Senior Vice President and General Manager of
Transcription; Faysal Sohail, Senior Vice President of Worldwide Field
Operations and Martin Lefebrve, a member of our Office of Technology and senior
executive of Cadabra. 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.

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. 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, third parties have advised us of literature which they believe to be
relevant to our patents. It is possible that this literature or literature we
may be advised of in the future could negatively affect the scope or
enforceability of our present or future patents and/or result in costly
litigation. In addition, we are aware of and are evaluating certain patents with
which our products, patents or patent applications may conflict. If any of these
patents are found to be valid, and we are unable to license such patents on
reasonable terms, or if our products, patents, or patent applications are found
to conflict with these patents, we could be prevented from selling our products,
our patents may be declared invalid or our patent applications may not result in
issued patents. 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.

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 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 an increasingly significant portion of our revenue from
international sales. In the first quarter of 2001, compared to the first quarter
of 2000, the breakdown of our revenue by geographic region, as a percentage of
our total revenue, was North America, 54% and 64%, Asia, 36% and 28%, Europe, 8%
and 7%, and other, 2% and 1%, respectively. In addition, as a result of our
acquisition of Cadabra, a Nova Scotia limited liability company, 50 of our 207
employees as of March 31, 2001 were located in Ontario, Canada. We have only
limited experience in developing, marketing, selling and supporting our
proprietary technologies and software products, and managing our employees and
operations, internationally. We 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;

. 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;

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

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

. economic or political instability.

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

Our operations are primarily located in California and, as a result, are subject
to power loss and other natural disasters.

Our business operations depend on our ability to maintain and protect our
facilities, computer systems and personnel, which are primarily located in or
near our principal headquarters in San Jose, California. California is currently
experiencing power outages due to a shortage in the supply of power within the
state. In the event of an acute power shortage, California has on some occasions
implemented, and may in the future continue to implement, rolling blackouts
throughout California. We currently do not have backup generators or alternate
sources of power in the event of a blackout, and our current insurance does not
provide coverage for any damages we or our customers or industry partners may
suffer as a result of any interruption in our power supply. If blackouts
interrupt our power supply, we would be temporarily unable to continue
operations at our facilities. Any such interruption in our ability to continue
operations at our facilities could damage our reputation, harm our ability to
retain existing customers and industry partners, or obtain new customers or
industry partners, and could result in loss of revenue. Furthermore, the
deregulation of the energy industry in California has caused power prices to
increase. If wholesale prices continue to increase, our operating expenses will
likely increase. In addition, San Jose exists on or near a known earthquake
fault zone. Our facilities are susceptible to damage from earthquakes and other
natural disasters, such as fires, floods and similar events. Although we
maintain general business insurance against fires and some general business
interruptions, there can be no assurance that the amount of coverage will be
adequate in any particular case.

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 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
recently acquired Transcription and Cadabra, and we may acquire or make
investments in additional complementary businesses, technologies or products if
appropriate opportunities arise. 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.

The market price of our common stock has been and may continue to be volatile
and could decline.

The market price of our common stock has fluctuated in response to factors, some
of which are beyond our control, including:

. changes in market valuations of other technology companies;

. conditions or trends in the semiconductor industry;

. actual or anticipated fluctuations in our operating results;

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

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

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

. departures of key personnel.

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.

The fluctuations in our stock price could result in securities class action
litigation, which could result in substantial costs and diversion of our
resources.

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. The share prices of
technology 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 high prices only to see the price drop a short time
later, resulting in a drop in value in the stock holdings of these investors.
Our stock may not trade at the same levels as other technology stocks, or at its
historical prices.

Item 3. Quantitative and Qualitative Disclosure about Market Risk.

Our exposure to market risk for changes in interest rates relate
primarily to our investment portfolio. We do not use derivative financial
instruments for speculative or trading purposes. We place our investments in
instruments that meet high credit quality standards, as specified in our
investment policy. The policy also limits the amount of credit exposure to any
one issuer and type of instrument. We do not expect any material loss with
respect to our investment portfolio.

PART II - OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

(d) Use of Proceeds from Registered Securities
------------------------------------------

In April 2000, we sold a total of 6,364,100 shares of common stock (the
total amount registered) at $14.00 per share through our initial public offering
pursuant to a registration statement on Form S-1 declared effective by the
Securities and Exchange Commission on April 6, 2000 (333-95695). The initial
public offering commenced on April 7, 2000 and the net proceeds, after
underwriters' commission and fees and other costs of an estimated $7.9 million
associated with the offering, totaled approximately $81.2 million.

Since April 12, 2000 (the closing date of the initial public offering), we
have used an estimated $35.9 million of the net proceeds from the Company's
initial public offering to fund operating expenses and increase working capital,
$2.1 million to purchase and install machinery and equipment, and $30.2 million
to pay the balance of principal and accrued interest under the notes payable
issued in connection with the acquisition of Transcription in January 2000. We
have placed approximately $13.0 million in short-term, interest-bearing,
investment grade securities pending future use.

No payments constituted direct or indirect payments to our directors,
officers, general partners or their associates, or to persons owning ten percent
or more of any class of our equity securities or our affiliates.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.

The exhibits listed in the accompanying Index to Exhibits are incorporated
by reference as part of this Form 10-Q.

(b) Reports on Form 8-K

No reports on Form 8-K were filed by the Company during the quarter ending
March 31, 2001.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.

NUMERICAL TECHNOLOGIES, INC.

Dated April 27, 2001 By: /s/ Richard S. Mora
Richard S. Mora
Chief Financial Officer
(duly authorized officer and principal
financial accounting officer)

INDEX TO EXHIBITS

These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K:

EXHIBIT
NUMBER DESCRIPTION
------ -----------

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.*
2.3 Agreement and Plan of Amalgamation, dated as of September 5, 2000, by and
among Numerical Technologies, Inc., Numerical Nova Scotia Company,
Numerical Acquisition Limited, 3047725 Nova Scotia Limited, Cadabra
Design Automation Inc., Martin Lefebvre, and Faysal Sohail. ***
3.2 Amended and Restated Certificate of Incorporation of registrant.*
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.*
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, 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.*
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 PSM Software Development and License Agreement, dated as of March 10,
2000, by and between registrant and Cadence Design Systems, Inc.*+
10.38 License Agreement, dated March 1, 2000, between registrant and Motorola,
Inc.**+
10.39 Production License Agreement, dated December 31, 2000, between
registrant and United Microelectronics Corporation.****+

* Incorporated by reference to registration statement on Form S-1 (333-95695) as
declared effective by the Securities and Exchange Commission on April 6, 2000.

** Incorporated by reference to registration statement on Form 10-Q as filed
with the Securities and Exchange Commission on May 12, 2000.

*** Incorporated by reference to the current report on Form 8-K as filed with
the Securities and Exchange Commission on September 15, 2000.

**** Incorporated by reference to the registrant's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on March 27, 2001.

+ 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.