---

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|UNITED STATES
  SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
|------------------------------------------------------------------------
|                                                                        
|Form 20-F                                                               
|                                                                        

|                                  |  | o | REGISTRATION
  STATEMENT PURSUANT TO SECTION 12(b) or (g) 
  OF THE SECURITIES EXCHANGE ACT OF 1934
|--------------------------------- |  | - | ---------------------------------------------------------------------------------------------------
|                                  |  |   |                                                                                                    
|OR                               
|                                  |  |   |                                                                                                    
|                                  |  | x | ANNUAL
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF 
  THE SECURITIES EXCHANGE ACT OF 1934          
|                                  |  |   | For
  the fiscal year ended December 31, 2003                                                      
|                                  |  |   |                                                                                                    
|OR                               
|                                 
|                                  |  | o | 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 0-030668
|                                 

NOVA MEASURING INSTRUMENTS LTD.(Exact name of
Registrant as specified in its charter)

|Nova Measuring Instruments Ltd.                   | Israel                                           
|------------------------------------------------- | -------------------------------------------------
|(Translation
  of Registrants name into English) | (Jurisdiction
  of incorporation or organization)

|                                                                                                                 
|-----------------------------------------------------------------------------------------------------------------
|Weizmann Science Park, Building 22, 2nd Floor, Ness-Ziona 76100, Israel(Address of principal
  executive offices)
|                                                                                                                 

Securities registered or to be registered pursuant to
Section 12(b) of the Act.

|Title of each class |  | Name of each exchange on which registered
|------------------- |  | -----------------------------------------
|                    |  |                                          
|None                |  | None                                     

Securities registered or to be registered pursuant to
Section 12(g) of the Act:Ordinary Shares,
nominal value NIS 0.01 per share

Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act:None

Indicate
the number of outstanding shares of each of the issuers classes of capital or
common stock as of the close of the period covered by the annual report:

15,117,538
Ordinary Shares, NIS 0.01 nominal (par) value per share, as of December 31,
2003

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.

YesxNoo

Indicate
by check mark which financial statement item the registrant has elected to
follow:

Item
17oItem
18x

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Table of Contents

|                                                                       | Page                                                                                  
|---------------------------------------------------------------------- | --------------------------------------------------------------------------------------
|                                                                       |                                                                                       
|Introduction                                                           | 1                                                                                     
|                                                                       |                                                                                       
|Our Functional Currency                                                | 1                                                                                     
|                                                                       |                                                                                       
|Cautionary Statement Regarding
  Forward-Looking Statements            | 1                                                                                     
|                                                                       |                                                                                       
|PART I                                                                 | 2                                                                                     
|                                                                       |                                                                                       
|                                                                       | Item
  1.  Identity of Directors, Senior
  Management and Advisors                    
|                                                                       | Item
  2.  Offer Statistics and Expected
  Timetable                                  
|                                                                       | Item
  3.  Key Information                                                            
|                                                                       | Item
  4.  Information on the Company                                                 
|                                                                       | Item
  5.  Operating and Financial Review and
  Prospects                             
|                                                                       | Item
  6.  Directors, Senior Management and
  Employees                               
|                                                                       | Item
  7.  Major Shareholder and Related
  Party Transactions                         
|                                                                       | Item
  8.  Financial Information                                                      
|                                                                       | Item 9.  The Offer and Listing                                                        
|                                                                       | Item
  10. Additional Information                                                     
|                                                                       | Item
  11. Quantitative and Qualitative Disclosures About Market Risk                 
|                                                                       | Item
  12. Description of Securities Other than Equity Securities                     
|                                                                       |                                                                                       
|PART II                                                                | 63                                                                                    
|                                                                       |                                                                                       
|                                                                       | Item
  13. Defaults, Dividend Arrearages and Delinquencies                            
|                                                                       | Item 14. Material Modification to
  the Rights of Security Holders and Use of Proceeds
|                                                                       |                                                                                       
|Item 15                                                                | 63                                                                                    
|                                                                       |                                                                                       
|Item 16                                                                | 64                                                                                    
|                                                                       |                                                                                       
|Item 16A                                                               | 64                                                                                    
|                                                                       |                                                                                       
|Item 16B                                                               | 64                                                                                    
|                                                                       |                                                                                       
|Item 16C. Principal Accountant Fees
  and Services                     | 64                                                                                    
|                                                                       |                                                                                       
|Item 16D                                                               | 65                                                                                    
|                                                                       |                                                                                       
|Item 16D. Exemptions from the
  Listing Standards fro Audit Committees | 65                                                                                    
|                                                                       |                                                                                       
|PART III                                                               | 65                                                                                    
|                                                                       |                                                                                       
|                                                                       | Item
  17. Financial Statements                                                       
|                                                                       | Item
  18. Financial Statements                                                       
|                                                                       | Item
  19. Exhibits                                                                   
|                                                                       |                                                                                       
|Signatures                                                             | 67                                                                                    

i

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LOGO

Introduction

In
this Annual Report, the Company, Nova or we refers to Nova Measuring
Instruments Ltd. and its consolidated subsidiaries, when the context requires.

The
consolidated financial statements and selected consolidated financial data as
of December 31, 1999, 2000, 2001, 2002 and 2003 and for each of the years in
the five-year period ended December 31, 2003 (the Consolidated Financial
Statements), included in this Annual Report have been prepared in accordance
with accounting principles generally accepted in the United States of America
(U.S. GAAP).

Our Functional Currency

Unless
otherwise indicated, all amounts herein are expressed in United States dollars
(U.S. dollars, dollars, USD, US$ or $).

The
currency of the primary economic environment in which we operate is the U.S.
dollar, since substantially all our revenues to date have been denominated in
U.S. dollars and over 50% of our expenses are in dollars or in New Israeli
Shekels linked to the dollar. Transactions and balances denominated in dollars
are presented at their original amounts. Non-dollar transactions and balances
have been re-measured into dollars as required by the principles in Statement
No. 52 of the Financial Accounting Standards Board (FASB) of the United States
of America. All exchange gains and losses from such re-measurement are included
in the net financial income when they arise.

Cautionary Statement Regarding Forward-Looking
Statements

Certain
information contained herein, which does not relate to historical financial
information, may be deemed to constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. The words or
phrases  will likely result, are
expected to, will continue, is anticipated, estimate, project,
believe, plan, or similar expressions identify forward looking
statements.  Such statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical results and those presently anticipated or
projected. We wish to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. We undertake
no obligation to release publicly any revisions to these forwardlooking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events. Among the factors that could
cause our actual results in the future to differ materially from any opinions
or statements expressed with respect to future periods are competitive industry
conditions and the ability to forecast the needs of our semiconductor industry
with respect to the extreme cyclically and very fast technology evolutions.
Various other factors set forth in Item 3 Key Information and elsewhere
herein.

1

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PART I

Item 1. 
Identity of Directors, Senior Management and Advisors

Not
applicable.

Item 2.  Offer
Statistics and Expected Timetable

Not
applicable.

Item 3.  Key
Information

Selected Financial Data

The
following selected consolidated financial data as of December 31, 2002 and 2003
and for the years ended December 31, 2001, 2002 and 2003 have been derived from
our audited Consolidated Financial Statements. These financial statements have
been prepared in accordance with U.S. GAAP, and audited by Brightman Almagor
& Co., a member of Deloitte Touche Tohmatsu. The consolidated selected
financial data as of December 31, 1999, 2000 and 2001 and for the years ended
December 31, 1999 and 2000 have been derived from other consolidated financial
statements not included in this Form 20-F and have also been prepared in
accordance with U.S. GAAP and audited by Brightman Almagor & Co., a member
of Deloitte Touche Tohmatsu. The selected consolidated financial data set forth
below should be read in conjunction with and are qualified by reference to
Item 5, Operating and Financial Review and Prospects and the Consolidated
Financial Statements and notes thereto and other financial information included
elsewhere in this Form 20-F.

Summary
of Consolidated Financial Data

|                                             |                                                                 | Year ended
  December 31,               |       
|-------------------------------------------- | --------------------------------------------------------------- | --------------------------------------- | ------
|                                             |                                                                 |                                         |       
|                                             |                                                                 | 1999                                    |       
|                                             |                                                                 |                                         |       
|                                             |                                                                 | (in
  thousands, except per share data) |       
|                                             |                                                                 |                                         |       
|Consolidated Statement of
  Operations Data: |                                                                 |                                         |       
|Revenues                                     |                                                                 | $                                       | 27,581
|Cost of revenues                             |                                                                 |                                         | 14,668
|                                             |                                                                 |                                         |       
|Gross profit                                 |                                                                 |                                         | 12,913
|                                             |                                                                 |                                         |       
|                                             | Operating expenses:                                             |                                         |       
|                                             | Research and development expenses, net                          |                                         |       
|                                             | Sales and marketing expenses                                    |                                         |       
|                                             | General and administrative expenses                             |                                         |       
|                                             | Other operating expenses (income)                               |                                         |       
|                                             |                                                                 |                                         |       
|                                             | Total operating expenses                                        |                                         |       
|                                             |                                                                 |                                         |       
|Operating loss                               |                                                                 |                                         | (5,394
|Financing income, net                        |                                                                 |                                         | 509   
|Other expenses                               |                                                                 |                                         | (150  
|                                             |                                                                 |                                         |       
|Net income (loss)                            |                                                                 | $                                       | (5,035
|                                             |                                                                 |                                         |       
|                                             |                                                                 |                                         |       
|                                             | Earnings (loss) per share:                                      |                                         |       
|                                             | Basic earnings (loss) per share                                 |                                         | $     
|                                             | Diluted earnings (loss) per share                               |                                         |       
|                                             | Shares used in calculation of basic earnings
  (loss) per share |                                         |       
|                                             | Shares used in calculation of diluted
  earnings per share      |                                         |       
|                                             |                                                                 |                                         |       

2

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|                                 |                      | December
  31,   |  
|-------------------------------- | -------------------- | ---------------- | -
|                                 |                      |                  |  
|                                 |                      | 1999             |  
|                                 |                      |                  |  
|                                 |                      | (in
  thousands) |  
|Consolidated Balance Sheet Data: |                      |                  |  
|                                 | Working capital      |                  | $
|                                 |                      |                  |  
|                                 | Total assets         |                  |  
|                                 |                      |                  |  
|                                 | Shareholders equity |                  |  
|                                 |                      |                  |  
|                                 | Dividends declared   |                  |  
|                                 |                      |                  |  

Risk
Factors

Risks
Related to Our Business and Our Industry

Because
substantially all our current sales are dependent on a single product line,
factors that adversely affect the pricing and demand for this product line
could substantially reduce our sales.

Although
we have expanded our product offering, we are currently dependent on a single
integrated process control product line targeting the chemical mechanical
polishing market. We expect revenues from this product line to continue to
account for a substantial portion of our revenues for at least the next year.
As a result, factors adversely affecting the pricing of or demand for
integrated process controls for the chemical mechanical polishing equipment
field, such as competition and technological change, could substantially reduce
our sales.

The main
markets we target are highly cyclical and are currently expanding after
experiencing a prolonged and severe downturn; it is difficult to predict the
length and strength of this period of expansion or when the next downturn will
occur.

The semiconductor capital
equipment market and industries are highly cyclical and are currently expanding
after experiencing a prolonged and severe downturn, during which the overall
rate of capital spending and purchase of manufacturing equipment had been
sharply cut and sales of our products had declined. As a result of this
recovery, we are beginning to see an increase in capital spending. However,
although we rely on market research companies, we cannot predict the length and
strength of this recovery. Should another downturn occur, we have only a
limited ability to reduce expenses because of the need for significant ongoing
expenditures related to engineering, research and development and worldwide
customer service and support operations. Accordingly, we may incur losses
during future downturns.

Our
inability to reduce spending during a protracted slowdown in the semiconductor
industry could reduce our prospects of achieving profitability.

Historically,
we have derived all of our revenues, and we expect to continue to derive all of
our revenues from sales of our products and related services to the
semiconductor industry. Our business depends in large part upon capital
expenditures by semiconductor manufacturers, which in turn depend upon the
current and anticipated demand for semiconductors.  The semiconductor industry has experienced, and is currently
experiencing, severe and protracted cyclical downturns, characterized by
slowing product demand, inventory surpluses, accelerated erosion of average
selling prices and production overcapacity. These downturns, including the
current one, have materially reduced demand for the type of capital equipment
and process technology that we offer and our sales and revenues have declined.
In addition, our ability to reduce expenses in response to any downturn or
slowdown in the rate of capital investment by manufacturers in these industries
may be limited because of:

| |  | our continuing need to invest in research and
  development,                
| | - | ----------------------------------------------------------------------------
| |   |                                                                             
| |  | our capital equipment requirements, and                                     
| |   |                                                                             
| |  | our extensive ongoing customer service and support
  requirements worldwide.

3

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---

If we do
not respond effectively and on a timely basis to rapid technological change,
our ability to attract and retain customers could be diminished, which would
hurt our sales and ability to remain competitive.

The
semiconductor manufacturing industry is characterized by rapid technological
change, new product introductions and enhancements and evolving industry
standards. Our ability to remain competitive and generate sales revenue will
depend in part upon our ability to develop new and enhanced systems at
competitive prices in a timely and cost-effective manner and to accurately
predict technology transitions. Because new product development commitments
must be made well in advance of sales, new product decisions must anticipate
the future demand for products.  If we
fail to correctly anticipate future demand for products, our sales and
competitive position could suffer.  In
addition, the development of new measurement technologies, new product
introductions or enhancements by our competitors could cause a decline in sales
or loss of market acceptance of our existing products.

We may
not be able to develop or market new products, which could slow or prevent our
growth.

Our
business plan requires the introduction of several new product lines. Our plans
to introduce process control products for photolithography, etch and other
processes will require development of new capabilities. Some of these projects
are in the early stages of development, and we cannot be certain that we will
be able to develop or bring to market these new product lines or, if we do,
that these products will be well received or profitable.  If we are unable to successfully introduce
new product lines, our future growth could be adversely affected.

New
product lines that we may introduce in the future may contain defects, which
will require us to allocate time and financial resources to correct.

Our
new product lines may contain defects when first introduced.  If there are defects, we will need to divert
the attention of our personnel from our product development efforts to address
the detection and correction of the defects. 
In the past, no liability claims have been filed against us for damages
related to product defects, and we have not experienced any material delays as
a result of product defects.  However,
we cannot assure you that we will not incur these costs or liabilities or
experience these lags or delays in the future. Moreover, the occurrence of such
defects, whether caused by our products or the products of another vendor, may
result in significant customer relations problems and injury to our reputation
and may impair the market acceptance of our products.

We have
had a history of losses and may incur future losses.

Since
our inception in 1993, we have incurred net losses in every year other than in 1998
and 2000, and our losses may continue. As of December 31, 2003, we had an
accumulated deficit of $40.4 million. We plan to continue the level of our
aggregate product development, sales and marketing and administrative expenses
over the next 12 months. Accordingly, to achieve profitability, we will need to
increase our revenues. In the future, our revenues may not grow and we may not
achieve profitability in the future.

Because
we have a limited operating history with one product line, our historical results
may not be indicative of our future results, and it is difficult to evaluate
our business and prospects.

Our
first system for chemical mechanical polishing applications was developed and
introduced to the market in October 1995. Because this is the only product line
with which we have significant manufacturing and marketing experience and
because of our focus on the development and introduction of new products, our
past operating results may not be indicative of our future results. Companies
in an early stage of product development frequently have higher risks and
encounter unexpected expenses and difficulties. These risks, expenses and
difficulties apply particularly to us because the semiconductor manufacturing
business is a rapidly evolving market characterized by technological advances.
The uncertainty of our future performance increases the risk that the value of
your investment will decline.

4

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---

Our
dependence on a single manufacturing facility magnifies the risk of an
interruption in our production capabilities.

We have only one
manufacturing facility, which is located in Ness-Ziona, Israel. Any event
affecting this site, including natural disaster, labor stoppages or armed
conflict, may disrupt or indefinitely discontinue our manufacturing
capabilities and could significantly impair our ability to fulfill orders and
generate revenues, thus negatively impacting our business.

We
experience quarterly fluctuations in our operating results, which may adversely
impact our stock price.

Our
quarterly operating results have fluctuated significantly in the past, and we
expect this trend to continue. A principal reason is that we derive a
substantial portion of our revenue from the sale of a relatively small number
of systems to a relatively small number of customers. As a result, our revenues
and results of operations for any given quarter may decrease due to factors
relating to the timing of orders by, and shipments of systems to, significant
customers.

We
also have a limited ability to predict revenues for future quarterly periods
and face risks of revenue shortfalls due to our limited sales backlog in
current periods. If the number of systems we actually ship, and thus the amount
of revenues we are able to record in any particular quarter, is below our
expectations, the adverse effect may be magnified by our inability to adjust
spending quickly enough to compensate for the revenue shortfall.

We may
not be able to expand our manufacturing capacity or marketing efforts quickly enough
to support our future growth.

Because
of our small size and our business strategy to aggressively increase our sales,
we anticipate an increased demand on all of our resources. If we do not
accurately estimate our need for personnel, manufacturing capacity or marketing
and customer support, we may not be able to support our future growth.

We
depend on a small number of large customers, and the loss of one or more of
them would lower our revenues.

Our
customer base is highly concentrated among a limited number of large customers,
primarily because the semiconductor industry is dominated by a small number of
large companies. The following table indicates the percentage of our total
revenues derived from sales to our five largest customers and the percentage
range of these revenues from these customers for the periods indicated:

| |                                                      |  | Year ended
  December 31, | 
| | ---------------------------------------------------- |  | ------------------------- | 
| |                                                      |  |                           | 
| |                                                      |  | 2000                      | 
| |                                                      |  |                           | 
| | Total revenues from five
       largest customers    |  | 66%                       | 
| | Range of revenues from five
       largest customers |  | 6%-21%                    | 

We
anticipate that our revenues will continue to depend on a limited number of
major customers, although the companies considered to be our major customers
and the percentage of our revenue represented by each major customer may vary
from period to period. Furthermore, if any of our customers become insolvent or
have difficulties meeting their financial obligations to us as a result of the
current protracted slowdown in the semiconductor industry or as a result of any
other reason, we may suffer losses.

We
operate in an extremely competitive market, and if we fail to compete
effectively, our revenues and market share will decline.

Although
the market for integrated process control systems used in semiconductor
manufacturing is currently concentrated and characterized by relatively few
participants, the semiconductor capital equipment industry is intensely
competitive. We compete with Nanometrics Inc., Therma-Wave Inc. and Rudolph
Technologies Inc., which manufacture and sell integrated process control
systems. In addition, we compete with established manufacturers of conventional
stand-alone measurement equipment, such as KLA-Tencor Corp., and original
equipment manufacturers of semiconductor equipment, such as Tokyo Electron Ltd.
Established companies, both domestic and foreign, compete with our product
line, and new competitors are entering our market. Many of our competitors have
greater financial, engineering, manufacturing and marketing resources than we
do. If a particular customer selects a competitors capital equipment, we
expect to experience difficulty in selling to that customer for a significant
period of time. A substantial investment is required by customers to evaluate,
test, select and integrate capital equipment into a production line. As a
result, once a manufacturer has selected a particular vendors capital
equipment, we believe that the manufacturer generally relies upon that
equipment for the specific production line application and frequently will
attempt to consolidate its other capital equipment requirements with the same
vendor. We believe that our ability to compete successfully depends on a number
of factors both within and outside of our control, including:

5

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| |  | the contribution of our equipment to our customers
  productivity;         
| | - | ----------------------------------------------------------------------------
| |   |                                                                             
| |  | our product quality and performance;                                        
| |   |                                                                             
| |  | our global technical service and support;                                   
| |   |                                                                             
| |  | the return on investment (ROI) of our equipment and
  its cost of ownership;
| |   |                                                                             
| |  | the breadth of our product line; and                                        
| |   |                                                                             
| |  | our success in developing and marketing new
  products.                     

If
we fail to compete in a timely and cost-effective manner against current or
future competitors, our revenues and market share will decline.

The
ongoing consolidation in our industry may harm us if our competitors are able
to offer a broader range of products and greater customer support than we can
offer.

We
believe that the semiconductor capital equipment market is undergoing
consolidation. A number of suppliers have been acquired by larger equipment
manufacturers. For example, in 2001 Therma-Wave Inc. acquired Sensys
Instruments Corp., in 2002 Rudolph Technologies Inc. acquired ISOA Inc. and in
2003 Applied Materials acquired Boxer Cross Inc. We believe that similar
acquisitions and business combinations involving our competitors and customers
may occur in the future. These acquisitions could adversely impact our
competitive position by enabling our competitors and potential competitors to
expand their product offerings and customer service, which could provide them
an advantage in meeting customers needs, particularly with those customers
that seek to consolidate their capital equipment requirements with a smaller
number of vendors. The greater resources, including financial, marketing and
support resources, of competitors involved in these acquisitions could permit
them to accelerate the development and commercialization of new competitive
products and the marketing of existing competitive products to their larger
installed bases. Accordingly, such business combinations and acquisitions by
competitors or customers could jeopardize our competitive position.

Because
we are small, we depend on a small number of employees who possess both
executive and technical expertise, and the loss of any of these key employees
would hurt our ability to implement our strategy and to compete effectively.

Because
of our small size and our reliance on employees with both executive and
advanced technical skills, our success depends significantly upon the continued
contributions of our officers and key personnel. All of our key management and
technical personnel have expertise, which is in high demand among our
competitors, and the loss of any of these individuals could cause our business
to suffer. We do not maintain life insurance policies for our officers and
directors.

Our
lengthy sales cycle increases our exposure to customer cancellations or delays
in orders, which may result in obsolete inventory and volatile quarterly
revenues.

Sales
of our systems depend, in significant part, upon our customers adding new
manufacturing capacity or expanding existing manufacturing capacity, both of
which involve a significant capital commitment. We may experience delays in
finalizing sales following initial system qualification while a customer
evaluates and approves an initial purchase of our systems. In general, for new
customers or applications, our sales cycle takes between 3 and 24 months to
complete. During this time, we may expend substantial funds and management
effort. Lengthy sales cycles subject us to a number of significant risks,
including inventory obsolescence and fluctuations in operating results, over
which we have little or no control.

6

---

---

Because
of the technical nature of our business, our intellectual property is extremely
important to our business, and our inability to protect our intellectual
property would harm our competitive position.

As
of December 31, 2003, we had obtained 29 U.S. patents and had 24 U.S. patent
applications pending. In addition, we had obtained 16 foreign patents and had
more than 70 foreign patent applications pending.

We
cannot assure you that:

| |  | pending patent applications will be approved;                                                                                                                             | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |   |                                                                                                                                                                           | 
| |  | any patents will be broad enough to protect our
  technology, will provide us with competitive advantages or will not be
  challenged or invalidated by third parties; or | 
| |   |                                                                                                                                                                           | 
| |  | the patents of others will not have an adverse
  effect on our ability to do business.                                                                                    | 

We
cannot assure you that others will not independently develop similar products,
duplicate our products or, if patents are issued to us, design around these
patents. Further, because patents may afford less protection under foreign law
than is available under U.S. law, we cannot assure you that any foreign patents
issued to us will adequately protect our proprietary rights.

In
addition to patent protection, we also rely upon trade secret protection,
employee and third-party nondisclosure agreements and other intellectual
property protection methods to protect our confidential and proprietary
information. Despite these efforts, we cannot be certain that others will not
otherwise gain access to our trade secrets or disclose our technology.

There
has been significant litigation involving intellectual property rights in the
semiconductor and related industries and similar litigation involving Nova
could force us to divert resources to defend against this litigation or deter
our customers from purchasing our systems.

We
have been, and may in the future be, notified of allegations that we may be
infringing intellectual property rights possessed by others. In addition, we
may be required to commence legal proceedings against third parties, which may
be infringing our intellectual property, in order to defend our intellectual
property.  In the future, protracted
litigation and expense may be incurred to defend ourselves against alleged
infringement of third party rights or to defend our intellectual property
against infringement by third parties. Adverse determinations in that type of
litigation could:

| |  | result in our loss of proprietary rights;                                                                               | 
| | - | ----------------------------------------------------------------------------------------------------------------------- | 
| |   |                                                                                                                         | 
| |  | subject us to significant liabilities, including
  treble damages in some instances;                                    | 
| |   |                                                                                                                         | 
| |  | require us to seek licenses from third parties,
  which licenses may not be available on reasonable terms or at all; or | 
| |   |                                                                                                                         | 
| |  | prevent us from selling our products.                                                                                   | 

Any
litigation of this type, even if we are ultimately successful, could result in
substantial cost and diversion of time and effort by our management, which by
itself could have a negative impact on our profit margin, competitive position
and ability to develop and market new and existing products.

7

---

---

We
have become aware of a United States patent held by a competitor, which may be
interpreted to cover some aspects of the products we sell in the United
States.  Nonetheless, we have not
received any indications of intention to enforce this patent or any notice from
the competitor with respect to this patent. In addition, the patent is being
reexamined by the United States Patent and Trademark Office (USPTO), is
unenforceable at this time, and may or may not survive the reexamination. If
the USPTO decides to allow the patent to stand in some reexamined form, it is
possible that the competitor could seek to enforce the patent rights against
certain of our products sold in the United States, seeking damages, an
injunction, or requiring us to pay royalties for a license.  While we believe that we would be successful
in any litigation seeking to enforce those patent rights, the ultimate outcome
of any litigation or other legal proceedings cannot be predicted.

We
depend on a limited number of suppliers, and in some cases a sole supplier. Any
disruption or termination of these supply channels may adversely affect our
ability to manufacture our products and to deliver them to our customers.

We
purchase components, subassemblies and services from a limited number of
suppliers and occasionally from a single source. Disruption or termination of
these sources could occur, and these disruptions could have at least a
temporary adverse effect on our operations. To date, we have not experienced
any material disruption or termination of our supply sources. A prolonged
inability on our part to obtain components included in our systems on a
cost-effective basis could adversely impact our ability to deliver products on
a timely basis, which could harm our sales and customer relationships.

We are
dependent on international sales, which expose us to foreign political and
economic risks that could impede our plans for expansion and growth.

Our
principal customers are located in the United States, Japan, Taiwan and South
Korea and we produce our products in Israel. International operations expose us
to a variety of risks that could seriously impact our financial condition and
impede our growth. For instance, trade restrictions, changes in tariffs and
import and export license requirements could adversely affect our ability to
sell our products in the countries adopting or changing those restrictions,
tariffs or requirements. This could reduce our sales by a material amount.

Because
we derive a significant portion of our revenues from sales in Asia, our sales
could be hurt by the instability of Asian economies.

A
number of Asian countries have recently experienced political and economic
instability. For instance, Taiwan and China have had a number of disputes, as
have North and South Korea, and Japan has for a number of years experienced
significant economic instability. We have a subsidiary in Taiwan and we have
significant customers in Japan and South Korea. An outbreak of hostilities or
other political upheaval or economic downturns in these or other Asian
countries would likely harm the operations of our customers in these countries,
causing our sales to suffer.

A large
number of our ordinary shares continue to be owned by a relatively small number
of shareholders, whose future sales of our stock, if substantial, may depress
our share price.

If
our principal shareholders sell substantial amounts of our ordinary shares,
including shares issued upon the exercise of outstanding options, the market
price of our ordinary shares may fall. As of December 31, 2003 we had
15,117,538 ordinary shares outstanding, of which 10,659,326 shares were held by
eight shareholders.

Because four of our shareholders control approximately 51% of our ordinary shares, they can control the
outcome of matters submitted to a vote of our shareholders, including the election of directors.

As of April 30, 2004, four of our
shareholders controlled approximately 7.7 million, or 51%, of our ordinary shares. As a
result, and although we are currently not aware of any voting agreement between such
shareholders, if these shareholders voted together or in the same manner, they would have
the ability to control the outcome of corporate actions requiring shareholder approval.
Even if these four shareholders do not vote together, each has the ability to influence
the outcome of corporate actions requiring shareholder approval.  For additional
information on our major shareholders, see Major shareholders on page 46 of
this report.

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Risks
Related to Operations in Israel

Potential
political, economic and military instability in Israel may adversely affect our
growth and revenues.

Our
principal offices and manufacturing facilities and many of our suppliers are
located in Israel. Although most of our sales are currently being made outside
Israel, political, economic and military conditions in Israel directly affect
our operations. Since the establishment of the State of Israel in 1948, a
number of armed conflicts have taken place between Israel and its Arab
neighbors. Conflicts between Israel and Palestinian militant groups have been
ongoing. A state of hostility, varying in degree and intensity, has led to
security and economic problems for Israel. 
The resumption of hostilities in the region, which have occurred after
the failure of Camp David peace talks, as well as the events of September 11,
2001, and the on-going tension in the region, have a negative effect on the
stability of the region which might have negative effect on our business and
harm our growth and revenues. For further detail see Item 5, paragraph
Political and economic conditions in Israel.

Our
operations may be disrupted by the obligation of key personnel to perform
military service.

Some
of our executive officers and employees in Israel are obligated to perform up
to 36 days of military reserve duty annually. This time-period may be extended
by the Minister of Defense or in the event of a declared national emergency.
Our operations could be disrupted by the absence for a significant period of
one or more of our executive officers or key employees due to military service.
To date, our operations have not been materially disrupted as a result of these
military service obligations, and no executive officer or key employee was
recruited for any significant time period. Any disruption in our operations due
to such obligations would adversely affect our ability to produce and market our
existing products and to develop and market future products.

Because
most of our revenues are generated in U.S. dollars, but a significant portion
of our expenses is incurred in New Israeli Shekels, our profit margin may be
seriously harmed by inflation and currency fluctuations.

We
generate most of our revenues in U.S. dollars, but incur a significant portion
of our expenses in New Israeli Shekels, commonly referred to as NIS. As a
result, we are exposed to risk to the extent that the rate of inflation in
Israel exceeds the rate of devaluation of the NIS in relation to the dollar or
if the timing of this devaluation lags behind inflation in Israel with respect
to such expenses that might increase as a result of inflation in Israel. In
that event, the dollar cost of our operations in Israel will increase and our
dollar measured results of operations will be adversely affected. Our
operations also could be adversely affected if we are unable to hedge against
currency fluctuations in the future. Accordingly, we may enter into currency
hedging transactions to decrease the risk of financial exposure from
fluctuations in the exchange rate of the dollar against the NIS. These
measures, however, may not adequately protect us from material adverse effects
due to the impact of inflation in Israel.

We
participate in government programs under which we receive tax and other
benefits. The reduction or termination of these programs would increase our
costs.

We
receive conditional grants from the Office of the Chief Scientist of the
Israeli Ministry of Industry and Trade for research and development programs
that meet specified criteria. We are also eligible to receive tax benefits
under Israeli law for capital investments that are designated as approved
enterprises. To maintain our eligibility for these programs and tax benefits,
we must continue to meet conditions, including paying royalties related to
grants received and making specified investments in fixed assets. In addition,
some of these programs restrict our ability to manufacture particular products
and transfer particular technology outside of Israel. If we fail to comply with
these conditions in the future, the benefits received could be cancelled. We
could also be required to pay increased taxes or refund any benefits previously
received, adjusted for inflation and interest. In 2002 and 2003, we recorded an
aggregate of $1.7 million and $1.4 million, respectively, in conditional grants
under Israeli government programs. As of December 31, 2002, our contingent
liability to the Office of the Chief Scientist for grants received was
approximately $ 0.7 million. As of December 31, 2003, our contingent liability
to the Office of the Chief Scientist for grants received was approximately $3.6
million. See also Note 7A to our consolidated 
financial statements contained elsewhere in this report.  From time to time, we submit requests for
new grants from the Office of the Chief Scientist and for expansion of our
approved enterprise programs. These requests might not be approved. The Israeli
government has reduced the benefits available under these programs in recent
years and has indicated that it may reduce or eliminate these benefits in the
future. The termination or reduction of these grants and tax benefits could
harm our business, financial condition and results of operations. In addition,
if we increase our activities outside the State of Israel due to, for example,
future acquisitions, our increased activities generally will not be eligible
for inclusion in Israeli tax benefit programs. Accordingly, our effective
corporate tax rate could increase significantly in the future.

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Any
shareholder with a cause of action against us as a result of purchasing our
ordinary shares, or as a result of buying, selling or holding our ordinary
shares may have difficulty asserting a claim under U.S. securities laws or
enforcing a U.S. judgment against us or our officers, directors or Israeli
auditors.

We
are organized under the laws of the State of Israel, and we maintain
significant operations in Israel. Most of our officers and directors as well as
our Israeli auditors reside outside of the United States and a substantial
portion of our assets and the assets of these persons are located outside the
United States. Therefore, if you wish to enforce a judgment obtained in the
United States against us, or our officers, directors and auditors, you will
probably have to file a claim in an Israeli court. Additionally, you might not
be able to bring civil actions under U.S. securities laws if you file a lawsuit
in Israel. We have been advised by our Israeli counsel that Israeli courts
generally enforce a final executory judgment of a U.S. court for liquidated
amounts in civil matters after a hearing in Israel.  If a foreign judgment is enforced by an Israeli court, it will be
payable in Israeli currency.

Our
shares are listed for trade on more than one stock exchange, and this may
result in price variations.

Our
ordinary shares are listed for trading on the Nasdaq National Market and on the
Tel Aviv Stock Exchange. This may result in price variations. Our ordinary
shares are traded on these markets in different currencies, U.S. dollars on the
Nasdaq and New Israeli Shekels on the Tel Aviv Stock Exchange. These markets
have different opening times and close on different days. Different trading
times and differences in exchange rates, among other factors, may result in our
shares being traded at a price differential on these two markets. In addition,
market influences in one market may influence the price at which our shares are
traded on the other. While our ordinary shares are listed for trading on the
Tel Aviv Stock Exchange, there has been no trading of our shares on that
exchange since the fourth quarter of 2002. We believe that there has not been
any trading on the Tel Aviv Stock Exchange since fourth quarter of 2002 as a
result of the belief of buyers and sellers that the Nasdaq market offers
greater liquidity and, generally, more favorable prices.  We are unable to predict whether there will
be trading on the Tel Aviv exchange in the future.

We may
be classified as a passive foreign investment Company and, as a result, our
U.S. shareholders may suffer adverse tax consequences.

Generally,
if for any taxable year 75% or more of our gross income is passive income, or
at least 50% of our assets are held for the production of, or produce, passive
income, we may be characterized as a passive foreign investment company for
U.S. federal income tax purposes. Our passive income would not include income
derived from the sale of our products, but would include amounts derived by
reason of a temporary investment of any cash amounts.  This characterization could result in adverse U.S. tax
consequences to our shareholders, including having gain realized on the sale of
our shares be treated as ordinary income, as opposed to capital gain income,
and having potentially punitive interest charges applied to such sales proceed.
U.S. shareholders should consult with their own U.S. tax advisors with respect
to the U.S. tax consequences of investing in our ordinary shares.

We
believe that in 2003 we were not a passive foreign investment company and
currently we expect that we will not be a passive foreign investment company in
2004. However, passive foreign income company status is determined as of the
end of the full tax year and is dependent on a number of factors, including the
value of a corporations assets in the amount and type of its gross income.  Therefore, there can be no assurances that
we will not become a passive foreign investment company for the current fiscal
year ending on December 31, 2004 or any future year. For a discussion on how we
might be characterized as a passive foreign investment company and related tax
consequences, please see the section of this annual report entitled U.S.
Taxation  Passive Foreign Investment Companies.

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Item 4.  Information
on the Company

History
and Development of the Company

Nova
Measuring Instruments Ltd. was incorporated in May 1993 under the laws of the
State of Israel. We commenced operations in October 1993 to design, develop and
produce integrated process control systems for use in the manufacture of
semiconductors, also known as integrated circuits or chips. In October 1995, we
began manufacturing and marketing systems for chemical mechanical polishing. We
have since expanded our product offering to include systems designed for
chemical vapor deposition, lithography and etch, and are continuing to develop
new products and additional applications for our current products.

In
April 2000, we conducted an initial public offering pursuant to which we sold
3,000,000 ordinary shares for consideration of $54 million and net proceeds of
$49.2 million.  In connection with the
public offering, our shares were listed for trading on the Nasdaq National
Market.

In
June 2002, we listed our shares in the Tel-Aviv Stock Exchange in Israel,
pursuant to legislation which enables Israeli companies whose shares are traded
on certain stock exchanges outside of Israel, to be registered on the Tel Aviv
Stock Exchange, while reporting, in substance, according to the provision of
the relevant foreign securities law applicable to the company. The Israeli
securities laws prescribe that as condition precedent of a company being
eligible to register its shares for trade on the Tel Aviv Stock Exchange, the
companys capital should consist of a single class of shares with equal voting
rights with respect their par value. Accordingly, all of our series E shares
were converted into ordinary shares in May 2002.  This conversion was approved by the Tel Aviv District Court on
May 2002 and our articles of association were amended accordingly.

We
have four wholly owned subsidiaries in the U.S., Japan, Taiwan and Netherlands.
These subsidiaries are engaged in marketing activities and provide technical
support to our customers.

Our
main office, research and development and production facilities are located in
Israel at the Weizmann Science Park, Building 22, 2nd Floor, Ness-Ziona. Our
telephone number at our main office is +1-972-8-938-7505.  Our agent for service of process in the U.S.
is David Gitlin, of Wolf, Block, Schorr and Solis-Cohen LLP, 1650 Arch Street,
22nd Floor, Philadelphia, PA  19103.

Overview

We
are a worldwide leading designer, developer and producer of integrated process
control metrology systems used in the manufacture of semiconductors and a
leading designer, manufacturer and producer of stand-alone process control
metrology systems.  Metrology systems
measure various thin film properties, critical circuit dimensions and
layer-to-layer circuit alignment, known as overlay, during various steps in the
semiconductor manufacturing process, allowing semiconductor manufacturers to
increase quality, productivity and yields, lower their manufacturing costs and
increase their profitability.  We supply
our metrology systems to major semiconductor manufacturers worldwide, either directly
or through process equipment manufacturers. 
Of the 20 semiconductor manufacturers that had the highest capital
equipment expenditures in 2003, 18 use our systems, including Intel, Samsung,
TSMC, UMC, IBM, AMD and Micron Technology. 
Process equipment manufacturers that purchase our metrology systems
include Applied Materials, Ebara, Novellus and Lam Research.  Our systems were first installed in 1995
and, since that time, we have sold more than 1,100 metrology systems.

The
semiconductor manufacturing process starts with a silicon wafer that has been
highly polished on one side to a mirror finish, upon which circuits are
constructed.  To construct the circuits,
a series of layers of thin films that act as conductors, semiconductors or insulators
are applied to the polished side of the wafer. 
During the manufacturing process, these film layers are subjected to
processes, which remove portions of the film layers, create circuit patterns
and perform other functions.  The
semiconductor manufacturing process requires exacting steps and strict control
of equipment performance and process sequences.  Tight control can be achieved through monitoring silicon wafers
and measuring relevant parameters after each process step with metrology tools
such as those we produce.

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Prior
to the introduction or our integrated metrology systems, process control was
achieved through stand-alone measurement equipment.  Stand-alone measurement equipment requires semiconductor
manufacturers to interrupt the manufacturing process sequence, remove sample
silicon wafers from the process equipment and place the silicon wafers on the
stand-alone measuring or inspection tool. 
In contrast, our integrated metrology approach is based upon patented
measuring methods that enable us to produce optical measuring systems that are
small enough to be integrated directly inside many types of semiconductor
process equipment.  Our integrated
approach offers considerable advantages over the conventional stand-alone approach
to metrology control, enabling manufacturers using our equipment to reduce
costs and to improve production efficiency, yield and quality.

We
have emphasized our integrated metrology solutions in the past and intend to
continue to do so.  However, we also
produce stand-alone metrology systems. We plan to leverage our technology,
methods, metrology expertise and market position in the integrated metrology
field to expand our offerings of stand-alone metrology systems. Our long-term
strategy is focused on advanced metrology and process control solutions where
our integrated process control products and stand alone products are compatible
or complementary.

Demand
for metrology systems, whether integrated or stand-alone, is driven by capital
equipment purchases by semiconductor manufacturers, which in turn are driven by
worldwide demand for semiconductors. 
Industry data indicates that the worldwide demand for semiconductors is
growing.  We believe that this growth in
demand will drive demand for process control equipment, including metrology
systems, as semiconductor manufacturers add capacity.  Demand for metrology systems will also be driven by the
increasing cost to manufacture semiconductors, which are becoming larger and
more complex, and the demands of semiconductor manufacturers for process
equipment that provides better film uniformity, increased dimensional control,
tool-to-tool matching and within-tool uniformity.

Our
Market

Growth
of the Semiconductor Industry and the Metrology Market

The
use of semiconductor devices continues to increase.  Semiconductors are no longer used solely in personal computers
and computer systems, but also in wireless communications, Internet
infrastructure, Internet access devices, automobiles, portable electronic
devices and other advanced consumer electronics.  As a result of the increasing demand for semiconductors, the
semiconductor industry has experienced significant growth over the past eight
to 10 years, despite a severe downturn between 2000 and 2003. According to the
Semiconductor Industry Association, worldwide sales of semiconductors increased
from $151 billion in 1995 to $224 billion in 2000, before decreasing to $167
billion in 2003. Over the past decade, the increased use of semiconductors has
driven demand for additional semiconductor manufacturing capacity. In turn, the
addition of semiconductor manufacturing capacity, whether through new
construction or refurbishment of existing manufacturing facilities, has been a
driver of demand for metrology systems such as those we produce.

The
increased use of semiconductors has been accompanied by in increase in their
complexity.  Due to the creation of new
applications and markets for semiconductors, suppliers and manufacturers are
faced with an increasing demand for new products that provide greater
functionality and higher performance at lower prices.  As a result, many new complex materials, structures and processes
are being introduced to semiconductor manufacturing.  New materials include copper, low- and high-k dielectrics,
silicon-on-insulator, silicon-germanium, strained silicon, raised
source/drain.  New processes include
chemical mechanical polishing (CMP), electro chemical plating (ECP) and atomic layer
deposition (ALD). Manufacturers are also increasingly moving toward 300 mm
silicon wafers from 200 mm silicon wafers. 
While 300 mm wafers can yield up to twice as many integrated circuits as
200 mm wafers, larger wafers increase manufacturing challenges.  For example, because 300 mm wafers can bend
or bow more than twice as much as 200 mm wafers, they are more susceptible to
damage.  The larger area of 300 mm
wafers also makes it more difficult to maintain film uniformity across the
entire wafer.  Semiconductors also
continue to move toward smaller feature sizes and more complex multi-level
circuitry.  The increase in complexity
of semiconductors and the resulting increase in the complexity and cost of the
semiconductor manufacturing process has also been a driver of demand for
metrology systems.

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The
ever-increasing level of complexity and the decrease in feature sizes has also
significantly increased the cost and performance requirements of semiconductor
fabrication equipment. The cost of wafer fabrication equipment is also
increased due to the higher levels of automation being utilized by
manufacturers. Thus, semiconductor manufacturers must increase their investment
in capital equipment in order to sustain technological leadership, to expand
manufacturing capacity and maintain profitability.  According to published reports by an industry market research
firm, the cost of building a state-of-the-art semiconductor manufacturing
facility has grown from approximately $200 million in 1983 to over $3 billion
today. Capital equipment, which includes metrology systems, accounts for 65% to
75% of this sum, according to industry data. We believe that the process
control equipment market, which includes the metrology segment, in the future
will grow at a rate greater than the overall process equipment market since
process control equipment is expected to consume a larger portion of the
overall costs of semiconductor manufacturing equipment.

While
we expect that the demand for semiconductors will increase and the market for
semiconductor process control equipment will expand, we cannot assure you that
either will occur, that we will benefit from any increase in demand or
expansion of the process control market, or that our products will be accepted
in the market place.  Our industry is
intensively competitive and if we fail to compete effectively our revenues and
market share will decline.

The
Semiconductor Manufacturing Process

Semiconductors
typically consist of transistors or other components connected by an intricate
system of circuitry on flat silicon discs known as wafers.  Integrated circuit manufacturing involves
hundreds of individual steps, some of which are repeated several times, through
which numerous copies of an integrated circuit are formed on a single silicon
wafer. Typically, up to 30 very thin patterned layers are created on each wafer
during the manufacturing process. At the end of the manufacturing process, the
wafer is cut into individual chips or die. 
Because semiconductor specifications are extremely exacting, and
integrated circuits are becoming more complex, requiring ever more
sophisticated manufacturing processes, the process steps are constantly monitored,
and critical parameters are measured at each step using metrology
equipment.

Many
of the manufacturing steps involve the controlled application or removal of
layers of materials to or from the wafer. 
The application of materials to the wafer, known as deposition, involves
the layering of extremely thin films of electrically insulating, conducting or
semi-conducting materials.  These layers
can range from one-thousandth to less than one-hundred-thousandth of a
millimeter in thickness and create electrically active regions on the wafer and
its surface.   A wide range of materials
and deposition processes are used to build up thin film layers on wafers to
achieve specific performance characteristics. 
One of the principal methods of thin film layer deposition is chemical
vapor deposition (CVD).  In CVD, a
chemical is introduced into the chamber where the wafer is being processed and
is deposited using heat and a chemical reaction to form a layer of solid
material on the surface of the  silicon
wafer.  Metrology systems monitor the
thickness and uniformity of thin film layers during the deposition
process.

Once
the thin film has been deposited on the wafer to form a solid material, circuit
patterns are created using a process known as photolithography.  During this process, a light-sensitive
coating called photoresist is applied to the wafer, which is then exposed to
intense light through a patterned, opaque piece of glass.  For the photolithography process to work
properly, the thickness of the photoresist must be precise and uniform.  In addition, to control the photolithography
process, the film thickness, reflectivity, overlay registration and critical
dimensions are all measured and verified. 
The exposed photoresist is developed when it is subjected to a chemical
solution.  The developed wafer is then exposed to another chemical
solution, or plasma, that etches away any areas not covered by the photoresist
to create the structure of the integrated circuit. Semiconductor manufacturers
use metrology systems to verify the removal of material through the etch
process and the critical dimensions of the structures created.

To meet the processing challenges posed by
ever smaller feature sizes and because of the use of new materials such as
copper in the manufacture of integrated circuits, manufacturers are
increasingly using a process technology known as chemical mechanical polishing.
Chemical mechanical polishing, or CMP, removes uneven film material deposited
on the surface of the wafer from processes such as CVD and photolithography by
carefully sanding the wafer with abrasives and chemicals, creating an
extremely flat and even surface for the patterning of subsequent film layers.
Metrology systems are used to control and verify the results of the CMP process
by measuring the thin film layer to determine when the correct thickness has
been achieved.

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The
processes described above are repeated in sequence until the last layer of
structures on the wafer has been completed. Each integrated circuit on the
wafer is then inspected and its functionality tested before shipment.  Measurements taken by metrology systems
during the manufacturing process help insure process uniformity and help
semiconductor manufacturers avoid costly rework and mis-processing, thereby
increasing efficiency and profitability.

The
Need for Greater Overall Equipment Efficiency

According
to SEMATECH, the industry consortium for semiconductor manufacturers, one of
the major challenges to achieving improvements in cost productivity is the
ability to maintain continuous improvements in equipment productivity.  Overall equipment efficiency, that is, the
percentage of time that processing equipment is utilized to produce wafers, is
used as a metric to quantify the productivity of a processing tool.  The major factors affecting productivity are
equipment downtime, qualification time, misprocessing and operator skills.  We believe it is imperative that
semiconductor manufacturers find ways to improve overall equipment efficiency
in order to improve cost productivity and earn an acceptable return on their
investment in capital equipment and to meet the demand for improved
semiconductor device performance.

Process
Control.  The steps used to form
semiconductors are an exacting processes that require strict control of
equipment performance and process sequences for the resulting semiconductors to
function properly.  Tight control is
achieved through monitoring of the in-process wafers and by measuring relevant parameters
after each process step. These procedures are usually carried out on a small
sample of the wafers.  The monitoring
may include measurement of several parameters, such as the thickness of the
layers of thin film deposited, the sizes of the features that are patterned
through the photolithography process, as well as the registration or alignment
between two consecutive layers, known as overlay. Monitoring also includes
inspection of the wafer for irregularities, defects or scratches. If parameters
are out of specification or if defects or contamination are present, the
manufacturer adjusts the process and measures another sample of wafers thereby
allowing manufacturers to reduce costs and improve device performance.

Traditional
Stand-Alone Process Control and Its Limitations.  In the standard approach to semiconductor manufacturing, process
control is a stand-alone operation. 
Stand-alone process control systems, however, impose a number of limitations
on the semiconductor manufacturer.  The
semiconductor manufacturer must interrupt the process sequence and add extra
steps in order to remove sample wafers from the fabrication process equipment
and put them on a stand-alone measuring or inspection tool.  The conventional stand-alone approach
necessitates redundant robotic wafer handling hardware and software in both the
process equipment and the stand-alone process monitoring tools, as well as
additional wafer transferring automation systems between the two pieces of
equipment, resulting in decreased factory efficiency and reduced
productivity.  In addition, removing the
wafer samples from the process equipment to the metrology tool increases the
risk of contamination or damage.  As
this removal significantly detracts from useable process time, it is not
practical to make a large number of measurements, thereby compromising the
accuracy of the measurement of process deviations and trends. If a measurement
indicates that the process has been out of specification, the wafers made since
the sample wafers were removed for inspection may have to be discarded or
re-worked, actions that are increasingly costly for the manufacturer.

The
Need for More Effective Process Control Tools.  In addition to the inherent limitations of stand-alone process
control systems, a number of technical and operational trends within the
semiconductor manufacturing industry are strengthening the need for more
effective process control solutions. 
These trends include:

| |  | Development of smaller
  semiconductor features.The
  development of smaller features, now as small as 90 nm in production, enables
  semiconductor manufacturers to produce larger numbers of circuits per wafer
  and to achieve higher circuit performance. As feature geometries decrease,
  manufacturing yields become increasingly sensitive to processing deviations
  and defects, as more integrated circuits are lost with every discarded
  wafer.  In addition, the increased
  complexity and number of layers of the integrated circuits increase the
  chance of error during the manufacture of the wafer. | 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

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| |  | Shortening of technology life
  cycles.The
  technology life cycle of integrated circuits continues to shorten as
  semiconductor manufacturers strive to adopt new processes that allow a faster
  transition to smaller, faster and more complex devices.  In the past, the technology life cycle was
  approximately three years; it is now only two years. The accelerating rate of
  obsolescence of technology makes early achievement of enhanced productivity
  and high manufacturing yields an even more critical component of a
  semiconductor manufacturers profitability.                                                                                                                                                                   | 
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
| |  | Transition to copper and other new
  materials.Copper
  metal layers and other new materials such as low and high k-dielectrics and
  silicon on insulator are increasingly replacing aluminum for advanced
  integrated circuits in order to increase performance and reduce the cost of
  integrated circuits. Copper and low-K materials make it possible to build
  higher speed devices using fewer layers. 
  The use of copper and other new materials, requires new processing and
  metrology equipment and thus represents challenging developments for the
  semiconductor manufacturing industry.                                                                                                                                              | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
| |  | Change to 300-millimeter
  wafers.The
  transition in wafer size from 200-millimeter diameter to 300-millimeter
  diameter that began in 1999more
  than doubles the number of integrated circuits per wafer.  Maintaining process uniformity across
  these larger wafers is more difficult. Processing larger wafers also
  increases the cost of mistakes caused by both the larger number of integrated
  circuits per wafer and the greater complexity (and, therefore, cost) of
  processing larger wafers.  Thus, with
  300 mm wafers, the need for effective metrology to quickly detect and correct
  errors in the manufacturing process has increased.  In addition, new metrology equipment is needed to accommodate
  the larger wafer size. | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
| |  | Increase in foundry
  manufacturing.As a result of the rising investment for
  semiconductor production and the proliferation of different types of
  semiconductors, semiconductor manufacturing is increasingly being outsourced
  to large semiconductor contract manufacturers, or foundries.  A foundry typically runs several different
  processes and makes hundreds to thousands of different semiconductor product
  types in one facility, making the maintenance of a constant high production
  yield and overall equipment efficiency more difficult to achieve.                                                                                                                                                                             | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
| |  | Increase in Automation.  In an effort to achieve greater operating
  efficiencies, semiconductor manufacturers are increasingly relying upon
  automation. Automation represents the fastest growing segment of the
  semiconductor manufacturing industry.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 

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In
order to address the increasing costs associated with these trends, we believe semiconductor
manufacturers must enhance manufacturing productivity. One way to enhance
productivity is through improvements in process control, with a greater
emphasis on metrology as part of process control.  As part of this emphasis on metrology, manufacturers are taking
more measurements to characterize each step of the semiconductor manufacturing
process, new and enhanced measurement techniques are being used to provide
meaningful data and the data provided is being used in new ways to enhance the
manufacturing process.  Furthermore, as
circuits and materials become more complex, measurement techniques must become
more sophisticated, requiring a deeper understanding of the interaction of the
various components of the metrology process. 
Complex automation in the manufacturing process also makes measurement
more expensive.

Conventional
stand-alone process control systems limit productivity and overall equipment
efficiency.  As the cost of capital
equipment continues to increase as semiconductor manufacturing becomes more
complex, manufacturers demand greater productivity and efficiency, which
integrated metrology systems can provide. 
We believe that the demand for advanced process control systems that address
the evolving needs of semiconductor manufacturers will continue to drive the
growth in the market for integrated process control systems.

We
believe integrated metrology systems provide semiconductor manufacturers with
the greatest opportunity to increase the productivity and yields of their
equipment, thereby increasing their profitability.  Therefore, we anticipate that we will continue to focus on the
integrated metrology market.  However,
recognizing that a significant number of semiconductor manufacturers will
continue to rely upon stand-alone equipment, we intend to leverage our market
leading position in the integrated metrology market and our metrology expertise
to deepen our penetration of the stand-alone metrology market.  Furthermore, the technological and
operational trends within the semiconductor manufacturing industry that are
strengthening the need for more effective process control solutions can also be
addressed through the use of stand-alone metrology equipment, although, we
believe, that greater efficiency can be achieved through the use of integrated
metrology systems.

The Nova
Approach

Integrated
Metrology

Our
integrated metrology systems provide semiconductor manufacturers with more
effective and efficient process control by measuring wafers and their
properties without removing the wafer from the process equipment.  Our products use our patented measuring
methods that enable us to produce optical measuring systems that are small
enough to be incorporated directly inside many types of equipment used in
semiconductor processing.  Integrated
systems measure the wafer within the actual process environment, reducing labor
and wafer handling as well as the risk of contamination of or damage to the
wafer.  In addition, we believe that our
systems deliver significant increases in overall equipment efficiency through
advanced process control, along with improving wafer-to-wafer uniformity, all
with minimal operator intervention.

We
provide our customers with flexible integrated process control solutions by
offering systems that meet thin film measurement needs in critical applications
in the fabrication process.  Our
integrated process control platform can be deployed to multiple processes and
applications of semiconductor manufacturing.

Our
systems can be installed directly in new equipment or used to upgrade existing
equipment with minimal integration costs, extending the useful life of existing
process equipment and saving significant capital costs. To our knowledge, only
our metrology systems can be used to retrofit older 200 mm semiconductor
manufacturing equipment, giving us a unique opportunity as manufacturers seek
to increase production quickly to meet the increasing demand for
semiconductors. Our pioneering approach, centered around our NovaReady
integration package, later adopted by the process equipment manufacturers,
allows process equipment manufacturers to prepare their equipment to accept our
measurement and inspection systems, which can then be integrated with a simple
plug-and-play installation.

We
believe our integrated process control systems provide several important
advantages to semiconductor manufacturers, enabling manufacturers to:

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| |  | utilize the process equipment wafer handling system
  to allow measurement of the sample wafers while processing other wafers;                                         | 
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |   |                                                                                                                                                                        | 
| |  | perform the measurements without removing the wafer
  from the process equipment, increasing the efficiency of the process and
  decreasing the risk of contamination; | 
| |   |                                                                                                                                                                        | 
| |  | reduce capital costs of the fabrication facility by
  increasing overall equipment efficiency and reducing labor costs and
  necessary clean room area;                | 
| |   |                                                                                                                                                                        | 
| |  | reduce the amount of time required to qualify
  process equipment that is usually idle during qualification steps, thus,
  minimizing costly equipment down-time;      | 
| |   |                                                                                                                                                                        | 
| |  | reduce the number of test wafers; and                                                                                                                                  | 
| |   |                                                                                                                                                                        | 
| |  | detect processing errors more quickly.                                                                                                                                 | 

We
believe that as semiconductor manufacturers demand greater efficiency from
their manufacturing equipment, process equipment manufacturers will
increasingly seek to offer their customers integrated metrology in their tools
to lower costs and increase overall efficiency.  In addition, as semiconductor manufacturers seek to increase
production, we believe they will seek to increase the efficiency of older
equipment by retrofitting older equipment with new metrology systems.  We believe the drive toward more efficient
manufacturing operations in the face of increasing complexity will accelerate
the adoption of integrated metrology solutions such as those we offer.

Stand-alone
Metrology

We
believe that our integrated metrology systems offer significant advantages over
traditional stand-along systems.  We do,
however, believe that a significant number of semiconductor manufacturers will
continue to use stand-alone metrology equipment for all or a portion of their
manufacturing equipment.  In order to be
able to serve all the metrology needs of our customers, whether integrated or
stand-alone, we plan to leverage our position in integrated metrology to
increase our offerings and market penetration for stand-alone systems.

As
a result of the ever changing semiconductor manufacturing process and
accompanying process control needs, we have begun to develop a new process
control equipment concept.  Under this
concept, the same basic metrology will be used in different configurations,
depending upon customer demands. For example, the same metrology module could
be used as an integrated system inside the process equipment, as stand-alone
systems or in metrology cluster tools. 
This would allow for easy customization of metrology solutions for any
given process and would allow multiple metrology solutions to be combined in a
single platform to answer all process needs. 
As we envision it, this new concept will allow semiconductor
manufacturers unparalleled flexibility, upgradeability and affordability in
both stand-alone and integrated forms. 
As technology life cycles continue to decrease, flexibility and
upgradeability will become even more important. While we have not yet fully
developed our new process equipment concept, we anticipate that we will begin
offering new products based on the concept within the next 12 months.  We cannot assure you, however, that we will
be able to meet this anticipated schedule or that, if introduced, these
products will be accepted by the market and purchased by customers in amounts
sufficient to generate significant revenues or any profits.

Our
Strategy

Our
strategy is to continually strengthen our leading position in the semiconductor
process control market by providing innovative and superior products and
solutions that generate sustainable growth and profitability.  The key elements of our strategy are:

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| |  | Technological leadership in
  metrology.  We
  intend to continue our aggressive investment in research and development to
  allow us to continue to provide superior leading-edge technology and
  metrology solutions to the semiconductor manufacturing industry on a timely
  basis. We believe that our proprietary and patented technology and our
  extensive expertise in integrated metrology, optics, software, and systems
  integration provide us with significant advantages over our competitors. We
  intend to leverage our existing intellectual property and experience and
  expertise to maintain technological leadership.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 
| |  | Maintain our open architecture
  policy that enables us to provide process control solutions that are
  integrate-able into many different brands of process equipment.  Our open architecture policy enables us to
  integrate our systems into many different brands of process equipment,
  thereby offering our end user and process equipment manufacturer customers
  maximum flexibility.  In addition,
  this policy allows our products to be installed directly in new equipment,
  whether by the process equipment manufacturer or the end user, or retrofitted
  in older equipment in order to extend the productive and technological life
  of older equipment.  Through our open
  architecture policy, we have established original equipment manufacturer
  partnerships with the major CMP tool manufacturers.  Under our NovaReady concept, equipment manufacturers can
  prepare their equipment to accept our integrated metrology systems with
  relative ease by finding on-tool space and providing wafer handling access
  and minimal wiring for our integrated metrology systems, which are a little
  larger than a wafer, with a small optical head that scans the wafers. Most
  CMP equipment manufacturers such as Applied Materials, Ebara, Nikon,
  Novellus, Strasbaugh, and others are using our NovaScan systems. We are
  strongly committed to our multi-vendor policy and are establishing
  relationships with different process equipment manufacturers for our new
  developments. | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 
| |  | Focus on customer needs.Process equipment
  manufacturers and end users are our customers and we will continue to focus
  on them as we develop the next generation of metrology products, including
  products based on our new process equipment concept.  In addition, we plan to continue to
  strengthen our relationships with our process equipment and end user
  customers by seeking opportunities for collaborative development of products
  and new service opportunities.  We
  also intend to focus on increasing our penetration with respect to existing
  customers by continuing to seek opportunities to offer our metrology
  solutions across their entire manufacturing facility and to continue to
  provide excellent service and the highest quality products to our customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 

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| |  | Continue to market our pioneering
  NovaReady concept. 
  Under our NovaReady concept, we work with process equipment
  manufacturers so that they can prepare their equipment to accept our
  integrated metrology systems with a simple plug-and-play installation.  We also work directly with semiconductor
  manufacturers to understand their needs, provide solutions to meet those
  needs and metrology systems that can be easily integrated into their new or
  existing manufacturing equipment.  By
  working directly with both process equipment manufacturers and semiconductor
  manufacturers, we believe our NovaReady concept allows us to create a
  long-term, three-way relationship among the process equipment manufacturer,
  the semiconductor manufacturer that is the end-user customer and Nova,
  encompassing sales, training and on-going support.  We plan to continue to market and promote our NovaReady
  concept, which we believe is unique and allows us to establish strong and
  long-term relationships with our customers. | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 
| |  | Continue to expand our worldwide
  sales and marketing efforts and provide worldwide support.We plan to focus our
  marketing efforts on acquiring new key customers around the world. To further
  these efforts, we continue to expand our global presence with sales and
  service centers in Europe, Israel, Japan, Korea, Singapore, Taiwan and the
  U.S.  Our global presence allows us to
  provide the end users with direct service and application support, thereby
  decreasing tool downtime and providing us opportunities to promote additional
  uses of our products throughout the fabrication process.  We plan to expand into additional
  territories as customer needs dictate.                                                                                                                                                                                                                                                                                                                                                                    | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 
| |  | Further penetrate the installed
  base of process equipment that can be upgraded with our integrated process
  control products.We
  plan to continue to market to the large installed base of existing process
  equipment that can be retrofitted with our integrated process control
  products.  We believe this represents
  a large and under-penetrated market segment for our integrated process
  control products.  This opportunity is
  especially attractive because we believe that we are the only integrated
  metrology solution provider that can retrofit older systems.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 
| |  | Establish and maintain strategic
  relationships with key technology and market partners. We have established strategic relationships
  with Applied Materials relating to the development of integrated metrology
  solutions for copper CMP processing and with Lucent Technologies Inc. and
  Agere Systems Guardian Corporation to gain access to certain technology we
  hope will allow us to develop new metrology products and technologies for the
  semiconductor industry.  Going
  forward, we plan to continue to seek strategic partners that can provide us
  with access to technologies or markets that will allow us to accelerate our
  creation of new metrology products and to further penetrate the metrology
  market.                                                                                                                                                                                                                                                                                                                           | 

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |  | Develop and mature the
  architecture and platform of the new metrology systems, which will offer significant
  improvements in metrology performance together with the flexibility of fast
  incorporation of different metrology modules. We have established a development program
  that we anticipate will allow us to introduce to the market our first product
  based upon our new process control equipment concept, the next generation
  (NG), in early 2005. Our intention is that the NG and subsequent related
  products will allow relatively fast and cost effective introduction of new
  metrology modules. | 

Our
Technology

We
believe that our technological and engineering expertise and research and
development capabilities allow us to develop and offer new products and
technologies to meet the ever-changing demands of the semiconductor
industry.  We have applied our
technological and engineering expertise to develop a wide range of integrated
and stand-alone products for the CMP, copper CMP, etch and lithography
processes.  Because of our open
architecture policy, our integrated metrology solutions can work with all
models of CMP and etch tools made by the major process equipment manufacturers,
for both 200 and 300 mm applications. In addition, to our knowledge, only our
integrated metrology systems can be used to retrofit existing 200 mm process
equipment, giving us a significant advantage over our competitors.

Our
suite of technological capabilities includes:

| |  | Laser ellipsometry.Ellipsometry
  is a non-contact, non-destructive optical measuring technique used to measure
  very accurately the thickness and other properties of transparent thin films.
  When a surface is exposed to a polarized light laser, ellipsometeres measure
  the change in the reflected lights polarization.  By using multiple light angles and multiple wavelengths,
  ellipsometry can provide accurate and reliable measurement of a wide range of
  film thicknesses, film materials and film stacks.                                                              | 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
| |  | Broadband spectrophotometry. Our broadband spectrophotometry
  capabilities range from deep ultraviolet to near infrared. This technology enables
  fast, accurate and small spot size film thickness measurement in large range
  of applications on a very cost effective basis, both as an integrated system
  and as a stand-alone system.                                                                                                                                                                                                                                                | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
| |  | Scatterometry.
  Our scatterometry systems are based on our broadband Spectrophotometry. These
  systems use fully polarized deep ultraviolet to near-infrared spectral light
  source. This technology enables fast and cost effective system development.
  Scatterometry provides two and three dimensional characterization of very
  fine geometries on patterned product wafers. These profiling and critical
  dimension capabilities are key enablers of advanced process control, allowing
  almost real time metrology of the most advanced design rule, down to 65 nm
  and below. | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
| |  | Imaging and image processing.  This technology has three different
  applications: 1) navigating on product wafers to perform measurement on
  selected very small sites; 2) detecting defects on product wafers after
  critical process steps, such as lithography and etch; and 3) measurement of
  the accuracy of registration between two layers (overlay measurement), mostly
  used in lithography.                                                                                                                                                                                   | 

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |  | Mass spectrometry.  This technology, which we acquired from
  Lucent Technologies Inc. and Agere Systems Guardian Corporation, will be
  developed to help minimize particle contamination on product wafers during
  processing. We anticipate that the system will allow to identify
  contaminating events as soon as they happen. Currently particle detection
  is performed in an off-line mode, at least after a whole lot has been
  processed. | 

Generally,
we develop our own technologies. However, we also directly acquire technology
from others and seek strategic partners that can provide us access to new
technologies. In February 2002, we signed a joint development agreement with
Applied Materials relating to integrated metrology for copper chemical
mechanical polishing processing. 
Pursuant to this agreement, we developed copper chemical mechanical
polishing monitoring capabilities using the NovaScan 2020/3030 Cu, which could
be sold exclusively to Applied Materials and its customers.  At the end of 2003, this exclusivity
agreement expired and was not extended. Consequently, we sell our copper
chemical mechanical polishing products to and through all equipment
manufacturers, yet the majority are still sold through and with Applied
Materials.  In February 2002, we also
signed a licensing agreement with Lucent Technologies Inc. according to which
we were licensed the rights to certain of Lucents patents, software and
technical information. In connection with the agreement entered into with
Lucent, we also signed an agreement with Agere Systems Guardian Corporation
according to which we were granted a license to a patent owned by Agere.
Pursuant to this agreement, as well as the agreement entered into with Lucent,
we hope to develop new metrology products and technologies for the
semiconductor industry. Going forward, we plan to continue to seek strategic
partners that can provide us with access to technologies or markets that will
allow us to accelerate our creation of new metrology products and to further
penetrate the metrology market.

The
measurement channels that we use in our metrology products are unique and protected
by patented intellectual property. Our measurement channels include: polarized
normal incidence spectral reflectometer/ellipsometer; multi-angle oblique
incidence spectral ellipsometer; and multi-focal image overlay microscope.  In addition, we are developing additional
measurement channels including: multi-angle, multi-wavelength, null
ellipsometer; eddy current micro-probe and phase imaging profilometer.  In addition to these proprietary measurement
channels, we are also seeking to acquire new measurement channels from third
parties, including: black beam scanning imaging; x-ray fluorescence
spectrometer; macroinspection; and other technologies.

Throughout
our history, we have been a technological leader in the integrated metrology
field.  We were the first to offer
integrated metrology solutions for semiconductor manufacturers and are the only
provider of integrated metrology solutions that can measure wafers in water,
which allows for more efficient and accurate metrology.  Furthermore, because our systems are small
enough to fit inside wafer fabrication equipment, to our knowledge, only our
metrology solutions can be used to retrofit older 200 mm systems.  Our systems have also been recognized by the
industry.  In 2004, we received the
prestigious Editors Choice Best Product Award from Semiconductor International
magazine for our NovaScan 2020Cu 3030Cu Copper CMP process monitoring.

Products

Our
products include metrology systems for thin film measurement in chemical
mechanical polishing and chemical vapor deposition applications; optical
topography systems for use in post-copper chemical mechanical polishing
applications; optical critical dimension systems for lithography and etch; and
overlay systems for lithography and etch applications.  Our integrated thickness monitoring system
for chemical mechanical polishing processing control enables wafer-to-wafer
closed loop control. We offer several models of this integrated thickness monitoring
systems, depending on polisher type and end-user requirements.  These metrology systems address a broad
range of metrology requirements of our end-user and process equipment
manufacturer customers.  Both our integrated
and stand-alone systems incorporate patented optical scanning, dynamic auto-focus,
unique pattern recognition for arbitrarily oriented wafers and proprietary
algorithms for in-water measuring of two layers simultaneously. We offer
several different product models that are tailored to both conventional
chemical mechanical polishing equipment as well as to newer, high throughput
polishers. Following is a summary of our products.

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Thin Film Process Control

| |  | The NovaScan 840
  combines high-speed measurement and effective handling, enabling measurement
  of wafers both before and after polishing. While we no longer market this
  system, this system and prior generations were our main revenue source in
  2001 and prior years.                                                                                                                                                                                                                                                                                                                                                  | 
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
| |  | The NovaScan 2020
  and 2040 are the second
  generation of integrated thickness monitoring systems with enhanced spectral
  range, responding to the needs of the industry for emerging chemical
  mechanical polishing high-end applications of thin films and complex layer
  stacks. The 2020 model was introduced to the market in the end of 2000, and
  since then has replaced the NovaScan 840 and accounted for the major portion
  of our sales for 200mm production lines. The NovaScan 2040 was introduced in
  2002 and is the fastest integrated film thickness 200mm measurement system in
  the market today.   | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
| |  | The NovaScan 3030 and 3060are
  the second generation of the 300mm measuring system, with improved optics and
  motion system enabling high speed measurement, and with broad spectral rage
  (Ultra Violet to Infra Red) allowing accurate measurements on complex
  structures and thin film layers. The 3030 model was introduced to the market
  in 2001 and since then has replaced the NovaScan 3000 and accounts for the
  major portion of our sales for 300mm production lines. The NovaScan 3060 was
  introduced in 2002 and is the fastest integrated film thickness 300mm
  measurement system in the market today. | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
| |  | The NovaScan 2020Cuhas
  the same basic platform as the NovaScan 2040, with additional hardware and
  software improvements, enabling the system to answer the unique requirements
  of copper CMP monitoring. The system went through several beta tests during
  2001 and 2002 and was released for sale in the beginning of 2003.                                                                                                                                                                                                                                                                                             | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
| |  | The NovaScan 3030Cu
  has same basic platform as the NovaScan 3030, with additional hardware and
  software improvements, enabling the system to answer the unique requirements
  of 300mm copper CMP monitoring.  The
  system went through field-testing during 2002 and was released for sale in
  the beginning of 2003.                                                                                                                                                                                                                                                                                                     | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
| |  | A closed loop control
  option for the NovaScan systems delivers reliable, highly automated
  wafer-to-wafer uniformity over chemical mechanical polishing manufacturing
  processes. The thickness data of every processed wafer is obtained and
  process parameters are fed back to adjust the next wafer polish.                                                                                                                                                                                                                                                                                                             | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
| |  | NovaNetis a
  highly sophisticated computer network, connecting all NovaScan systems on a
  factory floor. The network is managed by a dedicated server, running with
  proprietary software developed by Nova, and insuring safe recipe distribution
  and recipe integrity across the factory. The NovaNet also includes a report
  generator (NSA) that allows the creation of reports from all the systems
  connected and allows programmable cross sections.                                                                                                                                                               | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
| |  | The NovaScan 840CVDsystem
  is a 200 mm integrated metrology vacuum chemical vapor deposition measurement
  system, measuring different layers in the chemical vapor deposition
  process.  Data can be fed forward to
  the CMP process tool. Integration solutions were developed for different
  process equipment. The system was introduced to the market in the end of 2000
  and several units have been sold. However, we do not expect to sell a
  significant number of these systems in the future.                                                                                                                   | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
| |  | The NovaScan 3060CDsystem
  is a Scatterometry-based system
  for measuring the critical dimensions (CD) and profiling lines and trenches
  on 200 mm and 300 mm wafers. The system went through field-testing during
  2002 and was released for sale in 2003. The systems are sold as integrated
  metrology systems on Lam Research Inc. etch systems and as stand-alone
  systems with automation modules acquired from different suppliers, such as
  PRI Automation (now part of Brooks Automation) and Integrated Dynamics
  Engineering.                                                                                 | 

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Photolithography Process Control

The
NovaTrack 2020 and 3030systems are a dual-purpose integrated
metrology and stand-alone systems for overlay registration measurement and
macro defect inspection in the photolithography process. The systems are
designed for integration on a photoresist track and as a stand-alone system.
Both stand-alone and integrated models of the NovaTrack 2020 finished beta
testing in 2003 and have been released for sale. Currently the need for these
integrated overlay solutions is very limited. 
These products are currently not being promoted in the market due to
this low market potential. We believe that our next generation of systems
currently under development will meet 65 nm and below technology nodes and will
have a rather high integrated metrology potential.

While
we continue to emphasize our integrated metrology solutions, we also offer our
products as stand-alone equipment as well, thereby significantly expanding our
potential customer base.

Research and Development

We
have assembled a core team of experienced scientists and engineers who are
highly skilled in their particular field or discipline. Our research and
development core competencies, technologies and disciplines are comprised of
thin film measurement, image acquisition, pattern recognition, inspection and
automatic defect classification. Our management and research and development
staff consists of 72 highly skilled members, including independent
contractors.  Our staff includes 24
scientists holding Ph.D. degrees and 24 persons holding M.S. degrees.  In June 2003, our research and development
operations received the ISO9001/2000 quality mark from an international
certification institution.

The
process control market is characterized by continuous technological development
and product innovations. We believe that the rapid and ongoing development of
new products and enhancements to our existing product line is critical to our
success. Accordingly, we devote a significant portion of our technical,
management and financial resources to developing new applications and emerging
technologies.  In 2001, 2002 and 2003,
our research and development expenses, net of participation by the Office of
the Chief Scientist, were $13.3 million, $9.9 million and $8.6 million,
respectively, representing 63%, 49%, and 32% of our respective total revenues
for those years.  We anticipate that our
research and development expenses, net, will be $9.0 million in 2004,
representing an increase of 5% over 2003.

Our
research and development policy is based on a structured process of initiating
new projects and on-going review of existing development projects. Our vision
is to continue to be a market leader in the semiconductor process control
market and our research and development policies and activities are designed to
support this vision. Our launch of new development projects is based on market
requirement specifications, generated through our marketing activities and
research on customer needs, followed by a proposed detailed business plan, a
detailed development plan with milestones, risk analysis, profit and loss model
goals and required budget.  Each
development project is monitored through a structured process, including design
reviews and project management reviews.

Intellectual Property

Our
success depends in part upon our ability to protect our intellectual
property.  We, therefore, have an
extensive program devoted to seeking patent protection for our inventions and
discoveries that we believe will provide us with competitive advantages.  We have been granted 29 U.S. patents and 16
non-U.S. patents and hold an exclusive licenses to one U. S. patent.  The U.S. patents we hold have expiration
dates ranging from 2013 to 2021. We also have 24 U.S. patent applications
pending and more than 70 applications pending in other countries. Our patents
and applications principally cover various aspects of optical methods,
optomechanical and mechanical algorithms, and integrated process control
implementation concepts.

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To
protect our proprietary rights, we also rely on a combination of copyrights,
trademarks, trade secret laws, contractual provisions and licenses.  Our copyrights include software
copyrights.  We also enter into
confidentiality agreements with our employees and some of our consultants and
customers, and seek to control access to and distribution of our proprietary
information, such as our proprietary algorithms.

While
we attempt to protect our intellectual property through patents, copyrights and
non-disclosure and confidentiality agreements, we may not be able to adequately
protect our technology.  Competitors may
be able to develop similar technology independently or design around our
patents and, despite our efforts, our trade secrets may be disclosed to
others.  Furthermore, the laws of
countries other than the U.S. may not protect our intellectual property to the
same extent as the laws in the U.S.  We
also cannot assure that:  (i) our
pending patent applications will be approved; (ii) any patents granted will be
broad enough to protect our technology or provide us with competitive
advantages or will not be successfully challenged or invalidated by third
parties; or (iii) that the patents of others will not have an adverse effect on
our ability to do business.

From
time to time, we receive communications for others asserting that our products
infringe or may infringe their intellectual property rights.  Typically, our in-house patent counsel
investigates these matters and, where appropriate, retains outside counsel to
provide assistance. Presently, we are not involved in any material legal
proceeds in which a third party has asserted that we have violated their
intellectual property rights.However, as discussed under Risk Factors at
page 7, we have become aware of a U. S. patent held by a competitor, which may
be interpreted to cover some aspects of the products we sell in the U.S.

Our Customers, Sales and Marketing

Our
two pronged, integrated sales and marketing strategy involves marketing our
products directly to semiconductor manufacturers in addition to process
equipment manufacturers in order to create demand for our products. We believe
that the pricing structure of our NovaReady integration package enables process
equipment manufacturers to increase their margins, and that the quality of our
systems can improve equipment yields, creating an incentive for process
equipment manufacturers to promote our products to semiconductor manufacturers.
At the same time, we believe that semiconductor manufacturers, eager to improve
their own margins through increased factory throughput and yield improvements,
will demand that the equipment they employ incorporate or use our metrology
systems. We believe that by marketing directly to end users as well as to
process equipment manufacturers, we are able to ensure that both parties are
aware of the wide range of benefits that our products can deliver.

We
have a diverse customer base in terms of both geographic location and types of
integrated circuits manufactured. Our end user and process equipment
manufacturer customers are located in different countries, including Japan,
Korea, Singapore, Taiwan, the U.S. and various European countries.  While our overall customer base is diverse,
our sales are highly concentrated among a relatively small number of customers.
In 2003, our top five customers accounted for 87% of our total revenues, with
each top of our five customers accounting for 3% to 47%.

The
table below lists some of the largest semiconductor manufacturers who have
multiple installations of our systems in one or more sites. These users
purchase our products either directly from us or from process equipment
manufacturers.

|Elpida            | IBM               
|----------------- | ------------------
|Infineon          | Intel             
|Micron            | Motorola          
|Phillips          | STMicroelectronics
|Texas Instruments | Samsung           

To
further enhance our marketing efforts, we have established a system of
integrated sales and support activities with key process equipment
manufacturers, including Applied Materials, Ebara and Lam Research. This allows
us to provide comprehensive and long-term application support directly to
semiconductor manufacturers.  We expect
to continue to add new process equipment manufacturers to our roster as we
introduce new integrated process control systems that can be integrated with
different types of equipment.

24

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We
seek to establish and maintain close and mutually beneficial relationships with
our customers by consistently providing them with a high level of service,
support and new capabilities. We have established a global network of direct
sales and marketing, customer service and applications support offices. We
maintain sales, service or applications offices in Europe, Israel, Japan,
Korea, Singapore, Taiwan, and the U.S., with a total staff of 70 people. These
offices provide highly qualified application support specialists, training to
process equipment manufacturer customers and end users, marketing,
demonstrations and evaluations, spare parts hubs and sales and support
engineers.

All
of the large semiconductor manufacturers using our systems have placed repeat
orders for our systems, which we attribute to the productivity improvements
experienced by the semiconductor manufacturers using our equipment, our on-site
support of our equipment and the advantages to semiconductor manufacturers of
using equipment supplied by the same vendor.

The
table below describes the distribution of our total revenues, from systems and
services, according to the geographic location of the actual installation of
our systems in end-user sites:

|       |  | Year ended December 31, |       
|------ |  | ----------------------- | ------
|       |  |                         |       
|       |  | 2001                    |       
|       |  |                         |       
|       |  | (in thousands)          |       
|       |  |                         |       
|U.S.   |  | $                       | 13,797
|Europe |  |                         | 3,773 
|Japan  |  |                         | 977   
|Other  |  |                         | 2,624 
|       |  |                         |       
|Total  |  | $                       | 21,171
|       |  |                         |       

The
semiconductor industry is dominated by a small number of large companies.  As a result, our customer base is highly
concentrated.  The following table
indicates the percentage of our total revenues derived from sales to our five
largest customers and the range of these revenues from these customers for the
periods indicated.

| |                                                      |  | Year ended
  December 31, | 
| | ---------------------------------------------------- |  | ------------------------- | 
| |                                                      |  |                           | 
| |                                                      |  | 2000                      | 
| |                                                      |  |                           | 
| | Total revenues from five
       largest customers    |  | 66%                       | 
| |                                                      |  |                           | 
| | Range of revenues from five
       largest customers |  | 6%-21%                    | 

We
anticipate that our revenues will continue to depend on a limited number of
major customers, although the companies considered to be our major customers
and the percentage of our revenue represented by each major customer may vary
from year to year.  As our customer base
is highly concentrated, if any of our customers becomes insolvent or has
difficulties meeting its financial obligations to us, we may suffer losses that
may be material in amount.

Our Competition

The
market for semiconductor capital equipment is highly competitive. Significant
competitive factors in the market for integrated process control systems
include technological leadership, system performance, ease of use, reliability,
cost of ownership, technical support and customer relationships along with an
adequate business model, internal organization and unique process equipment
manufacturer agreements and partnerships. We believe we compete favorably on
the basis of these factors in the markets we serve.

25

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Our
current integrated products principally compete with products manufactured by
Nanometrics.  We believe that Dai Nippon
Screen has ceased its activities in integrated metrology and Sensys, which had
been acquired by Therma Wave in 2002, has reduced its integrated metrology
activity to a minimum (selling a small number of optical critical dimension
systems to Tokyo Electron).  Nanometrics
had and an exclusive agreement with Applied Materials, which we believe
prevented Nanometrics from selling to other customers.  We believe this exclusive agreement expired
in 2002.  We currently sell more systems
to Applied Materials than Nanometrics. 
However, we believe that since the expiration of its exclusive agreement
with Applied Materials, Nanometrics has started to work with other CMP
equipment manufacturers, such as Ebara. 
In the last year, we have lost significant sales to our competitors with
respect to three major customers.  We
believe we lost these sales mainly due to delays in introducing our deep
ultraviolet capabilities.  We plan to
introduce our deep ultraviolet system in the third quarter of 2004.  We expect to face intense competition in the
coming years.

In
the scatterometry field, which is a new application field in the semiconductor
industry, we have intensive competition in both integrated and stand-alone
metrology.  Our primary competitors in
this area are KLA-Tencor, Therma Wave, Nanometrics and Accent.  Nanometrics is our main competitor in this
area as well because it provides optical critical dimension systems which have
characteristics similar to our systems. 
In the software aspects of scatterometry, which is a significant portion
of the optical critical dimension business, Timbre (a Tokyo Electron
subsidiary), which provides optical critical dimension software only, is a
significant competitor that may also become a customer for our critical
dimension hardware.

Since
we have decided to put on hold our development and marketing efforts for
overlay measurement and macro inspection products, the competitive environment
in the photolithography metrology market is less important to us.  The principal competitors in this market
include KLA-Tencor and Rudolph Technologies. 
Although we have not yet entered this market, we believe our overlay
system being developed for the sub-65 nm technology node will be competitive.
We anticipate introducing this system in 2006.

Manufacturing

In
order to leverage the relatively high volume of integrated systems we
manufacture and to decrease production costs, we continue to focus our internal
manufacturing activities on processes that add significant value or require
unique technology or specialized knowledge and outsource others.

Our
principal manufacturing activities include assembly, integration, final testing
and calibration. Our production activities are conducted in our manufacturing
and service facility in Israel. We rely and expect to continue to rely on
subcontractors and turnkey suppliers to fabricate components, build assemblies
and perform other non-core activities in a cost-effective manner. While we use
standard components and subassemblies wherever possible, most mechanical parts,
metal fabrications and critical components used in our products are engineered
and manufactured to our specifications. A small portion of these components and
subassemblies are obtained from a limited group of suppliers, and occasionally
from a single source supplier. Our manufacturing operations received the ISO
9002 quality mark by an international certification institute in October 1999.
We have upgrade our quality systems to conform to ISO 9001/2000 requirements.

We
have the capacity to produce up to 80 systems per quarter in our current
facilities. Currently, we are operating at approximately 50% of that
capacity.

We
have only one manufacturing facility, which is located in Ness-Ziona, Israel.
Any event affecting this facility, including natural disaster, labor stoppages
or armed conflict, may disrupt or indefinitely discontinue our manufacturing
capabilities and could significantly impair our ability to fulfill orders and
generate revenues.

Our
Subsidiaries

Our
subsidiaries and the countries of their incorporation are as follows:

|Name of
  subsidiary                          |  | Country of
  incorporation
|--------------------------------------------- |  | --------------------------
|                                              |  |                           
|                                              |  |                           
|Nova Measuring Instruments
  Inc.             |  | Delaware, USA             
|Nova Measuring Instruments
  K.K.             |  | Japan                     
|Nova Measuring Instruments
  Taiwan Ltd.      |  | Taiwan                    
|Nova Measuring Instruments
  Netherlands B.V. |  | Netherlands               

26

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Capital Expenditures

For
information on our capital expenditures, see Liquidity and Capital Resources
on page 35 of this report.

Our Properties and Equipment

In
January 2002, we relocated our main office, research and development and
production facilities.  These
facilities, located in Ness-Ziona, Israel, occupy approximately 5,000 square
meters, including:  approximately 800
square meters of production facilities, approximately 3,000 square meters of
research and development offices (including approximately 300 square meters of
laboratories) and approximately 1,200 square meters of headquarters, sales and
marketing, service and support and administration facilities. Originally, the
new facilities were planned to be approximately 8,000 square meters, however,
due to the change in market conditions, we reduced this office space. Due to
the breach of part of our lease commitments associated with the move to the new
building, we incurred costs of approximately $1 million, charged to operations.
Our current lease commitment relating to the new building is until the end of
2007.

Our
U.S. subsidiary leases approximately 300 square meters in Arizona for use as a
pre sale and support facility. Our Japanese subsidiary leases approximately 100
square meters for use as a service and pre sale facility. In anticipation of
future growth, we intend shortly to enter into a six year lease for a space of
4,000 to 7,000 square meters near our current location in Israel.

Our
capital expenditures are primarily for network infrastructure, computer
hardware and software, leasehold improvements of our facilities and system
demonstration tools.  None of these
assets are held as collateral or guarantee other obligations. We believe that
our facilities and equipment are in good operating condition and adequate for
their present usage.

Item 5.  Operating and Financial Review and Prospects

Information
in this Operating Review and Financial Prospects Section should be read in
conjunction with our Consolidated Financial Statements and notes thereto which
are included elsewhere in this report.

Executive
Overview

We
are the worldwide leading designer, developer and producer of integrated
metrology systems for the semiconductor manufacturing industry and a leading
designer, developer and producer of stand-alone metrology systems for the
semiconductor industry. Our metrology systems are used to take precise
measurements of semiconductors during the manufacturing process to control the
manufacturing process and increase the productivity of the manufacturing
equipment.  We market and sell our
metrology systems to semiconductor process equipment manufacturers, such as
Applied Materials and Ebara, and directly to semiconductor manufacturers, such
as Intel, Samsung and AMD.

Our
business is greatly affected by the level of spending on capital equipment by
semiconductor manufacturers.  Capital
expenditures by semiconductor manufacturers tend to be cyclical in nature and
depend on numerous factors, many of which are beyond our control.  Factors affecting the semiconductor industry,
which are beyond our control, include general economic conditions throughout
the world and the demand and perceived demand for semiconductors.  In addition, demand for our products and
services is affected by the timing of new product announcements and releases by
us and our competitors, market acceptance of our new or enhanced products and
changes or advances in semiconductor design or manufacturing processes.

27

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Starting
in 2001, the semiconductor industry went through a severe downturn and
manufacturers greatly reduced their spending on capital equipment.  Our results for 2001 and 2002 reflect that
downturn.  In 2003, however, demand for
semiconductors started to increase and, as a result, demand for capital
equipment by semiconductor manufacturers also increased.  Accordingly, our financial results for 2003
improved when compared to 2002.  We
anticipate that the recovery of the semiconductor equipment industry that began
in 2003 will continue and accelerate in 2004 and 2005. We cannot, however,
predict with certainty whether the industry upturn will continue in 2004 and
2005. In addition, if we are unable to manage our resources effectively during
an industry upturn, we could suffer a material adverse affect.

We
derive our revenues principally from sales of our metrology systems and
services relating to our systems.  In
2003, product sales produced 79.3% of our total revenues and services produced
20.7%.  Presently, we have no long-term
debt and continue to finance our operations, which have produced losses in each
year since 1999 other than 2000, from the proceeds of our initial public
offering in 2000 and our cash flows from operations.  As of the end of 2003, we had $30.4 million in working capital
assets, including cash and cash equivalents of $26.6 million, and no long-term
debt.

From
quarter to quarter and from year to year, our revenues can vary significantly
for a number of reasons.   Importantly,
we do not have long-term or multi-unit purchase contracts with our
customers.  Therefore, while most of our
customers have purchased multiple systems from us and we anticipate that
customers will continue to do so, our customers can determine at any time to
stop doing business with us.  In
addition, primarily because the semiconductor industry is dominated by a small
number of large companies, our customer base is concentrated among a limited
number of customers.  A loss of any
single customer could cause our revenues to decrease by a material amount.  In addition, because our systems range in
price from $100,000 to over $600,000, the loss of relatively few sales could
also cause our revenue to decrease by a material amount.  Our service revenues, which tend to be more
predictable and less subject to wide fluctuations, tend to help decrease
volatility in our earnings.

Our
service organization is operated on a profit and loss basis and is measured as
a cost center in each territory and on a global basis. The objectives of our
service organization are defined and measured by: customer satisfaction;
quality parameters, such as time to repair and mean time between failures; and
by profit and loss criteria. The service organization provides support to all
products we sell, during both the warranty period and the post warranty
period.

When
evaluating the performance of the Company, our management tends to focus on
several financial metrics and several qualitative areas such as: warranty cost
per system and warranty costs as a percentage of sale price; costs of
production and costs of production as a percentage of sales; inventory as a
percentage of yearly sales; days sold out; and the mixture of our sales and
geographical distribution of installations of our systems at end users sites
compared to industry capital equipment trends. 
In 2003 and 2002, warranty costs ranged from 8% to 14% of sale price.
Factors that affect warranty cost include the number of systems installed in a
specific site or territory and the maturity of the products.  Costs of production include materials,
labor, write-off per product during product life time, and ranged from 32% to
40% of the sale price in 2003, depending upon the system.  Factors that affect cost of production
include sales volume, product configuration, product maturity, and actual sale
price.  In 2003, our costs of production
as percent of sales decreased by 3.2% as a result of the increase in volume of
sales. Our average inventory levels in 2003 and 2002 were approximately 15% of
yearly sales. As of December 31, 2003, average days sold out for total revenues
were 79, and ranged between 65 and 100 days over the four quarters in 2003.
Geographical distribution analysis of installation at end users sites reveals
increase of Nova installation in Japan from 6% of sales in 2002 to 22% in 2003
and in Asia pacific including Japan from 17% of sales in 2002 to 23% in 2003.
This trend is in line with the industry capital equipment trend of higher
investments in Japan and in the Asia Pacific region in 2003 and 2004 compare to
2001 and 2002. In 2004, the Company intends to continue to focus on these
metrics and seek to improve them

Significant
Events in 2003 and Outlook for 2004

For
Nova, the most significant event in 2003 was the start of a recovery of the
semiconductor industry after two years of deep slowdown. The start of this
recovery is reflected in our financial results, which improved from 2002. In
addition, in 2003, we made the first sales of our Optical-CD systems, both
integrated and stand-alone, and established our relationship and integration
with a major equipment manufacturer for the etch process.

28

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In
the first half of 2004, we have seen significant growth in the semiconductor
equipment industry and industry projections indicate the industry will continue
to enjoy significant growth for the remainder for 2004.  This growth is reflected in our revenues for
the first quarter of 2004, which increased 13% compared to the fourth quarter
of 2003.  We believe the recovery in the
semiconductor equipment industry is being driven by improving economic
conditions worldwide, especially in the U.S. and Japan, and the resulting
increase in consumer spending, particularly on electronic devices. As the
semiconductor industry continues its turnaround, we anticipate that
semiconductor manufacturers will seek to add capacity and accelerate
production, resulting in increased demand for capital equipment, including
metrology systems such as those we sell.

Other
trends in the industry include the move toward more complex semiconductor
devices and the adoption of more sophisticated manufacturing techniques.  We believe these trends are positive
developments for the semiconductor metrology market because, as semiconductors
and their manufacture become more complex and sophisticated, manufacturers will
increasingly look to make their operations more efficient.  Metrology systems can help deliver that
efficiency.  For additional information
on industry trends, see Information on the Company staring on page 11 of this
report.

Nova
will focus in 2004 on continuing development of its current CMP, copper CMP and
optical critical dimension systems as well as investing in the products and
technologies included in its long-term strategy. Over the next three years,
Nova anticipates introducing future generations of its current products and new
product to address the advancing technology trends toward feature sizes of 65
nm and below and new processes and materials.  
We believe that in 2004, our opportunities will most likely come from
the increased need for monitoring and control resulting from decreasing feature
sizes, and the accelerating move to 300 mm equipment and new process
materials.  The main challenges and
risks we see are to be on time with the right process control solutions to
meet the needs of our existing customers and new customers.  In order to address these risk and
challenges, we are working closely with leading customers development process
groups and with the leading process equipment manufacturers.  The purpose of working closely with
customers and process equipment manufacturers is to receive from them as early
as possible information and feedback on the metrology and process needs of the
upcoming new manufacturing processes and materials.   We believe receiving this
information as early as possible will assist us in developing metrology
solutions to meet the new needs of the semiconductor industry.  In tandem with this type of long term
development, our ongoing marketing activity supports our current products with
short term improvements to answer the customers ongoing needs and to make
required changes.

Currently,
our main revenue generator is our oxide CMP product line and sales of our oxide
CMP product line are affected by the total number of process tools sold in this
segment.  In years prior to 2003, the
oxide CMP represented more than 50% of the entire CMP equipment market.  In 2003 and 2004, this percentage is
decreasing and copper CMP equipment is expected to come to dominate the CMP
equipment market in the coming years. 
It is not yet clear what the process control needs of the industry will
be and what will be the level of use of Nova solutions and products.  The trend of using integrated process
control is accelerating in the industry, but the rate might be slower than we
anticipate and depends primarily on the adoption of 300 mm processing.
Currently, 300 mm processing is being adopted mainly in Japan and Taiwan.

Critical
Accounting Policies

Our
discussion and analysis of our financial condition and results of operations
are based upon our Consolidated Financial Statements, which have been prepared
in accordance with accounting principals generally accepted in the United
States of America. We believe the following critical accounting policies, among
others, affect our more significant judgments and estimates used the
preparation of our Consolidated Financial Statements.

Use of
estimates - General

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.

29

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Revenue
recognition

We
recognize revenues upon the shipment of our products to the customer or the
provision of support services, provided that persuasive evidence of an
arrangement exists, title has transferred, the price is fixed, collection of
resulting receivables is probable and there are no remaining significant
obligations.

Adequate
provision is made, upon shipment, for estimated product returns and warranties.
When transactions involve newly introduced products or when customers specify
acceptance criteria that cannot be demonstrated prior to the shipment, we defer
the relevant revenues. We currently anticipate introducing several new systems
in fiscal 2004. Delays in introducing a product or delays in our ability to
obtain customer acceptance, will delay the recognition of revenue and gross
profit by us.

Allowances
for doubtful accounts

We
review on an on-going basis the need for allowances for doubtful accounts for
estimated losses resulting from the inability or unwillingness of our customers
to make required payments.  When
determining what allowance, if any, to make for doubtful accounts, we review
many factors, including our history of relatively few write-offs, customer
relationships and customers creditworthiness. 
Based on this review, we estimate the amount of accounts receivable, if
any, we may be unable to collect and allowances for doubtful accounts may be
required.  To date, based upon
managements review, no allowance for doubtful accounts was deemed
necessary.  If the financial condition
of our customers were to deteriorate, their ability to make payments could be
impaired and our estimates could prove to be inaccurate. If significant,
allowances for doubtful accounts could have a material adverse effect on our
financial results.

Warranty
provisions

We
provide for the estimated cost of product warranties at the time revenue is
recognized. While we are engaged in extensive product quality programs and
processes, including actively monitoring and evaluating the quality of our
component suppliers, our warranty obligations are affected by product failure
rates, material usage and service delivery costs incurred in correcting product
failures at our locations or at customer sites. Should actual product failure
rates, material usage or service delivery costs differ from our estimates,
revisions to the estimated warranty liability may be required.

Inventories
write-down

We
value our inventory at the lower of the actual cost or the current estimated
market value of the inventory. We regularly review inventory quantities on hand
and record a provision for excess and obsolete inventory based primarily on our
estimated forecast of product demand and production requirements for the next
twelve months. As demonstrated during 2000 and 2001, demand for our products
can fluctuate significantly. A significant increase in the demand for our
products could result in a short-term increase in inventory purchases while a
significant decrease in demand could result in an increase in the amount of
excess inventory quantities on hand, which could lead to losses. In addition,
our industry is characterized by rapid technological change, frequent new
product developments, and rapid product obsolescence that could result in an
increase in the amount of obsolete inventory quantities on hand. Additionally,
our estimates of future product demand may prove to be inaccurate, in which
case we may have understated or overstated the provision required for excess
and obsolete inventory. In the future, if our inventory is determined to be
overvalued, we would be required to recognize such costs in our cost of goods
sold at the time of such determination. Likewise, if our inventory is
determined to be undervalued, we may have over-reported our costs of goods sold
in previous periods and would be required to recognize such additional
operating income at the time of sale. Therefore, although we make every effort
to ensure the accuracy of our forecasts of future product demand, any
significant unanticipated changes in demand or technological developments could
have a significant impact on the value of our inventory and our reported
operating results.

For
a discussion of other significant accounting policies used in the preparation
of our financial statements and recent accounting pronouncements, see Note 2 to
our Consolidated Financial Statements contained elsewhere in this report.

30

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Operating
results

Overview

A
significant portion of our revenues historically has been derived from
customers in the United States of America, and we expect that this trend will
continue, although we expect that U.S. sales as a percentage of total sales may
decrease as our total sales and sales to other geographic areas, particularly
Asia, increase.  In 1999, 71% of our
revenues were derived from U.S. customers, 12% were from European customers,
including 5% from Italian customers, 2% were from Japanese customers and 15%
were from Singaporean customers. In 2000, 71% of our revenues were derived from
U.S. customers, 12% were from European customers, 2% were from Japanese
customers and 15% were from Asian customers, including 5% from South Korean
customers. In 2001, 72% of our revenues were derived from U.S. customers, 13%
were from European customers, 8% were from Japanese customers, and 7% were from
Asian (other than Japanese) customers. 
In 2002, 61% of our revenues were derived from U.S. customers, 16% were
from European customers, 20% were from Japanese customers, and 3% were from
Asian (other than Japanese) customers. In 2003, 62% of our revenues were
derived from U.S. customers, 10% were from European customers, 21% were from
Japanese customers, and 7% were from Asian (other than Japanese) customers. The
table set forth below sets forth the information on our distribution of
revenues by geographic areas according to the geographic location of the actual
installation of our systems in end-user sites.

The
table below describes the distribution of our total revenues, from systems and
services, by geographic areas of our product installations at semiconductor
manufacturing facilities.  As our
customers include both semiconductor manufacturers and process equipment
manufactures, this distribution is different from the distribution of our
revenues by customer location discussed in the immediately preceding paragraph.

|       |  | 2001 |   | 2002 |     | 2003 | 
|------ |  | ---- | - | ---- | --- | ---- | 
|USA    |  | 65   | % |      | 54  | %    | 
|Europe |  | 18   | % |      | 23  | %    | 
|Japan  |  | 5    | % |      | 6   | %    | 
|Other  |  | 12   | % |      | 17  | %    | 
|       |  |      |   |      |     |      | 
|Total  |  | 100  | % |      | 100 | %    | 

Historically,
a substantial portion of our revenues has come from a small number of
customers. In 2001, 2002 and 2003, our five largest customers accounted for
81%, 86% and 87% of our revenues, respectively. In 2001, 2002 and 2003, our
single largest customer accounted for 33%, 30% and 47% of our revenues,
respectively. We anticipate that our revenues will continue to depend on a
limited number of major customers, although the companies considered to be
major customers and the percentage of our revenue represented by each major
customer may vary from period to period. Therefore, the loss of any one of our
major customers could materially and adversely affect us.

The
sale cycle for our systems typically ranges from three to 24 months and depends
upon the status of our systems integration with a particular model of process
equipment of a process equipment manufacturer, the evaluation criteria of our
customers, and the technology or application of the process. Additionally, the
rate and timing of customer orders may vary significantly from month to month
as a function of the introduction of a new type of system to a production line.
We have a relatively low backlog. 
Accordingly, if sales of our products do not occur when we expect or we
are unable to adjust our estimates on a timely basis, our expenses and
inventory levels may fluctuate relative to revenues and total assets. In 2003,
our inventory levels at the end of each quarter ranged from $2.8 million to
$4.2 million.  We planned our inventory
for 2003 for sales of 200mm systems and 300mm systems according to our expectation
that approximately 50% of equipment sales would be for 300 mm equipment.  At the end of 2003, the actual distribution
of Nova sales was similar to our expectations and therefore did not have
material affect on our inventory levels or write-off.  In the future, if our actual sales are significantly different
from our expectations, we may have to write-off some of our inventory.

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We
schedule production of our systems based upon order backlog and customer
forecasts. We include in backlog only those orders to which the customer has
assigned a purchase order number and for which delivery has been specified
within 12 months. As of December 31, 2003 we had a backlog of five systems,
representing $980,000.  Because shipment
dates may be changed and customers may cancel or delay orders with little or no
penalty, our backlog as of any particular date may not be a reliable indicator
of actual sales for any succeeding period. We do not maintain any reserves for
cancellations or variations in our customers orders because historically cancellations
and variations have been insignificant. 
In addition, if a cancellation occurs, we may be able to sell the
equipment to other customers.

Our
revenues increased 31% in 2003, following a 4% decline in 2002 and a 56%
decline in 2001. In comparison, overall, according to DataQuest December 2003
published research, the semiconductor wafer front-end equipment industry
increased 5% in 2003 over 2002, following 32% decline in 2002, and 29% decline
in 2001.

The
following table shows the relationship, expressed as a percentage, of the
listed items from our consolidated statements of operations to our total
revenues for the periods indicated:

| |                                                |  | Percentage of Total Revenues
  Year ended December 31, |  
| | ---------------------------------------------- |  | ------------------------------------------------------ | -
| |                                                |  |                                                        |  
| |                                                |  | 2001                                                   |  
| |                                                |  |                                                        |  
| |                                                |  |                                                        |  
| | Revenues from products sale                    |  | 69.6                                                   | %
| | Revenues from services                         |  | 30.4                                                   | %
| |                                                |  |                                                        |  
| | Total revenues                                 |  | 100.0                                                  | %
| |                                                |  |                                                        |  
| | Cost of products sale                          |  | 43.3                                                   | %
| | Cost of services                               |  | 34.5                                                   | %
| |                                                |  |                                                        |  
| | Total cost of revenues                         |  | 77.8                                                   | %
| |                                                |  |                                                        |  
| | Gross profit                                   |  | 22.2                                                   | %
| |                                                |  |                                                        |  
| | Operating expenses:                            |  |                                                        |  
| | Research and development
  expenses, net       |  | 62.6                                                   | %
| | Technology for use in research and development |  | --                                                     |  
| | Sales and marketing
  expenses                 |  | 32.4                                                   | %
| | General and administrative
  expenses          |  | 14.3                                                   | %
| | Other operating expenses
  (income)            |  | 4.8                                                    | %
| |                                                |  |                                                        |  
| | Total operating expenses                       |  | 114.1                                                  | %
| |                                                |  |                                                        |  
| | Operating loss                                 |  | 91.9                                                   | %
| |                                                |  |                                                        |  
| | Financing income, net                          |  | 12.2                                                   | %
| |                                                |  |                                                        |  
| |                                                |  |                                                        |  
| | Net loss                                       |  | 79.7                                                   | %

Comparison
of Years Ended December 31, 2003 and 2002

Revenues.Our revenues in 2003
increased by $6.3 million, or 31.0%, compared to 2002, with revenues
attributable to product sales accounting for $21.2 million, an increase of $6.6
million, or 45.8%, compared to 2002, and services accounting for $5.5 million,
a decrease of $0.3 million, or 5.6%, compared to 2002.  We believe the increase in product sales
revenue was due to the beginning of a recovery in the semiconductor industry in
the first half of 2003 which resulted in semiconductor manufacturers adding
manufacturing capacity, leading to increased sales of our metrology products.
We believe the semiconductor industry recovery in 2003 was driven by increased
demand for semiconductors as a result of improving economic conditions
worldwide, especially in the U.S. and Japan and the resulting increase in
consumer spending, particularly for electronic devices.  Revenues from services accounted for 20.7%
of total revenues in 2003, as compared to 28.8% of total revenues in 2002. The
decrease in service revenues as a percentage of total revenues was attributed
mainly to the increase in 2003 total revenues by 31.0% over total 2002
revenues.

32

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We
expect that sales from our main integrated process control product line
targeting the chemical mechanical polishing market, including dielectric and
copper, will continue to account for a substantial portion of our revenues for
at least the next year, and that the new product lines sales (process control
systems for lithography and etch) will gradually become more significant as we
introduce our next generation of metrology systems for lithography and etch. As
our revenues are largely dependent upon the sale of systems for CMP processing,
any decrease in demand for our CMP products would have a material adverse
affect on us. We expect service revenue to grow gradually in the following
years as a result of expanding the number systems sold to the industry and
served by our customer support organization.

Cost
of Revenues and Gross Profit.Cost of revenues consists of
the labor, material and overhead costs of manufacturing our systems, and the
costs associated with our worldwide service and support infrastructure. It also
consists of inventory write-offs and provision for estimated future warranty
costs for systems we have sold.  Our
cost of revenues attributable to product sales in 2003 was $10.3 million, an
increase of $3.5 million, or 52.1%, compared to 2002.  This increase is attributable mainly to the increased volume of
systems sold.  As a percentage of total
revenues, our cost of revenues attributable to product sales in 2003 increased
to 38.5% from 33.1% in 2002.  This
increase is attributable to the volume of sales and mixture of products
sold.  Our cost of revenues attributable
to services in 2003 was $6.3 million, a decrease of $0.3 million, or 5.1%,
compared to 2002.  This decrease is the
result of a decrease in our service-related revenues and the implementation of
a cost-reduction plan in 2002.

Our
gross profit increased by 45.7% to $10.2 million in 2003 from $7.0 million in
2002. Our gross profit represented 38.0% and 34.5% of our total revenues in
2003 and 2002, respectively. Our gross profits increase from 2002 to 2003 is
attributable to the higher volume of systems sold and cost reduction measures
and adjustments to our manufacturing and service and support operations to make
them more compatible with current sales levels.

Research
and Development expenses, Net.Research and development
expenses, net, consist primarily of salaries and related expenses and also
include consulting fees, subcontracting costs, related materials and overhead
expenses, after offsetting conditional grants received or receivable from the
Office of the Chief Scientist. Our research and development expenses, net,
decreased 13.5% from $9.9 million in 2002 to $8.6 million in 2003, after
offsetting conditional grants received or receivable from the Office of the
Chief Scientist of $2.3 million and $1.7 million in 2003 and 2002,
respectively. The decrease in research and development expenses, net, is
attributed mainly to cost reduction steps that we took in 2001 and 2002, mainly
significant workforce reductions. We do not expect the workforce reductions to
adversely impact our major development plans and the introduction of new
products. Research and development expenses, net, represented 32.1% and 48.6%
of our revenues in 2003 and 2002, respectively. This decrease is the result of
a decrease in net research and development expenses, as well as an increase in
our revenues in 2003.

Approximately
$5 million of our research and development expenses, net, in 2003, resulted
from our research and development efforts relating to the introduction of new
products and new models of the NovaScan systems for the next manufacturing
technology nodes. We believe that meeting the needs of semiconductor
manufacturers with respect to the manufacture of semiconductors with features
ranging from 90 nm to below 65 nm will allow us to maintain our position as a
market leader in integrated process control equipment.  (According to the International Technology
Roadmap for Semiconductors, ITRS, published in December 2003, semiconductor
manufacturers are expected to begin high volume manufacturing of semiconductors
with 90 nm features in 2004 and high volume manufacturing of semiconductors
with 65 nm features in 2006.)  The
balance of the research and development expenses, net, were related to current
products activities, such as engineering improvements, new versions of software
and application support and developments.

33

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Sales
and Marketing.Sales and marketing expenses are comprised of
salaries and related costs for sales and marketing personnel, related travel
expenses, and overhead. They also include commissions to our representatives
and sales personnel and royalties. Our sales and marketing expenses decreased
7.1% from $7.0 million in 2002 to $6.5 million in 2003. Sales and marketing
expenses represented 34.1% and 24.5%, respectively, of our revenues in 2002 and
2003. This decrease is related to cost saving measures in our sales and
marketing operations.

General
and Administrative. General and administrative expenses are
comprised of salaries and related expenses and other non-personnel related
expenses. Our general and administrative expenses increased 5.5% from $1.8
million in 2002 to $1.9 million in 2003. This increase is attributed mainly to
the increased operating overhead, employee benefits and investor relations
activity. General and administrative expenses represented 8.8% and 7.1% of our
revenues in 2002 and 2003, respectively. The decrease in general and
administrative expenses as a percentage of revenues from 2002 to 2003 is a
result of an increase in our revenues in 2003.

Other
Operating Income. During the fourth quarter of 2003, the
Office of the Chief Scientist approved the Companys request to allocate $2.2
million from the grants provided by the Office of the Chief Scientist to a
specific lithography project, to be repaid as royalties only from sales of
specific lithography products. As a result, the Company has canceled in 2003 a
royalty provision, made mainly in prior years, in the total amount of $2.2
million. The other income in the year 2003 represents this cancellation.

In
2002, the Company purchased technology for use in one of the Companys specific
research and development programs, which had no alternative use, for $1.5
million. This amount has been charged to the statement of operations for the
year ended December 31, 2002 in accordance with the principals set force in
SFAS 2.

Comparison
of Years Ended December 31, 2002 and 2001

Revenues.Our revenues in 2002
decreased $0.8 million, or 3.8%, compared to 2001. This decrease resulted from
our sale of fewer systems as a result of the continuing deep slowdown in the
semiconductor industry in 2002. Revenues from services in 2002 accounted for
28.8% of total sales, as compared to 30.4% in 2001. The decrease in revenues
was attributed mainly to a decrease in the quantity of systems sold.

Cost
of Revenues and Gross Profit.Cost of revenues consists of
the labor, material and overhead costs of manufacturing our systems, and the
costs associated with our worldwide service and support infrastructure. It also
consists of inventory write-offs and the provision for estimated future
warranty costs for systems we have sold. Our gross profit increased 49.3% from
$4.7 million in 2001 to $7.0 million in 2002. Our gross profit represented
22.2% and 34.5% of our revenues in 2001 and 2002, respectively. Our gross profits
increase from 2001 to 2002 is attributed to cost reduction measures and
adjustments to our manufacturing and service and support operations to make
them more compatible with current sales levels. The cost reduction measures
taken during 2002 were related to the deep slowdown of the semiconductor
industry.

Costs
related to 2002 services decreased $0.7 million, or 9.5%, as compared to 2001
following the implementation of a cost-reduction plan. Revenues related to
services decrease $0.6 million in 2002 compared to 2001. Due to the cost
reduction plan, the loss related to services decreased by $0.2 million and we
recorded a gross loss related to services of $0.7 million in 2002, as compared
to a gross loss of  $0.9 million in
2001.

Research
and Development Expenses, Net.Research and development
expenses, net, consist primarily of salaries and related expenses and also
include consulting fees, subcontracting, related materials and overhead
expenses, after offsetting conditional grants received or receivable from the
Office of the Chief Scientist. Our research and development expenses, net,
decreased 25.3% from $13.3 million in 2001 to $9.9 million in 2002, after
offsetting conditional grants received or receivable from the Office of the
Chief Scientist of $1.8 million and $1.7 million in 2001 and 2002,
respectively. This decrease is attributed mainly to the cost reduction steps
that had been taken in 2001 and 2002, including significant workforce
reductions. We do not expect the workforce reductions to adversely impact our
major development plans and the introduction of new products. Research and
development expenses, net, represented 48.6% and 62.6%, respectively, of our
revenues in 2002 and 2001. Approximately $5 million of our research and
development expenses, net, in 2002, resulted from our research and development
efforts relating to the introduction of new product lines in order to maintain
our position as a market leader in integrated process control equipment.

34

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Sales
and Marketing.Sales and marketing expenses are comprised of
salaries and related costs for sales and marketing personnel, related travel
expenses, and overhead. They also include commissions to our representatives
and sales personnel and royalties. Our sales and marketing expenses increased
1.4% from $6.9 million in 2001 to $7.0 million in 2002. Sales and marketing
expenses represented 32.4% and 34.1%, respectively, of our revenues in 2001 and
2002.

General
and Administrative. General and administrative expenses are
comprised of salaries and related expenses and other non-personnel related
expenses. Our general and administrative expenses decreased 40.7% from $3.0
million in 2001 to $1.8 million in 2002. This decrease is attributed mainly to
the cost reduction actions taken during 2001 and 2002, which included a
reduction in workforce. General and administrative expenses represented 14.3%
and 8.8%, respectively, of our revenues in 2001 and 2002.

Other
Operating Expenses. 
In 2002 the company purchased technology for use in one of the Companys
specific research and development programs, which had no alternative use, for
$1.5 million. Such amount has been charged to the statement of operations in
the year ended December 31, 2002 in accordance with the principals set force in
SFAS 2. Other operating expenses in 2001 of $1.0 million are comprised of
non-recurring expenses related to the breach of part of our operating lease
commitments associated with the move to the new building.

Our
operating results have historically experienced significant quarterly and
annual fluctuations.  We anticipate that
factors affecting our future operation results, many of which are beyond our
control, will include the timing of significant orders, the timing of new
products announcements and releases by us or by our competitors, patterns of
capital spending by customers, market acceptance of new and enhanced versions
of our products and changes in pricing by us or in our industry or the markets served
by our customers.  In addition, the
timing of our research and development expenses could cause quarterly results
to fluctuate.  Accordingly,
period-to-period comparisons of our statements of operations may not be
meaningful, and you should not rely upon them as indications of our future
performance.

Liquidity
and Capital Resources

As
of December 31, 2003, we had working capital of $30.3 million compared to
working capital of $34.7 million as of December 31, 2002. This decrease is
attributed primarily to our operating losses incurred during 2003. Cash and
cash equivalents, short-term deposits and securities held to maturity as of
December 31, 2003 were $31.6 million compared to cash and cash equivalents,
short-term deposits and securities held to maturity of $38.6 million as of
December 31, 2002.

Trade
accounts receivables increased from $2.9 million as of December 31, 2002 to
$5.8 million as of December 31, 2003. This increase is attributable mainly to
the increase in our sales during the fourth quarter of 2003 (2003 fourth
quarter revenues were $8.1 million compared to $5.6 million in the fourth
quarter of 2002).  Inventories increased
from $3.2 million as of December 31, 2002 to $4.2 million as of December 31,
2003. Typically, during periods of revenue growth, our accounts receivable and
inventories increase and represent a use of cash as we expend cash to build
inventory and produce and sell systems to customers in advance of receiving
cash payment from them.  While we cannot
be certain, we expect that in 2004, trade accounts receivable and inventories
will increase as the semiconductor industry continues to recover.

Operating
activities in 2003 used cash of $5.5 million compared to cash of $7.9 million
used in 2002. Operating activities in 2003 used less cash relative to 2002
mainly due to the decrease of our net losses in 2003.  Financing activities generated $0.3 million of cash in 2003,
compared to $0.03 million in 2002.  The
increase in cash provided by financing activities in 2003 is attributable to
changes in market interest rates and the use of effective financial management,
including our cash management policy.

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The
following table describes our investments in capital expenditures during the
last three years:

|                               |  | 2003                  |     | 2002   |  | 2001 |    
|------------------------------ |  | --------------------- | --- | ------ |  | ---- | ---
|                               |  |                       |     |        |  |      |    
|                               |  | Home                  |     | Abroad |  | Home |    
|                               |  |                       |     |        |  |      |    
|                               |  | (in dollar thousands) |    
|Electronic equipment           |  |                       | 397 |        |  |      | 32 
|Office furniture and equipment |  |                       | 14  |        |  |      | 69 
|                               |  |                       |     |        |  |      |    
|Leasehold improvements         |  |                       | 564 |        |  |      | 65 
|                               |  |                       |     |        |  |      |    
|                               |  |                       |     |        |  |      |    
|Total                          |  |                       | 975 |        |  |      | 166

The
decrease in capital expenditures for leasehold improvements in 2003 was due to
our completion of our 2001 and 2002 investments in new facilities in Israel.
Although we currently have no significant capital commitments, we expect to
spend approximately $1.1 million on capital expenditures in the next 12 months,
mainly for information systems improvements (software and hardware), electronic
equipment used in our research and development labs and systems for our
demonstration centers and application development.

We
currently have contractual obligations as described in the following table:

|                            |  | Total                 |  | Less than 1 year |       | 1-3 years |  | 3-5 years |       | More than
  5 years | 
|--------------------------- |  | --------------------- |  | ---------------- | ----- | --------- |  | --------- | ----- | ------------------- | 
|                            |  | (in dollar thousands) | 
|Operating Lease Obligations |  | 4,865                 |  |                  | 1,630 |           |  |           | 2,430 |                     | 
|Purchase Obligations        |  | 2,328                 |  |                  | 2,328 |           |  |           | --    |                     | 
|Other Long Term Liabilities |  | 175                   |  |                  | 58    |           |  |           | 117   |                     | 
|                            |  |                       |  |                  |       |           |  |           |       |                     | 
|Total                       |  | 7,368                 |  |                  | 4,016 |           |  |           | 2,547 |                     | 

Our
principal liquidity requirements are expected to be for working capital,
research and development, capital expenditures and lease payments for our
worldwide facilities. We believe that our current cash reserves and expected
cash flow will be adequate to fund our activities for at least the next 12
months.

Our
long-term capital requirements will be affected by many factors, including the
success of our current products, our ability to enhance our current products
and our ability to develop and introduce new products that will be accepted by
the semiconductor industry. We plan to finance our long-term capital needs with
the remaining net proceeds of our initial public offering, together with cash
flow from operations, if any. If these funds are insufficient to finance our
activities, we will have to raise additional funds through the issuance of
additional equity or debt securities, through borrowing or through other means.
We cannot assure you that additional financing will be available on acceptable
terms.

Presently,
we have no long-term debt, nor any readily available source of long-term debt
financing such as a line of credit.

With
regard to usage of hedging financial instruments and the impact of inflation
and currency fluctuations, see Quantitative and Qualitative Disclosures About
Market Risk on page 62 of this report.

Off-balance
sheet arrangements

We do not have and are not party
to any off-balance sheet arrangements.

Research
and Development

For
information regarding our research and development activities, see Research
and Development starting on page 23 of this report.

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Conditional
Grants from the Office of the Chief Scientist

Under
the Law for the Encouragement of Industrial Research and Development, 1984, a
qualifying research and development program is eligible for conditional grants
of up to 50% of the programs expenses. The program must be approved by a
committee of the Office of the Chief Scientist of the Israeli Ministry of
Industry and Trade. The recipient of the conditional grants is required to
return the grants by the payment of royalties on the revenues derived from
using the grants. Current regulations promulgated under the law provide for the
payment of royalties to the Office of the Chief Scientist ranging from 3% to 6%
on the revenues derived from using the conditional grants until 100% of the
grants are repaid. Conditional grants received under programs approved after
January 1, 1999 will accrue interest at an annual rate of the 12-month LIBOR
applicable to dollar deposits. Royalties are paid in NIS linked to the dollar
at the exchange rate in effect at the time of payment. Following the full
payment of such royalties and interest, there is generally no further liability
for payment.

The
terms of the conditional grants under the law require that we manufacture in
Israel the products developed with these grants. These restrictions apply even
after grants are fully repaid. Under the regulations promulgated under the law,
the products may be manufactured outside Israel by us or by another entity, if
prior approval is received from the Office of the Chief Scientist. Ordinarily,
as a condition to obtaining this approval, we would be required to pay
increased royalties. If we perform the manufacturing, the increased royalties
would ordinarily be one percentage point above the otherwise applicable royalty
rate. If the manufacturing is performed by an entity other than us, the rate
would depend on the amount of manufacturing performed outside of Israel and the
size of the conditional grants in relation to the investments made by us in the
project. The total amount to be repaid to the Office of the Chief Scientist
would also be adjusted to between 120% and 300% of the conditional grants,
depending on the manufacturing volume that is performed outside Israel. We may
not transfer the technology developed with funds from these conditional grants
to third parties without the prior approval of a governmental committee.
Approval of the transfer of technology may be granted only if the recipient abides
by all the provisions of the law and related regulations, including the
restrictions on the transfer of know-how outside of Israel and the obligation
to pay royalties in an amount that may be increased. Approval to manufacture
products outside of Israel or consent to the transfer of technology, if
requested, might not be granted.

As
of December 31, 2003 we received conditional grants from the Office of the
Chief Scientist totaling $7.2 million. Because the implementation of
regulations raising royalty rates to between 3% and 6% has been deferred, we
are obligated to pay royalties of 3% of revenues derived from sales of products
funded with these grants. As of December 31, 2003, our contingent liability to
the Office of the Chief Scientist for conditional grants received was
approximately $3.6 million. See also Note 7A to our consolidated  financial statements contained elsewhere in
this report.

The
funds available for Office of the Chief Scientist conditional grants were
reduced for 2003, and the Israeli authorities have indicated that the
government may further reduce or abolish Office of the Chief Scientist grants
in the future. Even if these conditional grants are maintained, we might not
receive Office of the Chief Scientist grants in the future and cannot presently
predict the amount of any grants we might receive.

In
addition to royalty-bearing grants from the Office of Chief Scientist, in 2003,
we participated in two programs sponsored by the Office of Chief Scientist. In
one program, we are a member of a research consortium comprised of several
Israeli high technology companies, which are engaged in the development of
multimedia on-line technology. In the other program, we are cooperating with a
research institute in Israel for the development of advanced measurement
techniques. In both programs, the Office of Chief Scientist contributes 66% of
the approved research and development budget for the research consortium and
the members of the research consortium contribute the remaining 34%. No
royalties from this funding are payable to the Israeli government. Expenses in
excess of the approved budget are borne by the consortium members. In general,
any consortium member that develops technology as part of the consortium retains
the intellectual property rights to the technology developed by this member,
and all the members of the consortium have the right to utilize and implement
such technology without having to pay royalties to the developing consortium
member. As of December 31, 2003, we had received approximately $1 million in
grants from the Office of Chief Scientist in connection with the
above-mentioned programs.

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Political
and economic conditions in Israel

The
Company is incorporated under the laws of Israel, and has its principal offices
and manufacturing facilities in Israel. The Company is, therefore, directly
influenced by the political, economic and military conditions affecting Israel.
Any major hostilities involving Israel, the interruption or curtailment of
trade between Israel and its trading partners or a significant downturn in the
economic or financial condition of Israel could have a material adverse effect
on the Companys business, financial condition and results of operations. For
additional information on risks related to operating in Israel, see Risk
Factors starting on page 9 of this report.

Political
Conditions. Since the establishment of the state of Israel in
1948, a number of armed conflicts have taken place between Israel and its Arab
neighbors and a state of hostility, varying from time-to-time in intensity and
degree, has led to security and economic problems for Israel.  However, a peace agreement between Israel
and Egypt was signed in 1979, a peace agreement between Israel and Jordan was
signed in 1994 and, since 1993, several agreements between Israel and the
Palestinian Authority representatives have been signed.  As of the date hereof, Israel has not
entered into any agreement with Syria or Lebanon. Currently there is stagnation
in the peace process in the Middle East and ongoing hostilities between
Palestinian militant groups and Israel. The resumption of hostilities in the
region, which have occurred after the failure of Camp David peace talks, as
well as the events of September 11, 2001, and the ongoing tension in the
region, has a negative effect on the stability of the region. There can be no
assurance as to whether or how the peace process will develop or what affect
it or these ongoing hostilities may have upon the Company.

Beginning
in 1948, nearly all Arab countries have formally adhered to a boycott of Israel
and Israeli companies and, since the early 1950s, of non-Israeli companies
doing business in Israel or with Israeli companies.  Attempts to ensure that Arab countries are complying with this
boycott have intensified due to recent hostilities between the State of Israel
and the Palestinians. Despite measures to counteract the boycott, including
anti-boycott legislation in the US, the boycott has had an indeterminate
negative effect upon trade with and foreign investments in Israel. Although in
the past such attempts did not materially affect us, there can be no assurance
that restrictive laws, policies, or practices directed toward Israel or Israeli
businesses will not have an adverse impact on the operation or expansion of the
Companys businesses.

Due
to recent presence of the Israeli military in the territories previously
transferred to the control of the Palestinian authority, there were certain
initiatives within the institutions of the European Union to suspend the trade
agreements entered into between the State of Israel and members of the European
Union.  These initiatives culminated in
a resolution of the European Parliament recommending that the European Union
members suspend those trade agreements. It is uncertain whether such agreements
will in fact be suspended, but if such agreements are suspended, it is likely
to adversely affect the Company.

Military
Service. Generally, all male adult citizens and permanent
residents of Israel under the age of 46, or under the age of 41 with regard to
certain units, are, unless exempt, obligated to perform up to approximately 36
days of military reserve duty annually. 
Additionally, all such residents are subject to being called to active
duty at any time under emergency circumstances. Some of the Companys officers
and employees are currently obligated to perform annual reserve duty. While the
Company has operated effectively under these requirements since it began
operations, no assessment can be made as to the full impact of such
requirements on the Companys workforce or business if conditions should
change, and no prediction can be made as to the effect on Company of any expansion
or reduction of such obligations.  For
information regarding the risk obligatory military service may pose to us, see
Risk Factors at page 9 of this report.

Economic
conditions. Israels economy has been subject to numerous
destabilizing factors, including a period of rampant inflation in the early to
mid-1980s that reached an annual peak of 445%, low foreign exchange reserves,
fluctuations in world commodity prices, military conflicts and civil unrest. In
the past three years, the Israeli economy has been in a recession. The Israeli
government has, for these and other reasons, intervened in the economy by
utilizing, among other means, fiscal and monetary policies, import duties,
foreign currency restrictions and control of wages, prices and exchange rates.
The Israeli government periodically changes its policies in all these areas.

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Item
6.  Directors, Senior Management and
Employees

The
following is the list of officers and directors:

|Name                  |  | Age |  | Position                                                     
|--------------------- |  | --- |  | -------------------------------------------------------------
|                      |  |     |  |                                                              
|Barry Cox (1) *       |  | 64  |  | Chairman of the Board of Directors                           
|Giora Dishon          |  | 59  |  | President, Chief Executive Officer, Director and
  Co-Founder
|Moshe Finarov         |  | 52  |  | Chief Technology Officer, Director and Co-Founder            
|Meir Shannie (2) *    |  | 59  |  | Director                                                     
|Micha Brunstein (3) * |  | 60  |  | Director                                                     
|Avi Kerbs *           |  | 57  |  | Director                                                     
|Joseph Ciechanover *  |  | 71  |  | Director                                                     
|Alon Dumanis *        |  | 61  |  | Director                                                     
|Lauri Hanover *       |  | 44  |  | External Director                                            
|Karey Holland *       |  | 48  |  | External Director                                            
|Chai Toren *          |  | 48  |  | Vice President Finance, Chief Financial Officer              
|Gad Yaron *           |  | 53  |  | GM, Chief Operational Officer                                
|Ronen Frish *         |  | 47  |  | Vice President, Sales and Marketing                          

* Each one of these
persons beneficially owns less than one percent of the Companys ordinary
shares.

|(1) | Was appointed as Chairman in May 2003.
|--- | --------------------------------------
|(2) | Resigned from office in June 2003.    
|(3) | Was appointed in November 2003.       

Our directors (other than
the external directors) serve as such until the Companys next annual general
meeting of shareholders.  Our external
directors, in accordance with Israeli law, serve for a three-year term, which
may be renewed for only one additional three-year term. All of our external
directors were elected in 2000 and were reelected in 2003.

Mr.
Barry L. Cox was
appointed chairman of the Board of Directors of the Company in May, 2003.
During the years 2001 to 2002 Mr. Cox served as chairman of the board of
directors of MorphICs Technology Inc. and from 1998 to 2000, as chairman of the
board of directors of Quantum Effect Devices Inc. Mr. Cox served as chief
executive officer of Weitek Corporation between 1993 and 1995, and before that
filled various roles in Intel, the last of which was president of Intel Europe.
Mr. Cox holds a B.S. in engineering from the U.S. Air Force Academy and an MBA
from Boston University.

Dr.
Giora Dishonis a co-founder of Nova and has served as
President and Chief Executive Officer since Novas formation in 1993. From 1989
to 1993 he served as Thin Film and Flat Panel Display Product Line Manager at
Orbot Systems and Orbotech Ltd., a manufacturer of automated optical inspection
equipment. From 1986 to 1988 he was a Visiting Scientist at the
Microelectronics Center of North Carolina, and from 1982 to 1986 he served as
the Managing Director at AVX Israel Ltd., a manufacturer of electronic devices.
Dr. Dishon holds a B.Sc. in Chemistry, a MSc. and a Ph.D. in Materials Science
from the Hebrew University in Jerusalem.

Dr.
Moshe Finarovis a co-founder of Nova and a member of the
board of directors. He has served as Chief Technology Officer of Nova since
Novas formation in 1993. From 1989 to 1993 he served as Senior Physicist at
Orbotech and from 1978 to 1988 he was employed at the ENIMS and PULSAR
Institutes of Research in Moscow. Dr. Finarov holds a Ph.D. in Semiconductor
Physics from Moscow University.

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Dr.
Micha Brunstein was elected as director of Nova during
November 2003 by the other members of the board of directors. During the years
1983 to 1999, Dr. Brunstein served as a Managing Director of Applied Materials
Israel Ltd. Prior to that, Dr, Brunstein served as President of Opal Inc. and
as a Director of New Business development in Optrotech Ltd. At present, Dr.
Brunstein serves as the chairman and board member of several Israeli companies,
as well as the Israel Association of Electronics Industries and the Israel-US
chamber of Commerce and Industry. Dr. Brunstein holds B.Sc. in Mathematics and
Physics from the Hebrew University, Jerusalem, and M.Sc. and Ph.D. degrees in
Physics from the Tel Aviv University.

Mr. Avi Kerbs has served as a director of Nova since 1993. He serves as
          the president and chief executive officer of Teuza Management and Development
          Ltd., the management company of Teuza-A Fairchild Technology Venture Ltd., a
          venture capital Company and has done so since 1991. Teuza-A Fairchild Technology
          Venture Ltd. is a major shareholder of Nova. He serves as a director of most of
          the companies comprising the investment portfolio of the Teuza Fund. Mr. Kerbs
          is also a director of DSS Inc., currently traded on Nasdaq Smallcap market
          and in two other Israeli companies. Mr. Kerbs holds a B.Sc. in Industrial
          Engineering and Management and an M.Sc. in Management, both from the Technion in
          Haifa-the Technology Institute of Israel. Mr. Kerbs was originally appointed to
          our board of directors by Teuza.

Mr.
Joseph Ciechanover has served as a director of Nova from
October 1996 until December 1998 and again from February 2000 until the
present. He is the founder and president of the Challenge Fund-Etgar L.P., a
venture capital firm and served as chairman of the board of El-Al Israel
Airlines from 1995 until 2001.   He
served as a member of the advisory committee of the Bank of Israel from 1980 to
1994 and the president and a member of the board of directors of PEC Israel
Economic Corporation, a diversified investment company. Mr. Ciechanover holds a
law degree from the Hebrew University in Jerusalem, an L.L.M. from the
University of California at Berkeley and a Ph.D. in philosophy from Boston
University.

Dr.
Alon Dumanis, is the Chief Executive Officer of Docor
International Management, a Dutch venture capital, subsidiary of The Van-Leer
Group Foundation. Dr. Dumanis serves as member of various companies boards of
directors, including El Al Israel Airlines, Inventech and others. Previously,
Dr. Dumanis was the Head of The Material Command in the Israel Air Force with
the rank of Brigadier General. Dr. Dumanis currently serves as chairperson and
member of several national steering committees and is the author of many papers
published locally and internationally in a number of subject areas, including
technology and management. Dr. Dumanis holds a Ph.D. in Aerospace Engineering
from Purdue University in the United States.

Ms.
Lauri Hanover has been a Director of the Company since 2000.
Ms. Hanover has served as Corporate Vice President and Chief Financial Officer
of NICE Systems Ltd. since December 2000.  She previously served as
Executive Vice President and Chief Financial Officer of Sapiens International
Corporation N.V. since March 1997.  From 1984 to 1997, Ms. Hanover served
in a variety of financial management positions, including Corporate Controller,
at Scitex Corporation Ltd.  Ms. Hanover holds a bachelors degree in
finance from the Wharton School of Business and a Bachelor of Arts degree from
the College of Arts and Sciences, both of the University of Pennsylvania. 
Ms. Hanover also holds a masters degree in business administration from New
York University.

Dr.
Karey Holland was appointed as the Companys external
director in accordance with the provisions of Israeli law. Dr. Holland serves
concurrently as Vice President, Technology at Thomas West Inc., an equipment
manufacturer for the semiconductor industry, and as Senior Managing partner of
Techcet, a Company providing strategic technical services in the semiconductor
industry. Prior to her current position, Dr. Holland was employed for over five
years by IPEC, a semiconductor manufacturing company, and later SpeedFam-IPEC,
where she held the positions of Vice President of Process Technology and later
Vice President and Chief Technological Officer. She worked for IBM from 1981
through 1993 where she held several positions including Sematech Advanced
Lithography Technology Development Program Manager, Process Technology
Development Manager and Manufacturing Implementation Manager. After leaving IBM
and before taking her position at IPEC, Dr. Holland spent nine months at
Motorola in Manufacturing Planning for the Microprocessor and Memory Technology
Group.  Dr. Holland holds a Ph.D. in
analytical chemistry from Pennsylvania State University.

Mr.
Chai Torenhas served as Chief Financial Officer of Nova
since 1995. From 1994 to 1995 Mr. Toren served as Chief Financial Officer of
Zar Laboratories, a biotechnology Company. From 1989 to 1994, he was employed
as Project Manager of the Jerusalem Foundation, a non-profit organization. Mr.
Toren holds a B.A. in Economics and Business Administration from the Hebrew
University in Jerusalem.

40

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Dr.
Gad Yaron was appointed as Novas Chief Operational Officer
in October 2002, and has served as Novas Lithography Product Line Manager
since 2000. From 1998 to 2000 he was New Applications Manager. From 1997 to
1998 he served as Director of Yield Management at Applied Materials Israel, a
subsidiary of Applied Materials Inc. From 1988 to 1997 he served in various key
engineering management positions at Intel Electronics Ltd. Dr. Yaron holds a
Ph.D. in Experimental Semiconductor Physics from the Hebrew University in
Jerusalem.

Mr.
Ronen Frishhas served as Vice President, Sales and Marketing
of Nova since 1995. From 1993 to 1995, Mr. Frish served as Sales Manager at
Digital Equipment Israel, a computer manufacturer. From 1987 to 1993 he held
various sales and marketing management positions in Israel and in Europe at
Orbot Systems and Orbotech. From 1981 to 1987 he served as a project manager at
AREL Electronics. Mr. Frish holds a B.Sc. in Business Management from the Hebrew
University in Jerusalem.

Voting
agreement

We
are not aware of any voting agreement currently valid.

Compensation

The
aggregate direct remuneration paid or payable to all 13 persons who served in
the capacity of director or executive officer during 2003 was approximately
$900,000, including approximately $250,000, which was set aside for pension and
retirement benefits and including amounts expended by us for automobiles made
available to our executive officers.

The
Company has approved the terms of remuneration to the external directors of the
Company, according to which the external directors shall receive remuneration
comprised of: an annual payment in the amount of NIS 34,122 (approximately
$7,600) and an additional per meeting payment of NIS 1,270 (approximately
$300). Israeli Law determines these amounts, and adherence to these amounts
exempts the Company from the need to obtain the approval of the Companys
shareholders with respect to the remuneration paid to the external directors.

On
November 7, 2001, the Companys shareholders approved payment of remuneration
to the Companys directors in the same amounts as mentioned above for the
external directors. The total amount paid or payable to the directors, including
external directors, for 2003 is $122,000. In 2002, this amount was $73,000.

On
September 5, 2002, the Companys Board of Directors and the Companys Audit
Committee approved the issuance of options to directors as follows:

| | Name of
  directors | Position                                | # of
  options | 
| | ------------------- | --------------------------------------- | -------------- | 
| |                     |                                         |                | 
| | Giora Dishon        | Director, CEO &
  President             | 60,000         | 
| |                     |                                         |                | 
| | Moshe Finarov       | Director & CTO                          | 50,000         | 
| |                     |                                         |                | 
| | Meir Shannie        | Former Director (resigned
  June, 2003) | 10,000         | 
| |                     |                                         |                | 
| | Avi Kerbs           | Director                                | 10,000         | 
| |                     |                                         |                | 
| | Joseph Ciechanover  | Director                                | 10,000         | 

These
grants were approved by the shareholders on October 31, 2002. The options were
granted during 2003 and are subject to the terms and conditions of the
Companys Option Plan 6. The options vest over a period of between one and
three years and their term may not exceed seven years from the date of grant.
The exercise price of these options is $2.06 per share.

41

---

---

As
of May 15, 2003, we entered into an agreement with Mr. Barry L. Cox according
to which Mr. Cox serves as chairperson of our board of directors. Under the
agreement, Mr. Cox is entitled to gross annual compensation of $50,000 as well
as a one-time grant of an option to purchase up to 50,000 ordinary shares of
the Company, at the fair market value of the shares at the time of grant. The
option vests during a three year period so that a third of the entire amount
granted to Mr. Cox shall be exercisable upon each anniversary of the grant.

On
May 15, 2003, the Companys Board of Directors and Audit Committee resolved (i)
that the monthly gross salary of Dr. Dishon shall be increased to 44,000 NIS
(approximately $9,800) for the period February 1, 2003 through July 31, 2003
and increased to 50,000 NIS (approximately $11,120) starting on August 1, 2003
and (ii) that the monthly gross salary of Dr. Finarov shall be increased to
40,000 NIS (approximately $8,900) for the period February 1, 2003 through July
31, 2003 and increased to 44,000 NIS (approximately $9,800) starting on August
1, 2003. These changes in the terms of compensation for Drs. Dishon and Finarov
were approved by our shareholders on September 1, 2003.

On
July 1, 2003 and on July 10, 2003, the Companys Audit Committee and Board of
Directors, respectively, resolved to grant each of Lauri Hanover and Karey
Holland whom serve as the Companys external directors, an option to purchase
up to 10,000 ordinary shares of the Company under the term set forth in Option
Plan 6, which were approved by the Companys shareholders on October 31, 2002.  These resolutions were approved by the
Companys shareholders on September 1, 2003. 
The options were granted under Option Plan 6, in the same terms of all
other directors.  The exercise price of
these options is $2.06 per share.

On
January 30, 2004, the Companys Board of Directors and the Companys Audit
Committee approved the issuance of options to directors according to the
following:

| | Name of
  directors | Position                    | # of
  options | 
| | ------------------- | --------------------------- | -------------- | 
| |                     |                             |                | 
| | Giora Dishon        | Director, CEO &
  President | 65,000         | 
| |                     |                             |                | 
| | Moshe Finarov       | Director & CTO              | 55,000         | 
| |                     |                             |                | 
| | Micha Brunstein     | Director                    | 10,000         | 
| |                     |                             |                | 
| | Avi Kerbs           | Director                    | 10,000         | 
| |                     |                             |                | 
| | Joseph Ciechanover  | Director                    | 10,000         | 
| |                     |                             |                | 
| | Alon Dumanis        | Director                    | 10,000         | 
| |                     |                             |                | 
| | Lauri Hanover       | Director                    | 10,000         | 
| |                     |                             |                | 
| | Karey Holland       | Director                    | 10,000         | 

These
grants were approved by the shareholders on March 31, 2004. The options were
granted in March 2004 and are subject to the terms and conditions of the
Companys Option Plan 7A. The options vest over a period of between one and
four years and their term may not exceed seven years from the date of grant.
The exercise price of these options is $5.15 per share.

Board of
Directors Committees

The
Companys Board of Directors has appointed the following directors committees:

TheAudit Committee is comprised of three
members, as required under Israeli law. The members are Lauri Hanover, Karey
Holland and Joseph Ciechanover.  The
functions of the audit committee according to Israeli Law are to locate deficiencies
in the business management of the Company in consultation with the Companys
auditors and to suggest the measures to be taken regarding such deficiencies.
The Audit Committee is also responsible for approving related party
transactions.  In addition, as described
under Item 16, the audit committee is responsible for the approval of all audit
and non-audit services provided to the Company by Deloitte & Touche and
Ernst & Young.

42

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---

TheCompensation Committeeis comprised of
Karey Holland, Lauri Hanover and Avi Kerbs. The function of the compensation
committee is to determine the compensation of directors, senior management and
employees (subject to provisions regarding related party transactions).

TheInvestment Committeeis comprised of
Lauri Hanover and Alon Dumanis. The function of the investment committee is to
review and determine the cash investment policy of the cash reserves of the
Company.

Employees

Set
forth below is a chart showing the number of people we employed at the times
indicated.

|                                |  | as of
  December 31, | 
|------------------------------- |  | -------------------- | 
|                                |  |                      | 
|                                |  | 2001                 | 
|                                |  |                      | 
|                                |  |                      | 
|Total Personnel                 |  | 249                  | 
|                                |  |                      | 
|Located in Israel               |  | 179                  | 
|Located abroad (mainly
  U.S.)  |  | 70                   | 
|                                |  |                      | 
|In operations                   |  | 37                   | 
|In research and
  development   |  | 92                   | 
|In sales and marketing          |  | 31                   | 
|In service and support          |  | 66                   | 
|In general and
  administration |  | 23                   | 

As
of December 31, 2003, we employed a total of 212 persons worldwide, not including
15 independent contractors and temporary employees, of which 72 were in
research and development, 37 were in operations, 62 were in service and
support, and testing, 24 were in sales and marketing and 17 were in general and
administration. As of December 2003, 150 of our employees were based in Israel
and 62 were located abroad.

Because
we were adversely affected by, and our financial results reflect, the general
slowdown in the semiconductor equipment market that started in 2001, we implemented
a cost-reduction plan, which included a reduction in workforce, as seen in the
above table.

We
are a member of the Industrialists Association in Israel, an employers union.
As a result of this membership, a number of collective bargaining agreements
apply to us. These agreements principally concern cost of living wage
increases, paid vacation and holidays, length of the workday, wage tariffs,
termination and severance payments. We provide our employees with benefits and
working conditions that are at least as favorable as those found in the
collective bargaining agreements.

Israeli
labor laws and regulations apply to all our employees. The laws principally
concern matters such as paid vacation, paid sick days, length of the workday,
payment for overtime and severance payments upon the retirement or death of an
employee or termination of employment.

Share
ownership

Giora
Dishon, President, Chief Executive Officer and Co-Founder, and Moshe Finarov,
Vice President, Director of Technology, Director and Co-Founder, owned 708,091
and 646,892 ordinary shares of the Company, respectively, as of April 1, 2004.
All other directors, external directors and senior management each hold less
than 1% of the Companys shares. The following table sets forth information
regarding options held by our directors and officers as of April 1, 2004:

43

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| |                                                                                               |  |                                       |  |                    |           |                               | 
| | --------------------------------------------------------------------------------------------- |  | ------------------------------------- |  | ------------------ | --------- | ----------------------------- | 
| | Name                                                                                          |  | Ordinary
  Share
  Underlying Options |  | Expiration
  Dates |           | Exercise
  Prices
  ($/share) | 
| |                                                                                               |  |                                       |  |                    |           |                               | 
| |                                                                                               |  |                                       |  |                    |           |                               | 
| | Giora Dishon (1)                                                                              |  | 185,000                               |  |                    | 2007-2011 |                               | 
| |                                                                                               |  |                                       |  |                    |           |                               | 
| | Moshe Finarov (1)                                                                             |  | 165,000                               |  |                    | 2007-2011 |                               | 
| |                                                                                               |  |                                       |  |                    |           |                               | 
| | 10 directors and officersas a group (1)                                                       |  | 459,820                               |  |                    | 2004-2011 |                               | 
| |                                                                                               |  |                                       |  |                    |           |                               | 
| | (1) The vesting period of each option is between one
  and four years from the date of grant.

Through
December 31, 2003, options to acquire 4,480,822 ordinary shares have been
issued under the share options plans, of which options to acquire 1,482,848
shares have been exercised, 376,761 have been terminated and forfeited and 1,290,609
were exercisable as of December 31, 2003.

As
of December 31, 2003, we had seven employee share option plans that provided
for the grant of options to our employees, including senior management, to
purchase an aggregate of 4,480,822 ordinary shares. The existing share option
plans are described below (excluding the first share option plan that was
comprised of options to acquire 827,700 ordinary shares, which have been fully
exercised).

| |  | Options to purchase 650,000 shares at an exercise
  price per share of NIS 0.01 (approximately $.0023); as of December 31, 2003,
  all options under this plan were granted, 558,840 options were exercised,
  65,704 options were exercisable and 25,456 options were forfeited;                                                                                                                                       | 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                         | 
| |  | Options to purchase 387,000 shares at an exercise
  price per share of $3.17; as of December 31, 2003, all options under this
  plan were granted, 45,159 options were exercised, 295,562 options were
  exercisable and 45,223 options were forfeited;                                                                                                                                                                 | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                         | 
| |  | Options to purchase 668,350 shares at exercise
  prices ranging from $6.27 or $7.37 per share; originally, this plan included
  1,000,000 shares, and was reduced to 668,350 shares by a decision of the
  board of directors of the Company. As of December 31, 2003, all options under
  this plan were granted, 2,483 options were exercised, 443,575 options were
  exercisable and 162,500 options were forfeited; | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                         | 
| |  | Options to purchase 746,500 shares at an exercise
  prices of $1.13, $2.17 or $2.46, the fair market value of Novas stock on the
  date of grant; as of December 31, 2003, all options under this plan were
  granted, 48,656 options were exercised, 319,508 options were exercisable and
  83,582 options were forfeited;                                                                                            | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                         | 
| |  | Options to purchase 910,000 shares at an exercise
  prices of $2.06, the fair market value of Novas stock on the date of grant;
  as of December 31, 2003, all options under this plan were granted, none were
  exercised or exercisable and 40,000 options were forfeited;                                                                                                                                           | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                         | 
| |  | Options to purchase 116,272 ordinary shares at an exercise
  price of $5.16 per share; granted in March 1999 to Mendy Erad, the chairman
  of the board at that time; as of December 31, 2003, these options were fully
  exercisable;                                                                                                                                                                                  | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                         | 
| |  | Options to purchase an aggregate of 75,000 ordinary
  shares at an exercise price of $3.69 per share granted to the members of our
  Board of Directors, other than our external directors; as of December 31,
  2003, 49,998 of these options were exercisable; and                                                                                                                                                    | 

44

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| |  | Options to purchase 50,000 ordinary shares at an
  exercise price of $2.68 per share; granted in May 2003 to Barry Cox, the
  chairman of the board; as of December 31, 2003, these options were not yet
  exercisable; | 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

In
addition to the option plans described above, in 2003, the Company implemented
an Employee Stock Purchase Plan pursuant to which eligible employees of the
Company may purchase up to 150,000 ordinary shares, subject to certain
adjustments, at a discounted price. The Company issued 43,585 shares in 2003
and 24,889 shares in 2004 to cover purchases made in the first and second phase
of this plan. The Employee Stock Purchase Plan is presently scheduled to run
through 2005.

The following table summarizes information about share
options outstanding as of December 31, 2003:

| | Outstanding
  as of
  December 31, 2003 |  | Exercisable
  as of
  December 31, 2003 |          
| | --------------------------------------- |  | --------------------------------------- | ---------
| |                                         |  |                                         |          
| | Range of
  exercise
  prices            |  | Number
  outstanding                    |          
| |                                         |  |                                         |          
| | (US dollars)                            |  |                                         |          
| |                                         |  |                                         |          
| |                                         |  |                                         |          
| | 0.0025                                  |  |                                         | 65,704   
| | 2.06                                    |  |                                         | 910,000  
| | 2.46-3.69                               |  |                                         | 1,025,870
| | 5.16                                    |  |                                         | 116,272  
| | 6.27-7.37                               |  |                                         | 503,367  
| |                                         |  |                                         |          
| |                                         |  |                                         | 2,621,213
| |                                         |  |                                         |          

In
addition to the option plans described above, on March 31, 2004 our
shareholders approved Option Plan Number 7. Under this plan, we are authorized
to issue options to purchase up to 1,500,000 ordinary shares of the Company in
three sub-plans. Under the first sub-plan, Plan 7A, we may issue options to
purchase up to 600,000 ordinary shares. We have granted, under Option Plan 7A,
options to purchase 600,000 ordinary shares at an exercise price of $5.15 per
share for directors and $4.01 for employees.

45

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Item
7.  Major Shareholder and Related Party
Transactions

Major
shareholders

The
following table shows the number of ordinary shares beneficially owned by
persons known by us to own beneficially more than five percent of the Companys
ordinary shares, as of April 30, 2004.

|Name                                       |  | Number of
  Ordinary
  Shares Beneficially
  Owned* |  | Percentage
  of Ordinary
  Shares
  Beneficially Owned |     
|------------------------------------------ |  | --------------------------------------------------- |  | ------------------------------------------------------ | ----
|                                           |  |                                                     |  |                                                        |     
|Clal Electronics Industries Ltd. (1)       |  | 2,823,584                                           |  |                                                        | 18.6
|Inventech Investments Co. Ltd.             |  | 1,165,221                                           |  |                                                        | 7.7 
|Teuza - A Fairchild Technology Venture Ltd |  | 1,661,327                                           |  |                                                        | 10.9
|Austin W. Marxe & David Greenhouse (2)     |  | 2,094,277                                           |  |                                                        | 13.8
|Tamir Fishman Ventures II, L.L.C. (3)      |  | 894,600                                             |  |                                                        | 5.9 
|Shai Saul (3)                              |  | 894,600                                             |  |                                                        | 5.9 
|Michael Elias (3)                          |  | 901,850                                             |  |                                                        | 5.9 
|Tamir Fishman & Co. Ltd. (3)               |  | 899,700                                             |  |                                                        | 5.9 
|Eldad Tamir (3)                            |  | 899,700                                             |  |                                                        | 5.9 
|Danny Fishman (3)                          |  | 899,700                                             |  |                                                        | 5.9 
|Capital Group International, Inc.          |  | 774,800                                             |  |                                                        | 5.1 
|Giora Dishon (4)                           |  | 810,255                                             |  |                                                        | 5.3 
|Moshe Finarov (5)                          |  | 807,548                                             |  |                                                        | 5.3 

|* Unless specifically
  stated otherwise, the information provided hereinabove is based upon
  information contained in filings made by the named person with the U.S.
  Securities and Exchange Commission (SEC) pursuant to Regulation 13D-G.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)                                                                                                                                                                                                                                              
|(2)                                                                                                                                                                                                                                              
|(3)                                                                                                                                                                                                                                              
|(4)                                                                                                                                                                                                                                              
|(5)                                                                                                                                                                                                                                              

All major shareholders
have the same voting rights.

46

---

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The Company believes
that, as of December 31, 2003, approximately 40% of its ordinary shares were
held by United States holders.

Control
of Registrant

To
the Companys knowledge, it is not owned or controlled by a foreign
government.  Except for the shareholders
identified above owning more than ten percent of the Companys ordinary shares,
the Company has no knowledge of any corporation or other natural or legal
person owning a controlling interest in the Company.

Related
Party Transactions

On
September 5, 2002, the Companys Board of Directors and the Companys Audit
Committee approved the issuance of options to directors as set forth in the
following chart:

|Name of directors  |  | Position                    |  | # of
  options | 
|------------------ |  | --------------------------- |  | -------------- | 
|                   |  |                             |  |                | 
|Giora Dishon       |  | Director, CEO &
  President |  | 60,000         | 
|                   |  |                             |  |                | 
|Moshe Finarov      |  | Director & CTO              |  | 50,000         | 
|                   |  |                             |  |                | 
|Meir Shannie       |  | Director                    |  | 10,000         | 
|                   |  |                             |  |                | 
|Avi Kerbs          |  | Director                    |  | 10,000         | 
|                   |  |                             |  |                | 
|Joseph Ciechanover |  | Director                    |  | 10,000         | 

The
options were granted during 2003 and are subject to the terms and conditions of
the Companys option plan 6. The options vest over a period of between one and
three years and their term may not exceed seven years from the date of
grant.  The exercise price of these
options is $2.06 per share.

In
2002, the Company obtained directors and officers liability insurance for its
officers and directors with coverage in an aggregate amount of $5,000,000. This coverage was renewed in 2003. In
addition, the Company undertook to indemnify the Companys officers and
directors up to an aggregate amount of $15,000,000 pursuant to the terms set
forth in an Indemnification and Exculpation Letter. The Indemnification and
Exculpation Letter also exculpates the officers and directors from certain
liabilities relating to their positions and directors and officers with in the
framework allowed under the Israeli Companys Law.  The shareholders further approved our undertaking to indemnify
our officers and directors within the framework allowed under Israeli Companys
Law up to an aggregate amount of 15,000,000$. Under the Companies Law, a
company is prohibited from undertaking to indemnify its officers or directors
against: (i) breaches of fiduciary duty to the Company (other than with respect
to actions taken in good faith and upon reasonable grounds that such actions
shall not adversely affect the Company); (ii) breaches of the duty of care
which were made either intentionally or recklessly; (iii) an action intended to
produce unlawful personal profit; or (iv) a fine imposed upon the Officer.  The directors and officers insurance and
Indemnification and Exculpation Letter, to the extent applicable to directors,
were approved by the Companys shareholders on October 31, 2002, covering acts
and omissions made in their status as officers; worldwide (including the US and
Canada).  Companys undertakings under
the Indemnification and Exculpation Letter are subject to its undertaking made
under its F-1 according to which it shall not be bound to indemnify and
exculpate its directors and officers if such undertaking shall be held
contradictory to public policy under the ruling of the competent court.

As
of May 15, 2003 we entered into an agreement with Mr. Barry L. Cox according to
which Mr. Cox serves as chairperson of our board of directors. Under the
agreement, Mr. Cox is entitled to gross annual compensation of $50,000 as well
as a one-time grant of options to purchase up to 50,000 ordinary shares of the
Company, at the fair market value of the shares at the time of grant. The
options vest during a three year period so that a third of the entire amount
granted to Mr. Cox shall be exercisable upon each anniversary of the grant.

47

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On
May 15, 2003, the Companys Board of Directors and Audit Committee resolved (i)
that the monthly gross salary of Dr. Dishon shall be increased to 44,000 NIS
(approximately $9,800) for the period February 1, 2003 through July 31, 2003
and increased to 50,000 NIS (approximately $11,120) starting on August 1, 2003
and (ii) that the monthly gross salary of Dr. Finarov shall be increased to
40,000 NIS (approximately $8,900) for the period February 1, 2003 through July
31, 2003 and increased to 44,000 NIS (approximately $9,800) starting on August
1, 2003. These changes in the terms of compensation for Drs. Dishon and Finarov
were approved by our shareholders on September 1, 2003.

On
July 1, 2003 and on July 10, 2003 the Companys Audit Committee and Board of
Directors respectively, resolved to grant each of Lauri Hanover and Karey
Holland whom serve as the Companys external directors, an option to purchase
up to 10,000 ordinary shares of the Company under the term set forth in Option
Plan 6, which were approved by the Companys shareholders on October 31, 2002.
These resolutions were approved by the Companys shareholders on September 1,
2003.  The options were granted under
option plan 6 in the same terms of all other directors.  The exercise price of these options is $2.06
per share.

On
January 30, 2004, the Companys Board of Directors and the Companys Audit
Committee approved the issuance of options to directors as set forth in the
following chart:

| | Name of directors  |  | Position                    |  | # of
  options | 
| | ------------------ |  | --------------------------- |  | -------------- | 
| |                    |  |                             |  |                | 
| | Giora Dishon       |  | Director, CEO &
  President |  | 65,000         | 
| |                    |  |                             |  |                | 
| | Moshe Finarov      |  | Director & CTO              |  | 55,000         | 
| |                    |  |                             |  |                | 
| | Micha Brunstein    |  | Director                    |  | 10,000         | 
| |                    |  |                             |  |                | 
| | Avi Kerbs          |  | Director                    |  | 10,000         | 
| |                    |  |                             |  |                | 
| | Joseph Ciechanover |  | Director                    |  | 10,000         | 
| |                    |  |                             |  |                | 
| | Alon Dumanis       |  | Director                    |  | 10,000         | 
| |                    |  |                             |  |                | 
| | Lauri Hanover      |  | Director                    |  | 10,000         | 
| |                    |  |                             |  |                | 
| | Karey Holland      |  | Director                    |  | 10,000         | 

These
grants were approved by the shareholders on March 31, 2004. The options were
granted during March 2004 and are subject to the terms and conditions of the
Companys Option Plan 7. The options vest over a period of between one and four
years and their term may not exceed seven years from the date of grant. The
exercise price of these options is $5.15 per share.

Item
8.  Financial Information

Consolidated
Financial Statements

See
Financial Statements on page 65 of this report and pages F-1 through F-21.

Significant
Changes

No
significant change has occurred since the date of the annual financial
statements.

Legal
Proceedings

From
time to time, we are a party to legal proceedings and claims in the ordinary
course of business. We are not currently a party to any material legal
proceedings.

48

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In
1998, Intel Corporation (Intel), a major customer and former shareholder,
notified us by letter that a lawsuit had been filed against a number of
semiconductor manufacturers, including Intel, by the Lemelson Medical,
Education & Research Foundation. The suit alleged that these semiconductor
manufacturers infringed upon U.S. patents owned by Lemelson. In its 1998
letter, Intel requested that we defend, indemnify and hold it harmless against
the Lemelson claims to the extent the claims resulted from the use of the
products we sold to Intel.  We did not
undertake the defense or agree to hold Intel harmless as it requested.  Subsequently, in January 2004, in a suit
filed against Lemelson by Cognex Corporation,but not involving Intel or
Nova, the United States District Court for the District of Nevada found that
various Lemelson patents, including those upon which Lemelson based its claims
against Intel, were invalid and not enforceable.  We, therefore, believe that we will not have any liability to
Intel in connection with the Lemelson suit against Intel and other
semiconductor manufacturers. We have, however, not received any formal
communication from Intel withdrawing its request for defense and
indemnification.

Dividend
Policies

We
anticipate that, for the foreseeable future, we will retain any earnings to
support operations and to finance the growth and development of our business.
Therefore, we do not expect to pay cash dividends for at least the next several
years.

We
obtained the status of approved enterprise under the Law for the
Encouragement of Capital Investments, 1959, under which we may certain realize
tax exemptions. We may further obtain such status in the future. If we
distribute a cash dividend from income which is tax exempt, we would have to
pay corporate tax at the rate of up to 25% on the amount equal to the amount
distributed and on the amount of corporate tax which would have been due in the
absence of the tax exemption, in addition to withholding tax on such dividends
paid. For further description of the conditions limiting our ability to declare
and pay dividends see Israeli Taxation.

The
distribution of dividends may also be limited by the Israeli Companies Law,
which permits the distribution of dividends only out of retained earnings or
earnings derived over the two most recent fiscal years, whichever is higher,
provided that there is no reasonable concern that payment of a dividend will
prevent a company from satisfying its existing and foreseeable obligations as
they become due. Our Articles provide that dividends will be paid at the
discretion of, and upon resolution by, our board of directors.

Export
Sales

Substantially
all of our products are sold to customers located outside Israel.

Item 9.  The Offer and Listing

Offer
and listing details

The
information presented in the table below presents, for the periods indicated,
the reported high and low closing sales prices on the Nasdaq National Market of
our ordinary shares. The shares began trading on the Nasdaq National Market on
April 11, 2000 at a price of $18 per share. 
Our ordinary shares were registered for trading on the Tel Aviv Stock
Exchange in 2002 and the table below presents, for the periods indicated, the
reported high and low sales prices on the Tel Aviv Stock Exchange.

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Nasdaq National Market

|                         |                |  | Price per share (US$) |       |     
|------------------------ | -------------- |  | --------------------- | ----- | ----
|                         |                |  |                       |       |     
|                         |                |  | High                  |       | Low 
|                         |                |  |                       |       |     
|Yearly highs and lows    |                |  |                       |       |     
|2000                     |                |  |                       | 21.94 |     
|2001                     |                |  |                       | 10.97 |     
|2002                     |                |  |                       | 4.54  |     
|2003                     |                |  |                       | 7.19  |     
|                         |                |  |                       |       |     
|Quarterly highs and lows |                |  |                       |       |     
|2002                     |                |  |                       |       |     
|                         | First quarter  |  |                       |       | 4.54
|                         | Second quarter |  |                       |       | 3.70
|                         | Third quarter  |  |                       |       | 2.25
|                         | Fourth quarter |  |                       |       | 2.00
|2003                     |                |  |                       |       |     
|                         | First quarter  |  |                       |       | 2.62
|                         | Second quarter |  |                       |       | 4.30
|                         | Third quarter  |  |                       |       | 5.78
|                         | Fourth quarter |  |                       |       | 7.19
|2004                     |                |  |                       |       |     
|                         | First quarter  |  |                       |       | 8.20
|                         |                |  |                       |       |     
|Monthly highs and lows   |                |  |                       |       |     
|2003                     |                |  |                       |       |     
|                         | November       |  |                       |       | 7.37
|                         | December       |  |                       |       | 7.06
|2004                     |                |  |                       |       |     
|                         | January        |  |                       |       | 8.20
|                         | February       |  |                       |       | 7.80
|                         | March          |  |                       |       | 6.64
|                         | April          |  |                       |       | 7.30
|                         | May            |  |                       |       | 5.38

Tel Aviv Stock Exchange *

|                         |                |  | Price per share (NIS) |       |      
|------------------------ | -------------- |  | --------------------- | ----- | -----
|                         |                |  |                       |       |      
|                         |                |  | High                  |       | Low  
|                         |                |  |                       |       |      
|Yearly highs and lows    |                |  |                       |       |      
|2002                     |                |  |                       | 1,158 |      
|                         |                |  |                       |       |      
|Quarterly highs and lows |                |  |                       |       |      
|2002                     |                |  |                       |       |      
|                         | Second quarter |  |                       |       | 1,158
|                         | Third quarter  |  |                       |       | 1,158
|                         | Fourth quarter |  |                       |       | 1,080

* Since the fourth
quarter of 2002, there has been no market activity at the TASE.

Item 10.
Additional Information

Set
forth below is a summary of certain provisions of the Companys memorandum and
articles of association, as amended to date, and Israeli law affecting
shareholders of the Company. This summary does not purport to be complete and
is qualified in its entirety by reference to our memorandum and articles of
association and such law.

Registration.  The Company was incepted and registered in
the Israeli Registrar of Companys on May 17, 1993, under registration number
51-181-246-3.

Purpose
of the Company.  The
purposes of the Company, as provided by Article B(3) of our memorandum and
articles of association, are (a) to invent, design, plan, develop, manufacture,
market and trade in the field of measuring instruments in electronics,
micro-electronics, medicine, chemistry, metallurgy, ceramics and any other
field, (b) to initiate, participate, manage, execute, import and export any
kind of project within the borders of the State of Israel and/or outside
Israel, (c) to register patents, trademarks, trade names intellectual property
rights marketing rights and any other right of any kind whatsoever, both in
Israel and abroad and (d) to engage in any legal activity, both in Israel and
abroad.

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Approval
of Related Party Transaction; Corporate Borrowings.The Israeli Companies Law requires that an
office holder of a company, including directors and executive officers,
promptly disclose to the board of directors of that company any personal
interest that the office holder or the affiliates of the office holder may have
and all related material information known about any existing or proposed
transaction with the company.  Once the
office holder complies with this disclosure requirement, the approval of the
board of directors is required for the transaction unless the articles of
association provide otherwise.  If the
transaction is an extraordinary transaction, it also requires the approval of
the audit committee prior to its being approved by the board of directors. In
the event that the transaction is between the company and a director regarding
the directors terms of engagement with the company, including with regard to
other positions in the company filled by the director, the transaction would
require the approval of the audit committee and then the board of directors and
the shareholders.

The
Companies Law applies the same disclosure requirements to a controlling
shareholder of a public company. A controlling shareholder is a shareholder who
has the ability to direct the activities of a company, including a shareholder
that owns 25% or more of the voting rights if no other shareholder owns more
than 50% of the voting rights, but excluding a shareholder whose power derives
solely from his or her position on the board of directors or any other position
with the company. Approving and extraordinary transaction with a controlling
shareholder requires the approval of the Companys audit committee, the board
of directors and the Companys shareholders. 
Approval by the Companys shareholder must be by the affirmative vote of
a majority of the shares attending in person or by proxy and, in addition, at
least one third of the holders of shares who are not controlling shareholders
attending in person or represented by proxy must vote in favor of the proposal,
or the aggregate number of shares voted against the proposal must not exceed
one per cent (1%) of the Companys issued and outstanding shares.

Under
our articles of association, a transaction by the Company with an officer or
director of the Company, in which transaction such officer or director has a
personal interest, other than an extraordinary transaction, does not require
any board or shareholder approval. Interested board members may not vote on
extraordinary transactions. 
Arrangements regarding the compensation of directors are considered
extraordinary transactions and require approval by the board or directors,
audit committee and the shareholders. Arrangements as to compensation of
officers who are not directors require approval only by the board of
directors.

Under
regulations promulgated under the Companies Law regarding payment of
compensation to external directors, compensation of external directors shall be
comprised of annual compensation ranging from NIS 26,000 to NIS 42,425 and a
per meeting payment ranging from NIS 925 to NIS 1,625.  These amounts are adjusted twice a year in
accordance with the Israeli consumer price index. However, with regard to a
company, which shares are traded in an exchange outside of Israel, and is
subject to laws which impose upon the external directors demands which exceed
the demands imposed upon them under Israeli law, the maximum amount payable to
the external directors is 100,000NIS per annum and 3,000 NIS per meeting. The
approval of the shareholders of the Company is required for such compensation,
unless it is at a fixed amount set forth in these regulations. Additionally,
external directors are entitled to compensation in stock (including by way of
granting options to purchase the Companys stock), provided that such
compensation is granted within the framework of a stock incentive plan applicable
to all other directors and further provided the amount of stock granted or
purchasable shall not fall below the lowest amount granted to any other
director and shall not exceed the average amount of stock granted to all other
directors.

Our
articles of association grant broad powers to the board of directors to
authorize the Company to borrow funds, repay borrowings, make guarantees and
grant security interests in borrowings. There is no mandatory retirement age
for the Companys directors and a director need not be a shareholder of the
Company.

Share
Capital.  The Company
currently has one class of ordinary stock, 0.01 NIS par value per share. Our
articles of association provide that the board of directors may declare
dividends out of funds legally available therefor.  Under the Israeli Companies Law, dividends may be paid out of net
earnings, as calculated under that law, for the two years preceding the
distribution of the dividend and retained earnings, provided that there is no
reasonable concern that the dividend will prevent the company from satisfying
its existing and foreseeable obligations as they become due. For more
information, see the Companys balance sheet and the statement of shareholders
equity in the financial statements.

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Changes
of Rights of Holders of the Ordinary Shares.The rights
attached to the ordinary shares may be changed, converted, expanded or altered
in any other way by the shareholders with the vote of the holders of at least
75% of the ordinary shares.

Shareholders
Meetings.An annual
meeting shall be convened at least once every calendar year, and no later than
15 months after the preceding annual meeting, to deliberate on the financial
reports, appointment of directors, appointment of an auditing accountant, and
any other matter which the board of directors places on the agenda of the
annual meeting, at a time and place that the board of directors shall
determine. An extraordinary meeting may be called by the board of directors and
at the demand of any of the following: two directors or one-quarter of the
directors then serving; one or more shareholders who hold at least five per
cent of the issued and outstanding capital stock and at least one percent of
the voting rights in the Company; or one or more shareholders who hold at least
five percent of the voting rights in the Company.

According
to our articles of association, the quorum required for an ordinary meeting of
shareholders is at least two shareholders present in person or by proxy who
together hold or represent in the aggregate more than one this (33.33%) of the
voting power.  A meeting adjourned for
lack of a quorum is adjourned to the same day in the following week at the same
time and place or any time and place as the chairman may designate with the
consent of a majority of the shareholder votes cast on the matter.  At the reconvened meeting, the required
quorum consists of any number of members present in person or by proxy,
regardless of the number of shares represented. Israeli Companies Law and
regulations determine that prior notice of no less than 21 days should be given
the companys shareholders, prior to convening a meeting however, the law
further prescribes that the board of directors may determine a shorter notice
period provided that it does not fall below 14 days and that notices may be
provided by way of publishing notice of such meeting in a new paper of general
circulation.

There
are no limitations on the rights of non-resident or foreign owners to hold or
vote ordinary shares imposed under Israeli law or under the Companys
memorandum or articles of association.

Board
of Directors.  Our
articles of association provide that directors may be elected either at our annual
general meeting or an extraordinary meeting of shareholders by a vote of the
holders of at least 50% of the total number of votes represented at such
meeting.  In addition, our board of
directors is authorized to appoint directors, at its discretion, provided that
the total number of directors shall not exceed the maximum number of directors
permitted by our articles of association. 
Each of our directors holds office until the next annual general meeting
of shareholders. However, in accordance with the Companies Law, our external
directors serve for three years.  The
Companies Law requires that the offices of the Chief Executive Officer and the
Chairman of the board of directors be held by different persons. However, the
Companies Law further provide that those positions may be held by the same
person for a period not exceeding three years if approved by a majority of the
companys shareholder which shall include at least two thirds of the voting
shareholders which are not controlling shareholders.

External
directors may be elected at our annual general meeting or an extraordinary
meeting of our shareholders in a number and manner stipulated by law, namely,
for a term of three years which may be renewed for only one additional three
year term and requires the affirmative vote of a majority of the shares and in
addition either that (i) at least one third (33.33%) of the holders of shares
who are not controlling shareholders attending in person or represented by
proxy have voted in favor of the proposal, or (ii) the aggregate number of
shares voting against the proposal have not exceeded one per cent (1%) of the
Companys issued and outstanding share capital. External directors may be
removed from office only under the following circumstances:  (i) an external director ceases to meet the
legal requirements for appointment as an external director or breaches his or
her fiduciary duty to the Company and a resolution to remove such outside
director is made by the shareholders at a meeting at which such external
director is granted a reasonable opportunity to express his position; (ii) an
external director ceases to meet the legal requirements for appointment as an
external director or breaches his or her fiduciary duty to the Company and a
court orders that such director be removed; or (iii) an external director is
unable to perform his or her duties or is convicted of certain felonies and a
court orders that such director be removed.

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The
board of directors has the authority to issue preferred stock in one or more
classes or series and to fix the voting powers, preferences and relative
participating, optional or other special rights of such preferred stock,
without any further vote or action by the shareholders. The authority given to
the board of directors to issue preferred stock without seeking the approval of
the shareholders may have the effect of delaying a change in control of the
Company.

Changes
in Capital. Our share capital may be increased or decreased
by a vote of the holders of at least 75% of the shares present at the
shareholders meeting.

Acquisition
of a Controlling Stake.According to the Companys Law, an acquisition of a  controlling stake, defined as 25% or more
of the voting rights unless another shareholder holds 25% or more of the voting
rights, or an acquisition pursuant to which such purchaser shall hold 45% or
more of the voting rights of  the
company if no other shareholder owns more than 50% of the voting rights, may
not be preformed by way of market accumulation but only by way of a tender
offer made to all of the companys shareholders on a pro rata basis. Such offer
needs to be approved by the companys shareholders. A shareholder may be free
to object to such offer without such objection being deemed as waiver of his
right to sell its respective shares if the transaction is approved by a
majority of the companys shareholders despite his objection.  Shares purchased not in accordance with those
provisions shall become dormant shares and shall not grant the purchaser any
rights so long as held by the purchaser.

Merger.
The Companies Law requires an acquirer of a public companys shares who wishes
to acquire all of the companys shares without the approval of its minority shareholders
to acquire at least 95% of all outstanding shares.  Even if the acquirer acquires 95% of the outstanding shares, the
remaining minority shareholders may seek to block the acquisition in court.

The
Companies Law provides that corporate mergers require the approval of both
companies boards of directors and shareholders.  In the event, however that shares of the target company are held
by the acquiring company or by a person holding 25% or more of the shares of
the acquiring company, the merger will not be approved if a majority of the
shareholders of the target company attending and voting at the meeting at which
the merger is considered (without taking into account, for that purpose, the
shares held by the acquiring company or by a person holding 25% or more of the
shares of the acquiring company) object to and do not vote in favor of the
merger. If a person holds 25% or more of the shares of more than one merging
company, the same provisions shall apply with regard to the shareholders vote
with respect to each such company. Upon the request of a creditor of either
party to the proposed merger, the Israeli courts may delay or prevent the
merger if the courts conclude that there exists a reasonable concern that as a
result of the merger the surviving company will be unable to satisfy the target
companys obligations.  Furthermore, a
merger may not close unless at least 70 days have passed from the time that the
requisite approvals of the merger have been filed with the Israeli Registrar of
Companies.

In
addition, the Companies Law preserves provisions of its predecessor, the
Companies Ordinance, dealing with arrangements between a company and its
shareholders.  These arrangements may be
used to effect squeeze out transactions in which the target company becomes a
wholly owned subsidiary of the acquirer. 
These provisions generally require that the merger be approved by at
least 75% of the shares of participating shareholders and a majority of the
shareholders voting at a shareholders meeting. 
In addition to shareholder approval, court approval of the transaction
is required, which entails further delay.

A
merger, the acquisition of a controlling stake or any transaction in which all
or substantially all the assets of a company are de facto transferred to
another company,  may require the
approval of the Israeli Commissioner of Restrictive Trade Practices, in the
event that the aggregate annual sales volume in Israel of all the companies
which are parties to such transaction, exceeds 150,000,000NIS (approximately
$33,000,000, an amount which is adjusted on a semi annual basis), and also if
after the consummation of such transactions, the joint market, in Israel, or at
any identified geographic part of Israel will be in excess of 50% with respect
to such products and services.

Material
Contracts

Lease
Agreement between Nova and Ef-Shar Ltd. dated May 28, 2000 for Novas
facilities in Israel. A summary of this lease is provided at Exhibit 4.13.

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Exchange
Controls

Non-residents
of Israel who purchase our ordinary shares outside of Israel with U.S. dollars
or other foreign currency will be able to convert dividends (if any) thereon,
and any amounts payable upon the dissolution, liquidation or winding up of the
affairs of the Company, as well as the proceeds of any sale in Israel of the
ordinary shares to an Israeli resident, into freely repatriable dollars, at a
rate of exchange prevailing at the time of conversion, pursuant to regulations
issued under the Currency Control Law, 1978, provided that Israeli income tax
has been withheld by the Company with respect to such amounts.  Israeli residents are eligible to purchase
securities of certain companies, including our ordinary shares, if they are
listed on a foreign exchange in a designated country, which is defined to
include the Nasdaq.

Taxation

The
following summary describes the current tax structure applicable to companies
in Israel, with special reference to its effect on us. It also discusses
Israeli tax consequences material to persons holding our ordinary shares.
Because some parts of the summary are based on new tax legislation yet to be
judicially or administratively interpreted, we cannot be sure that the views
expressed will accord with any future interpretation. The summary is not
intended, and should not be construed, as legal or professional tax advice and
does not exhaust all possible tax considerations. Accordingly, you should
consult your own tax advisor as to the particular tax consequences of an
investment in our ordinary shares.

Tax
Reform

During the year 2002, tax
reform legislation was enacted with effect from January 1, 2003, which
significantly changed the taxation basis of corporate and individual taxpayers
from a territorial basis to a worldwide basis. From such date, an Israel
resident taxpayer will be taxed on income produced and derived both in and out
of Israel. The main provisions of the tax reform that may affect the Company
are as follows:

Transfer
pricing of international transactions with related parties.The Income Tax Ordinance was amended to include provisions
concerning transfer pricing between related parties, where one of the parties
is situated abroad. Detailed provisions are to be included in Income Tax Regulations
that have yet to be issued. Although the Company considers that the transfer
pricing policy adopted with foreign affiliates is economically fair, an
adjustment may be required following the issue of the said Regulations.

Employee
stock incentive plans.The tax reform codified past practice and determined three
alternative tracks for taxing employee stock option plans. Where a trustee
arrangement is in place, the employer can either claim an expense for tax
purposes while the employee will be fully taxed up to the maximum marginal tax
rate of 50% or the Company can waive the tax expense and the employee will pay
a reduced tax rate of 25%.  Where there
is no trustee arrangement, the employee is fully taxable and no expense is
allowed to the Company.  There are
detailed provisions for implementing these tracks.  For Option Plans 6 and 7, which were allocated after the
implementation of the tax reform, the Company has used the trustee arrangement,
with waiver of the tax expense for the company and employee payment of reduced
tax rate of 25%.  As a result of the
reform, the income tax authorities may allow a change of tracks with regard to
unvested options issued under option plans prior to the tax reform taking effect,
subject to the optionees agreeing to certain restrictions. We are currently
examining our ability to effectively change such tracks with regard to Option
Plans 3, 4 and 5.

Controlled
foreign company (CFC). 
The amendment to the law introduced Controlled Foreign Company (CFC)
provisions, which, in certain circumstances, will lead to the Israeli company
being charged tax on passive income of foreign affiliates as if it had received
a dividend from such companies.

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Capital
gains tax.Capital gains tax is reduced to 25% from 36%, except with
respect to capital gains from marketable securities, with transitional
provisions for assets acquired prior to January 1, 2003. For further discussion
see below Capital Gains Tax.

Carrying forward of capital losses. 
The seven year limit for carrying forward of capital losses has been removed
with respect to capital losses arising from 1996 and thereafter.

General
Corporate Tax Structure

Israeli
companies are taxed at a rate of 36% of taxable income. However, the effective
tax rate payable by a company that derives income from an approved enterprise
may be considerably less, as further discussed below.

Tax
Benefits under the Law for the Encouragement of Capital Investments, 1959

The
Law for the Encouragement of Capital Investments, 1959, provides that upon
application to the Investment Center of the Ministry of Industry and Commerce
of the State of Israel, a proposed capital investment in eligible facilities
may be designated as an approved enterprise. Each certificate of approval for
an approved enterprise relates to a specific investment program delineated both
by its financial scope, including its capital sources, and by its physical
characteristics, such as the equipment to be purchased and utilized under the
program. The tax benefits derived from this certificate of approval relate only
to taxable income derived from growth in operations as determined generally by
the growth in manufacturing revenues attributable to the specific approved
enterprise. If a company has more than one approval or only a portion of its
capital investments are approved, its effective tax rate is the result of a
weighted combination of the applicable rates. The tax benefits under the law
are not available for income derived from products manufactured outside of
Israel.

Taxable
income of a company derived from an approved enterprise is taxed at the maximum
rate of 25%, rather than the usual rate of 36%, for the benefit period. This
period is ordinarily seven years commencing with the year in which the approved
enterprise first generates taxable income, and is limited to 12 years from the
year of commencement of operations, as determined by the Investment Center, or
14 years from the year of approval, whichever is earlier.

A
company owning an approved enterprise may elect to receive an alternative
package of benefits. Under the alternative package, the companys undistributed
income derived from an approved enterprise will be exempt from tax for a period
of between two and ten years from the first year of taxable income, depending
on the geographic location of the approved enterprise within Israel, subject to
the 12- and 14-year limitations, and the company will be eligible for the tax
benefits under the law for the remainder of the benefits period.

A
company that has an approved enterprise program is eligible for further tax
benefits if it qualifies as a foreign investors company. A foreign investors
company is a company more than 25% of whose share capital and combined share
and loan capital is owned by non-Israeli residents. A company, which qualifies
as a foreign investors company and has an approved enterprise program is
eligible for tax benefits for a ten-year benefit period instead of the ordinary
seven-year period. Income derived from the approved enterprise program will be
exempt from tax for a specified period and will be taxed at a reduced rate for
the rest of the period. The tax rate for the additional eight years is 25%,
unless the level of foreign investment exceeds 49%, in which case the tax rate
is 20% if the foreign investment is more than 49% and less than 74%, 15% if
more than 74% and less than 90%, and 10% if 90% or more.

The
Investment Center bases its decision of whether to approve or reject a companys
application for designation as an approved enterprise on criteria set forth in
the law and related regulations, the then prevailing policy of the Investment
Center and the specific objectives and financial criteria of the applicant.
Accordingly, a company cannot be certain in advance whether its application
will be approved. In addition, the benefits available to an approved enterprise
are conditional upon compliance with the conditions stipulated in the law and
related regulations and the criteria set forth in the specific certificate of
approval. In the event that a company violates these conditions, in whole or in
part, it would be required to refund the amount of tax benefits plus an amount
linked to the Israeli consumer price index and interest.

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A
major portion of our production facilities has been granted the status of
approved enterprises. Income arising from our approved enterprise facilities is
tax-free under the alternative package of benefits described above and entitled
to reduced tax rates of up to 25%, based on the level of foreign ownership for
specified periods. We have derived, and expect to continue to derive, a
substantial portion of our income from our approved enterprise facilities. In
general, the benefits for most of our current production facilities in Israel
will continue until termination in 2006. Our current investments in facilities
are made under new approvals, the benefits of which will continue no longer
than 2009.

An
approved enterprise may elect to distribute dividends from taxable or
tax-exempt income. Dividends distributed from taxable income are considered to
be attributable to the entire taxable income of the enterprise and their
effective tax rate is the result of a weighted combination of the applicable
tax rates. We currently intend to reinvest the amount of our income and not to
distribute such income as a dividend. In the event that we do pay a cash
dividend from income that is derived from our approved enterprises under the
alternative package of benefits, which income would normally be tax-exempt, we
would be required to pay tax on the amount intended to be distributed as
dividends at the rate which would have been applicable had we not elected the
alternative package of benefits, generally 10% to 25%, depending on the
percentage of our shares held by foreign shareholders. The dividend recipient
is taxed at the reduced rate of 15% applicable to dividends from approved
enterprises if the dividend is distributed during the tax-exemption period or
within 12 years thereafter. We would be required to withhold this tax at
source, as final tax in Israel. See U.S. Taxation - Distributions on the
Ordinary Shares and Note 11 to our Consolidated Financial Statements.

The
law also provides that an approved enterprise is entitled to accelerated
depreciation on property and equipment included in an approved investment
program, generally ranging from 200% for equipment, to 400% for buildings, of
ordinary depreciation rates during the first five tax years of the operation of
these assets with a ceiling of 20% per year for depreciation on buildings.

Tax
Benefits for Research and Development

Israeli
tax law allows a tax deduction in the year incurred for expenditures, including
capital expenditures, in scientific research and development projects, if the
projects are approved by the relevant Israeli government ministry and the
research and development is for the promotion of the enterprise. Expenditures
from projects not so approved are deductible over a three-year period. However,
expenses made out of proceeds made available to us through government grants
are not deductible according to Israeli law.

Tax
Benefits under the Law for the Encouragement of Industry (Taxes), 1969

According
to the Law for the Encouragement of Industry (Taxes), 1969, an industrial
company is a company located in Israel, of which at least 90% of the income,
exclusive of income from defense loans, capital gains, interest and dividends,
is derived from an industrial enterprise owned by it. An industrial
enterprise is defined as an enterprise whose major activity in a given tax
year is industrial production activity. We believe that we currently qualify as
an industrial company within the definition of the Law for the Encouragement of
Industry (Taxes), 1969.

Under
the law, industrial companies are entitled to the following preferred corporate
tax benefits:

| |  | deduction of purchases of know-how and patents over
  an eight-year period for tax purposes;                                                                                                                                                                                         | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
| |   |                                                                                                                                                                                                                                                                                      | 
| |  | deduction of specified expenses incurred in
  connection with a public issuance of securities over a three-year period for
  tax purposes, although Israeli tax authorities have indicated that they do
  not allow these deductions in connection with offerings outside of Israel; | 

56

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| |   |                                                                                                                                               | 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------- | 
| |  | an election to file a consolidated tax return with
  related Israeli industrial companies that satisfy conditions set forth in the
  law; and | 

Additionally,
certain tax laws and regulation allow accelerated depreciation rates on
equipment and buildings for industrial companies  while referring to the definition of  industrial company set out by the Law for the Encouragement of
Industry (Taxes), 1969.

Eligibility
for the benefits under the law does not require receipt of prior approval from
any governmental authority. However, the Israeli tax authorities may determine
that we do not qualify as an industrial company. In addition, we might not
continue to qualify as an industrial Company in the future. As a result of
either of the foregoing, the benefits described above might not be available in
the future.

Special
Provisions Relating to Taxation Under Inflationary Conditions

The
Income Tax Law (Inflationary Adjustments) (the Inflationary Adjustments Law),
1985 represents an attempt to overcome the problems presented to a traditional
tax system by an economy undergoing inflation. The law is highly complex. Its
features that are material to us can be described as follows:

| |  | A special tax adjustment for the preservation of
  equity whereby corporate assets are classified broadly into fixed, or
  inflation immune assets and non-fixed, or soft assets. Where a companys
  equity exceeds the depreciated cost of its fixed assets, the company may take
  a deduction from taxable income, including tax-exempt income, that reflects
  the effect of multiplication of the annual rate of inflation on this excess,
  up to a ceiling of 70% of taxable income, including tax exempt income, in any
  single tax year, with the unused portion carried forward on a linked basis.
  If the depreciated cost of fixed assets exceeds a companys equity, then the
  excess multiplied by the annual rate of inflation is added to taxable income. | 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
| |  | Depreciation deductions on fixed assets and losses
  carried forward are generally adjusted for inflation based on the increase of
  the Israeli consumer price index.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
| |  | Gains on traded securities, which are normally
  exempt from tax, are taxable in specified circumstances. However, the regular
  tax rules governing business income in Israel apply to dealers in securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 

In
accordance with an amendment to the Inflationary Adjustments Law, the Minister
of Finance may, with the approval of the Knesset Finance Committee, determine
by order, during a certain fiscal year (or until February 28th of the following
year), in which the rate of increase of the price index would not exceed or
shall not have exceeded, as applicable, 3%, that all or some of the provisions
of this law shall not apply to such fiscal year, or, that the rate of increase
of the price index relating to such fiscal year shall be deemed to be 0%, and
to make the adjustments required to be made as a result of such determination.

Capital
Gains Tax

Israeli
law imposes a capital gains tax on the sale of capital assets. The law
distinguishes between the inflationary surplus and the real gain. The
inflationary surplus is a portion of the total capital gain, which is
equivalent to the increase of the relevant assets purchase price that is
attributable to the increase in the Israeli consumer price index between the
date of purchase and the date of sale. The real gain is the excess of the total
capital gain over the inflationary surplus. Inflationary surplus accumulated
after December 31, 1993 is exempt from any capital gains tax in Israel. The
real gain is added to ordinary income, which is taxed at ordinary rates of 30%
to 50% for individuals and 36%, up to December 31, 2002 and 25% thereafter for
corporations. Prior to the reform, individuals were exempt from capital gains
tax on the sale of shares listed for trade in certain stock exchanges,
including Nasdaq  under certain
conditions.

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As
a result of the recent tax reform legislation in Israel, gains from the sale of
our ordinary shares and warrants to purchase our ordinary shares derived from
January 1, 2003 and on will in general be liable to capital gains tax of up to
15% so long as our shares are eligible for sale on a designated foreign stock
market such as Nasdaq.   However,
according to the tax reform subordinate legislation, non-residents of Israel
will be exempt from any capital gains tax from the sale of our securities so
long as the gains are not derived through a permanent establishment that the
non-resident maintains in Israel, and so long as our securities remain listed
for trading as described above. These provisions dealing with capital gains
exemptions are not applicable to a person whose gains from selling or otherwise
disposing of our securities are: (i) deemed to be business income (such as a
broker or dealer); (ii) whose taxable income is determined pursuant to the
Israeli Income Tax Law (Inflation Adjustments), 1985; or (iii) who purchased
our shares prior to our initial public offering. The Israeli Income Tax Law
(Inflation Adjustments) would not normally be applicable to non-resident
shareholders who have no business activity in Israel.

In
any event, under the US-Israel Tax Treaty, a US treaty resident may only be
liable for Israeli capital gains tax on the sale of our ordinary shares
(subject to the provisions of Israeli domestic law as described above) if that
US treaty resident holds 10% or more of the voting power in our company.

Under
a treaty between the governments of the United States and Israel, Israeli
capital gains tax does not apply to the sale, exchange or disposition of
ordinary shares by a person who qualifies as a resident of the United States
within the meaning of the treaty and who is entitled to claim the benefits
afforded to such resident by the treaty. This exemption does not apply if the
person holds, directly or indirectly, ordinary shares representing 10% or more
of our voting power during any part of the 12-month period preceding the
applicable sale, exchange or disposition. However, the person would be
permitted to claim a credit for the capital gains tax paid in Israel against
the U.S. income tax imposed for the applicable sale, exchange or disposition,
subject to the limitations in U.S. laws applicable to foreign tax credits. The
U.S.-Israel Tax Treaty does not relate to the U.S. state or local taxes.

Taxation
of the Ordinary Income of Non-Resident Holders of Our Shares

Non-residents of Israel
pay income tax on income accrued or derived from sources in Israel. These
sources of income include passive income such as dividends, royalties and
interest, as well as non-passive income from services rendered in Israel. On
distributions of dividends other than bonus shares, or stock dividends, income
tax at the rate of 25% is withheld at source. If the income out of which the
dividend is being paid is attributable to an approved enterprise, the rate is
15%. A different rate may be provided in a treaty between Israel and the
shareholders country of residence. Under the U.S.-Israel Tax Treaty, the
maximum tax on dividends paid to a U.S. resident is 25% however, the tax rate
is reduced to 12.5% for dividends not generated by an approved enterprise to a
corporation which holds 10% or more of the companys voting power during a
certain period preceding the distribution of the dividend. Also, under the
treaty with the U.S., if the income out of which the dividend is being paid is
attributable to an approved enterprise and the non-resident is a U.S.
corporation that holds 10% of the companys voting power, the rate is 15%.

A
non-resident of Israel who receives interest, dividend or royalty income
derived from or accrued in Israel, from which tax was withheld at the source,
is generally exempt from the duty to file tax returns in Israel on such income,
provided that income was not derived from a business conducted in Israel by the
taxpayer.

Under
Israeli law, non-Israeli corporations might be required to pay Israeli taxes on
the sale of traded securities in an Israeli Company, taking into consideration
the provisions of any applicable double taxation treaty.

Foreign
Exchange Regulations

Non-residents
of Israel who hold our ordinary shares are able to receive any dividends, and
any amounts payable upon the dissolution, liquidation and winding up of our
affairs, freely repatriable in non-Israeli currency at the rate of exchange
prevailing at the time of conversion. However, Israeli income tax is required
to have been paid or withheld on these amounts. In addition, there are
currently no Israeli currency control restrictions on the proceeds from the
sale of ordinary shares. However, legislation remains in effect by which
currency controls can be imposed by administrative action at any time.

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U.S.
TAXATION

The
following describes the material United States federal income tax consequences
of the purchase, ownership and disposition of the ordinary shares to a U.S.
holder.

For
purposes of this discussion, a U.S. holder is:

| |  | a natural person who is a citizen or resident of the
  United States;                                                                                                                             | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |   |                                                                                                                                                                                                   | 
| |  | a corporation or another entity taxable as a
  corporation created or organized under the laws of the United States or any
  political subdivision of the United States;                          | 
| |   |                                                                                                                                                                                                   | 
| |  | an estate, the income of which is includable in
  gross income for United States federal income tax purposes regardless of its
  source; or                                                       | 
| |   |                                                                                                                                                                                                   | 
| |  | a trust, if (a) a U.S. court is able to exercise
  primary supervision over its administration and (b) one or more U.S. persons
  have the authority to control all of its substantial decisions. | 

This
summary is for general information purposes only and does not purport to be a
comprehensive description of all of the U.S. federal income tax considerations
that may be relevant to a decision to purchase, hold or dispose of the ordinary
shares. This summary generally considers only U.S. holders that will own the
ordinary shares as capital assets and does not consider the U.S. tax
consequences to a person that is not a U.S. holder or the tax treatment of
persons who hold the ordinary shares through a partnership or other
pass-through entity. In addition, the possible application of U.S. federal
estate or gift taxes or any aspect of state, local or non-U.S. tax laws is not
considered. This discussion is based on current provisions of the Internal
Revenue Code of 1986, as amended (the Code), current and proposed Treasury
Regulations promulgated under the Code, and administrative and judicial
interpretations of the Code, all as in effect today and all of which may
change, possibly with a retroactive effect.

This
discussion does not address all aspects of U.S. federal income taxation that
may be relevant to any particular U.S. holder based on the holders particular
circumstances, such as,

| |  | persons who own, directly, indirectly or
  constructively, 10% or more of our outstanding voting shares; | 
| | - | -------------------------------------------------------------------------------------------------------- | 
| |   |                                                                                                          | 
| |  | persons who hold the ordinary shares as part of a
  hedging, straddle or conversion transaction;         | 
| |   |                                                                                                          | 
| |  | persons whose functional currency is not the dollar;                                                     | 
| |   |                                                                                                          | 
| |  | persons who acquire their ordinary shares in a
  compensatory transaction;                               | 
| |   |                                                                                                          | 
| |  | broker-dealers;                                                                                          | 
| |   |                                                                                                          | 
| |  | insurance companies;                                                                                     | 
| |   |                                                                                                          | 
| |  | tax-exempt organizations;                                                                                | 
| |   |                                                                                                          | 
| |  | financial institutions; and                                                                              | 
| |   |                                                                                                          | 
| |  | persons subject to the alternative minimum tax.                                                          | 

Availability of Reduced
Tax Rates

U.S.
legislation enacted in 2003 reduced to 15% the maximum U.S. Federal income
tax rate on certain long-term capital gains and on qualifying dividends. Long-term
capital gains from the sale of our ordinary shares would be eligible for this
reduced rate.  Dividends, if any, would also be eligible for this
reduced rate, provided that we do not constitute a passive foreign investment
company.

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Distributions
on the Ordinary Shares

We
currently do not intend to pay dividends for at least the next several years.
However, if we make any distributions of cash or other property to a U.S.
holder of our ordinary shares, the amount of the distribution for U.S. federal
income tax purposes will equal the amount of cash and the fair market value of
any property distributed and will also include the amount of Israeli taxes
withheld, if any, as described above under Israeli TaxationTaxation of Non-Resident
Holders of Our Shares. In general, a distribution paid by us on the ordinary
shares to a U.S. holder will be treated as dividend income if the distribution
does not exceed our current and accumulated earnings and profits, as determined
for U.S. federal income tax purposes. The amount of any distribution which
exceeds these earnings and profits will be treated first as a non-taxable
return of capital, reducing the U.S. holders tax basis in its ordinary shares
to the extent thereof, and then as capital gain from the deemed disposition of
the ordinary shares. Corporate holders generally will not be allowed a
deduction for dividends received on the ordinary shares.

A
dividend paid by us in NIS will be included in the income of U.S. holders at
the U.S. dollar value of the dividend, based upon the spot rate of exchange in
effect on the date of the distribution. U.S. holders will have a tax basis in
the NIS for U.S. federal income tax purposes equal to that U.S. dollar value.
Any subsequent gain or loss resulting from exchange rate fluctuations between
the day the dividend was included in income of U.S. holders and the day the NIS
are converted into U.S. dollars or otherwise are disposed of, will be taxable
as ordinary income or loss from U.S. sources.

Dividends
paid by us generally will be foreign source passive income for U.S. foreign
tax credit purposes or, in the case of a U.S. holder that is a financial
services entity, financial services income. U.S. holders may elect to claim as
a foreign tax credit against their U.S. federal income tax liability the
Israeli income tax withheld from dividends received on the ordinary shares. The
Code provides limitations on the amount of foreign tax credits that a U.S.
holder may claim. U.S. holders that do not elect to claim a foreign tax credit
may instead claim a deduction for Israeli income tax withheld, but only for a
year in which these U.S. holders elect to do so for all foreign income taxes.
The rules relating to foreign tax credits are complex, and you should consult
your tax advisor to determine whether and if you would be entitled to this
credit.

Sale or
Exchange of the Ordinary Shares

Upon
the sale or exchange of the ordinary shares, a U.S. holder generally will
recognize capital gain or loss in an amount equal to the difference between the
amount realized on the sale or exchange and the U.S. holders tax basis in the
ordinary shares. The gain or loss recognized on the sale or exchange of the
ordinary shares generally will be long-term capital gain or loss if the U.S.
holders holding period of the ordinary shares is more than one year at the
time of the disposition.

Gain
or loss recognized by a U.S. holder on a sale or exchange of ordinary shares
generally will be treated as U.S. source income or loss for U.S. foreign tax
credit purposes. Under the tax treaty between the United States and Israel,
gain derived from the sale, exchange or other disposition of ordinary shares by
a holder who is a resident of the U.S. for purposes of the treaty and who sells
the ordinary shares within Israel may be treated as foreign source income for
U.S. foreign tax credit purposes.

Passive
Foreign Investment Companies

In
general, a foreign (that is, non-U.S.) corporation will be a passive foreign
investment company for any taxable year if either (1) 75% or more of its gross
income in the taxable year is passive income, or (2) 50% or more of the average
value of its gross assets in the taxable year is held for the production of, or
produces, passive income.   For purpose
of the income test, passive income includes dividends, interest, royalties,
rents, annuities and net gains from the disposition of assets, which produce
passive income.  For purposes of the
assets test, assets held for the production of passive income includes assets
held for the production of, or that produce dividends, interest, royalties,
rents, annuities, and other income included in the income test.  The income test is conducted at the taxable
year-end.  The asset test is conducted
on a quarterly basis and the quarterly results are then averaged together.

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If
a corporation is treated as a passive foreign investment company for any year
during a U.S. holders holding period and the U.S. holder does not timely elect
to treat the corporation as a qualified electing fund under Section 1295 of
the Code or elect to mark its ordinary shares to market, any gain on the
disposition of the shares will be treated as ordinary income, rather than
capital gain, and the holder will be required to compute its tax liability on
that gain, as well as on dividends and other distributions, as if the income
had been earned ratably over each day in the U.S. holders holding period for
the shares. The portion of the gain and distributions allocated to prior
taxable years in which a corporation was a passive foreign investment company
will be taxed at the highest ordinary income tax rate in effect for each
taxable year to which this portion is allocated. An interest charge will be
imposed on the amount of the tax allocated to these taxable years. A U.S.
holder may elect to treat a corporation as a qualified electing fund only if
the corporation complies with requirements imposed by the IRS to enable the
shareholder and the IRS to determine the corporations ordinary income and net
capital gain. Additionally, if a corporation is a passive foreign investment
company, a U.S. holder who acquires shares in the corporation from a decedent
will be denied the normally available step-up in tax basis to fair market value
for the shares at the date of death and instead will have a tax basis equal to
the decedents tax basis if lower than fair market value.

Status
of Nova as a Passive Foreign Investment company.  Under
the income test, less than 75% of our gross income was passive income in 2003.
The determination of our status under the asset test is more difficult, because
that test requires a quarterly determination of the fair market value of our
passive and non-passive assets.  For
2003, because we continue to have substantial amounts of cash and short-term
deposits and the market value of our ordinary shares has decreased, a
determination of the value of our non-passive assets by reference to the market
value of our ordinary shares would result in a conclusion that the average
value of our passive assets exceeds 50% of the average value of our gross
assets.  Therefore, there is a risk that
we were a passive foreign investment company in 2003 or we will be a passive
foreign investment company in subsequent years. There is, however, no
requirement that the fair market value of a companys assets be determined
solely by reference to the market value of the companys stock. Accordingly,
after making a determination of the gross fair market value of our non-passive
assets, we believe that the average percentage of the value of our passive
assets is less than 50% of the average gross fair market value of our total
assets. If we will be treated as a passive foreign investment company
for any taxable year, U.S. holders should consider whether or not to elect to
treat us as a qualified electing fund or to elect to mark-to-market their
ordinary shares. In particular, if a U.S. holder makes a qualified electing
fund election for all taxable years that the U.S. holder holds the ordinary
shares during which we are treated as a passive foreign investment company, the
U.S. holder will be required for each taxable year to include in income a pro
rata share of our undistributed ordinary earnings and net capital gain, if any,
as ordinary income and long-term capital gain, respectively. We will comply
with all the requirements of the Code so that U.S. holders of our ordinary
shares will be able to elect to treat Nova as a qualified electing fund if
they so choose.

Alternatively,
if a U.S. holder elects to mark-to-market its ordinary shares, the U.S.
holder will generally include in income any excess of the fair market value of
the ordinary shares at the close of each taxable year over the holders
adjusted basis in such stock. A U.S. holder generally will be allowed an
ordinary deduction for the excess, if any, of the adjusted tax basis of the
ordinary shares over the fair market value of the ordinary shares as of the
close of the taxable year, or the amount of any net mark-to-market gains
recognized for prior taxable years, whichever is less. A U.S. holders adjusted
tax basis in the ordinary shares will generally be adjusted to reflect the
amounts included or deducted under the mark-to-market election. Additionally,
any gain on the actual sale or other disposition of the ordinary shares
generally will be treated as ordinary income. Ordinary loss treatment also will
apply to any loss recognized on the actual sale or other disposition of
ordinary shares to the extent that the amount of such loss does not exceed the
net mark-to-market gains previously included with respect to such stock. An
election to mark-to-market generally will apply to the taxable year in which
the election is made and all subsequent taxable years.

If
a U.S. holder makes one of these two elections, distributions and gain will not
be recognized ratably over the U.S. holders holding period or be subject to an
interest charge as described above. Further, the denial of basis step-up at
death described above will not apply. If a U.S. holder elects to treat us as a
qualified electing fund, gain on the sale of the ordinary shares will be
characterized as capital gain. However, U.S. holders making one of these two
elections may experience current income recognition, even if we do not
distribute any cash.

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A
number of specific rules and requirements apply to both of these elections, and
you are urged to consult your tax advisor concerning these elections if we
become a passive foreign investment company.

United
States Information Reporting and Backup Withholding

Dividend
payments and proceeds from the sale or disposal of ordinary shares may be
subject to information reporting to the Internal Revenue Service and possible
U.S. federal backup withholding at the rate of 31%.  Backup withholding will not apply, however, to a holder who
furnishes a correct taxpayer identification number or certificate of foreign
status and makes any other required certification or who is otherwise exempt
from backup withholding (for example, if you are a corporation).  Any U.S. holder who is required to establish
exempt status generally must file Internal Revenue Service Form W-9 (Request
for Taxpayer Identification Number and Certification).  Finalized Treasury Regulation, which are
applicable to payments made after December 31, 2000, have generally expanded
the circumstances under which information reporting and backup withholding may
apply.

Amounts withheld as backup
withholding may be credited against a U.S. holders federal income tax
liability.  A U.S. holder may obtain a
refund of any excess amounts withheld under the backup withholding rules by
filing the appropriate claim for refund with the Internal Revenue Service and
furnishing any required information.

Documents
on Display

The
documents referred to herein, including our memorandum and articles of
association, can be obtained from the Company at its registered office at
Weizmann Science Park, Building 22, 2nd Floor, Ness-Ziona 76100, Israel.  In addition, the Company is subject to
certain informational requirements of the Securities Exchange Act of 1934 and
the rules and regulations promulgated thereunder.  In accordance therewith, the Company files reports with the
United States Securities and Exchange Commission (SEC).  Reports and other information provided to
the SEC by the Company may be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549.  Information on
the operation of the public reference facilities may be obtained by calling the
SEC at 1-800-SEC-0330.  In addition,
certain of the Companys reports filed with the SEC are available on-line at
www.sec.gov.

Item 11.
Quantitative and Qualitative Disclosures About Market Risk

Market
risk

Market
risk represents the risk of loss that may impact the consolidated financial
position, results of operations or cash flows of the Company. The Company is exposed
to market risk in the area of foreign exchange rates, as described below.

The
Company does not utilize financial instruments for trading purposes and holds
no derivative financial instruments that could expose it to significant market
risk.

Impact
of Inflation and Currency Fluctuation

Substantially
all of our sales are made in U.S. dollars. 
Over 50% of our expenses in 2003 were in dollars or in NIS linked to the
dollar.  Most of the remaining expenses
were in NIS.  The dollar cost of our
operations in Israel is influenced by any increase and the timing of such
increase, in the rate of inflation in Israel that is not offset by the
devaluation of the NIS in relation to the dollar.  During 2003, the value of the NIS increased against the dollar by
7.6%, while the consumer price index in Israel decreased 1.9%.  During 2002, the value of the NIS decreased
against the dollar by 7.3%, while the consumer price index in Israel increased
by 6.5%.  During 2001, the value of the
NIS decreased against the dollar by 9.3%, while the consumer price index in
Israel increased by 1.4%.  See Note 2A
of our Consolidated Financial Statements. 
We believe that the rate of inflation in Israel has had a minor effect
on our business to date.  However, our
dollar costs in Israel will increase if inflation in Israel exceeds the
devaluation of the NIS against the dollar or if the timing of this devaluation
lags behind inflation in Israel.  As of
December 31, 2003, the majority of our net monetary assets were denominated in
dollars and the remainder was denominated mainly in NIS.  Net monetary assets that are not denominated
in dollars or dollar-linked NIS are affected by the risk of currency
fluctuations.  In addition,
approximately 5% of our expenses are in Euros. 
During 2003, the value of the Euro increased against the dollar by
approximately 20%.

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Based
upon historical US dollar currency movement, the Company does not believe that
reasonably possible near-term changes in the US dollar currency of 10% will
result in a material effect on future earnings, financial position or cash
flows of the Company.

In
2001, the Company entered into several currency-forward transactions
(NIS/dollar) of approximately $8.8 million with settlement dates ranging from
January to June 2002, designed to reduce cash-flow exposure to the impact of
exchange-rate fluctuations on firm commitments of approximately $12
million.  In accordance with SFAS 133
the Company recorded in 2001 an unrealized loss from the decrease of $212 in
the fair market value of derivatives recorded as other comprehensive loss in
the statement of changes of shareholders equity. The corresponding liability
was separately reported as fair market value of forward contracts within
other current liabilities. In 2002 this decrease was charged to operations on
the relevant settlement dates.

In
2002, the Company did not enter into currency-forward transactions
(NIS/dollar).  The Company did enter
into currency-put options transactions to insure (NIS/dollar) rate in
2002.  The total accumulated sum insured
in the year was approximately $4 million, and the results of these transactions
did not have, as expected, material effect on the operational results of the
Company.

In
2003, the Company entered into currency-forward and currency-put options
transactions (NIS/dollar) to insure (NIS/dollar) rate in 2003. The total
accumulated sum insured in the year was approximately $4 million (including
$400,000, with settlement date of January 2004; see Note 14 to our Consolidated
Financial Statements), and the results of these transactions did not have, as
expected, any material effect on the operational results of the Company.

Item 12.
Description of Securities Other than Equity Securities

Not
applicable.

PART II

Item 13.
Defaults, Dividend Arrearages and Delinquencies

None.

Item 14.
Material Modification to the Rights of Security Holders and Use of Proceeds

The
effective date of the Securities Act registration statement for which use of
proceeds is being disclosed is April 11, 2000. 
The commission file number assigned to that registration statement is
333-11640.

We
sold 3,000,000 ordinary shares for consideration of $54 million. The net
proceeds amounted to $49.2 million. As of March 31, 2004, approximately $16.5
million of the net proceeds had been used for working capital requirements and
$3.5 million for capital expenditures.

Item 15

Evaluation of disclosure controls and procedures

Based
on their evaluation as of the end of the period covered by this Annual Report
on Form 20-F, the Companys President and Chief Executive Officer and Chief
Financial Officer have concluded that the Companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the Exchange Act)) are effective to ensure that
information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the Securities and Exchange
Commissions rules and forms.

63

---

---

Changes in internal controls

During
the fiscal year ended December 31, 2003, there were no significant changes in
our internal controls over financial reporting or in other factors that could
significantly affect these controls subsequent to the date of their
evaluation.

Item 16

Reserved.

Item
16A.

Audit Committee Financial Expert

Our
Board of Directors has determined that our Audit Committee includes one audit
committee financial expert, Lauri Hanover.

Item
16B.

Code of Ethics

The
Company has adopted a written code of conduct that applies to all Company
employees, including the Companys directors, principal executive officer,
principal financial officer and principal accounting officer.

| | You may review our code of conduct on our website, http://nova.co.il
  under Investor Relations section. | 
| | ---------------------------------------------------------------------------------------------------------- | 

Item 16C

Principal Accountant Fees and Services

During
each of the last two fiscal years, Brightman Almagor & Co., a member of
Deloitte Touche Tohmatsu  ( Deloitte
& Touche) has acted as the Companys independent auditors.

AUDIT
FEES

Deloitte
& Touche billed the Company approximately $34,000 for audit services for
fiscal 2003, including fees associated with the annual audit and reviews of the
Companys quarterly financial results submitted on Form 6-K, consultations on
various accounting issues and performance of local statutory audits. Deloitte
& Touche billed the Company approximately $32,000 for audit services in
fiscal 2002.

AUDIT-RELATED
FEES

Deloitte
& Touche did not bill for any audit-related services in 2003 or 2002,
except as included under the caption AUDIT FEES.

TAX
FEES

Deloitte
& Touche billed the Company approximately $2,000 for tax advice, including
fees associated with tax compliance services, tax planning services and other
tax consulting services for fiscal 2003. Deloitte & Touche billed the
Company approximately $1,000 for tax advice in fiscal 2002.

64

---

---

ALL
OTHER FEES

Deloitte
& Touche billed the Company approximately $37,500 for services other than
Audit Fees and Tax Fees described above for fiscal 2003. In fiscal 2003, such
other services included consulting for office of the chief scientist grants
refund and consulting regarding investment center application. Deloitte &
Touche billed the Company approximately $1,000 for services other than Audit
Fees and Tax Fees described above for fiscal 2002. In fiscal 2002, such other
services included consulting regarding investment center application.

PRE-APPROVAL
POLICIES FOR NON-AUDIT SERVICES

Prior
to the engagement of Deloitte & Touche each year, the engagement is
approved by the Audit Committee of the Board of Directors. The Companys Audit
Committee rules of procedure provide for a process with respect to the prior
approval of all services, including non-audit services, to be performed by the
independent auditors for the Company. In fiscal 2003 and 2002, the Companys
Audit Committee approved all of the services provided by Deloitte & Touche.

Item 16D

Exemptions from the Listing Standards for Audit
Committees

None.

PART III

Item 17.
Financial Statements

Not
applicable.

Item 18.
Financial Statements

See
pages F-1 through F-22.

Item 19.
Exhibits

|Number |  | Description                                                                                                                                                              
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  |                                                                                                                                                                          
|       |  |                                                                                                                                                                          
|1.1    |  | Articles of Association (incorporated by reference
  to exhibit 3.1 to the Companys Registration Statement on Form F-1
  (registration number 333-11640))               
|       |  |                                                                                                                                                                          
|1.2    |  | First Amendment to the Companys Articles of
  Association (incorporated by reference to the Companys Current Report on
  Form 6-K filed on June 4, 2002)               
|       |  |                                                                                                                                                                          
|4.1    |  | 1997 Stock Option Plan (Plan 2) (incorporated by
  reference to exhibit 10.1 to the Companys Registration Statement on Form F-1
  (registration number 333-11640))      
|       |  |                                                                                                                                                                          
|4.2    |  | Option Plan 3 (incorporated by reference to exhibit
  10.2 to the Companys Registration Statement on Form F-1 (registration number
  333-11640))                        
|       |  |                                                                                                                                                                          
|4.3    |  | Option Plan 4A and 4B (incorporated by reference to
  exhibit 10.3 to the Companys Registration Statement on Form F-1
  (registration number 333-11640))                
|       |  |                                                                                                                                                                          
|4.4    |  | Option Plan 5 (incorporated by reference to Exhibit
  4.4 to the Companys Annual Report for 20-F for 2002 filed May 9, 2002                                             
|       |  |                                                                                                                                                                          
|4.5    |  | Option Plan 6 (incorporated by reference to Exhibit
  4.1 to the Companys Registration Statement on Form S-8 filed December 24,
  2002 (registration number 333-102193))

65

---

---

|       |  |                                                                                                                                                                                                                                  
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                                                                                                                                      
|       |  |                                                                                                                                                                                                                                  
|       |  |                                                                                                                                                                                                                                  
|4.6    |  | Employment Agreement between Nova and Giora Dishon
  (incorporated by reference to exhibit 10.4 to the Companys Registration
  Statement on Form F-1 (registration number 333-11640))                                           
|       |  |                                                                                                                                                                                                                                  
|4.7    |  | Employment Agreement between Nova and Moshe Finarov
  (incorporated by reference to exhibit 10.6 to the Companys Registration
  Statement on Form F-1 (registration number 333-11640))                                          
|       |  |                                                                                                                                                                                                                                  
|4.8    |  | Employment Agreement between Nova and Chai Toren
  (incorporated by reference to exhibit 10.7 to the Companys Registration
  Statement on Form F-1 (registration number 333-11640))                                             
|       |  |                                                                                                                                                                                                                                  
|4.9    |  | Employment Agreement between Nova and Ronen Frish
  (incorporated by reference to exhibit 10.8 to the Companys Registration
  Statement on Form F-1 (registration number 333-11640))                                            
|       |  |                                                                                                                                                                                                                                  
|4.10   |  | Agreements between Nova and the Office of the Chief
  Scientist in Israel (incorporated by reference to exhibit 10.10 to the
  Companys Registration Statement on Form F-1 (registration number 333-11640))                     
|       |  |                                                                                                                                                                                                                                  
|4.11   |  | Certificate of Approval from the Investment Center
  in Israel (incorporated by reference to exhibit 10.11 to the Companys
  Registration Statement on Form F-1 (registration number 333-11640))                                
|       |  |                                                                                                                                                                                                                                  
|4.12   |  | Lease Agreement between Nova and Ef-Shar Ltd.
  (incorporated by reference to Exhibit 4.14 to the Companys Annual Report on
  Form 20-F filed on May 9, 2002)                                                                   
|       |  |                                                                                                                                                                                                                                  
|4.13   |  | Summary of Lease Agreement between Nova and Ef-Shar
  Ltd. (incorporated by reference to Exhibit 4.15 to the Companys Annual
  Report on Form 20-F filed on May 9, 2002)                                                        
|       |  |                                                                                                                                                                                                                                  
|4.14   |  | Letter Agreement between Barry Cox and the Company
  dated May 15, 2003 (incorporated by reference to Exhibit 4.1 to the Companys
  Registration Statement on Form S-8 filed on May 17, 2004 (registration number
  333-115556))
|       |  |                                                                                                                                                                                                                                  
|4.15   |  | Employee Stock Purchase Plan 1 (incorporated herein
  by reference to Exhibit 4.1 to the Companys Registration Statement on Form
  S-8 filed on March 24, 2003 (File No. 33-103981))                                            
|       |  |                                                                                                                                                                                                                                  
|4.16   |  | Letter of Indemnification and Exculpation for
  certain directors, officers and/or employees (incorporated herein by
  reference Annex A to the Companys Current Report on Form 6-K filed on
  October 8, 2002)                 
|       |  |                                                                                                                                                                                                                                  
|4.17   |  | Option Plan 7A (incorporated by reference to Exhibit
  41. to the Companys Registration Statement on Form S-8 filed on May 17, 2004
  (registration number 333-115554))                                                         
|       |  |                                                                                                                                                                                                                                  
|8      |  | List of Subsidiaries (filed herewith)                                                                                                                                                                                            
|       |  |                                                                                                                                                                                                                                  
|12.1   |  | Certification required by Rule 13a-14(a) of the
  Securities Exchange Act of 1934, as amended (filed herewith)                                                                                                                   
|       |  |                                                                                                                                                                                                                                  
|12.2   |  | Certification required by Rule 13a-14(a) of the
  Securities Exchange Act of 1934, as amended (filed herewith)                                                                                                                   
|       |  |                                                                                                                                                                                                                                  
|13.1   |  | Certification Pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002 (filed herewith)                                                                                                                                       
|       |  |                                                                                                                                                                                                                                  
|13.2   |  | Certification Pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002 (filed herewith)                                                                                                                                       
|       |  |                                                                                                                                                                                                                                  
|14.1   |  | Consent of Brightman Almagor & Co. (filed
  herewith)                                                                                                                                                                            

66

---

---

Signatures

Pursuant
to the requirements of Section 12 of the Securities Exchange Act of 1934, the
registrant certifies that it meets all of the requirements for filing on Form
20-F and has duly caused this annual report to be signed on its behalf by the
undersigned, thereunto duly authorized.

| |  | NOVA MEASURING INSTRUMENTS, LTD.
| |  | --------------------------------
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 

Date:  June 29, 2003

67

---

---

NOVA MEASURING INSTRUMENTS LTD.

CONSOLIDATED
FINANCIAL STATEMENTS

AS
OF DECEMBER 31, 2003

---

---

NOVA
MEASURING INSTRUMENTS LTD.

CONSOLIDATED
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003

Contents

|                                  | Page                                                                                                      
|--------------------------------- | ----------------------------------------------------------------------------------------------------------
|                                  |                                                                                                           
|Independent Auditors Report      | 1                                                                                                         
|                                  |                                                                                                           
|Consolidated Financial Statements |                                                                                                           
|                                  |                                                                                                           
|                                  | Balance Sheets - December 31, 2003
  and 2002                                                             
|                                  |                                                                                                           
|                                  | Statements of Operations - Years
  Ended December 31, 2003, 2002 and 2001                                 
|                                  |                                                                                                           
|                                  | Statements of Shareholders Equity
  and Comprehensive Loss - Years Ended December 31, 2003, 2002 and 2001
|                                  |                                                                                                           
|                                  | Statements of Cash Flows - Years
  Ended December 31, 2003, 2002 and 2001                                 
|                                  |                                                                                                           
|                                  | Notes to the Financial Statements                                                                         

---

---

INDEPENDENT AUDITORS REPORT
TO THE SHAREHOLDERS OF
NOVA MEASURING INSTRUMENTS LTD.

We have audited the
accompanying consolidated balance sheets of Nova Measuring Instruments Ltd.
(the Company) and its subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, shareholders equity and
comprehensive loss and cash flows for each of the three years in the period
ended December 31, 2003. 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
in accordance with standards of the Public Company Accounting Oversight Board
(United States). Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by the Companys management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2003 and 2002, and their consolidated results
of operations and cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America.

Brightman
Almagor & Co.
Certified Public Accountants (Israel)
A member of Deloitte Touche Tohmatsu

Tel Aviv, Israel
February 18, 2004

F-1

---

---

NOVA MEASURING INSTRUMENTS
LTD.
CONSOLIDATED BALANCE SHEETS(In thousands, except share and per share data)

|                                       |                                                                                                                                                       | As of
  December 31, |       
|-------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ------
|                                       |                                                                                                                                                       |                      |       
|                                       |                                                                                                                                                       | 2003                 |       
|                                       |                                                                                                                                                       |                      |       
|                                       |                                                                                                                                                       |                      |       
|CURRENT ASSETS                         |                                                                                                                                                       |                      |       
|                                       | Cash and cash equivalents                                                                                                                             |                      | $     
|                                       | Short-term interest-bearing bank deposits                                                                                                             |                      |       
|                                       | Held to maturity securities                                                                                                                           |                      |       
|                                       | Trade accounts receivable (no allowance for doubtful
  accounts)                                                                                      |                      |       
|                                       | Inventories (Note 3)                                                                                                                                  |                      |       
|                                       | Other current assets                                                                                                                                  |                      |       
|                                       |                                                                                                                                                       |                      |       
|                                       |                                                                                                                                                       |                      | 42,841
|                                       |                                                                                                                                                       |                      |       
|                                       |                                                                                                                                                       |                      |       
|LONG-TERM ASSETS                       |                                                                                                                                                       |                      |       
|                                       | Long-term interest-bearing bank deposits                                                                                                              |                      |       
|                                       | Other Long term assets                                                                                                                                |                      |       
|                                       | Severance pay funds (Note 6)                                                                                                                          |                      |       
|                                       |                                                                                                                                                       |                      |       
|                                       |                                                                                                                                                       |                      | 3,652 
|                                       |                                                                                                                                                       |                      |       
|                                       |                                                                                                                                                       |                      |       
|                                       | FIXED ASSETS, NET (Note 4)                                                                                                                            |                      |       
|                                       |                                                                                                                                                       |                      |       
|                                       |                                                                                                                                                       |                      |       
|                                       | Total assets                                                                                                                                          |                      | $     
|                                       |                                                                                                                                                       |                      |       
|                                       |                                                                                                                                                       |                      |       
|                                       |                                                                                                                                                       |                      |       
|CURRENT LIABILITIES                    |                                                                                                                                                       |                      |       
|                                       | Trade accounts payable                                                                                                                                |                      | $     
|                                       | Other current liabilities (Note 5)                                                                                                                    |                      |       
|                                       |                                                                                                                                                       |                      |       
|                                       |                                                                                                                                                       |                      | 12,491
|                                       |                                                                                                                                                       |                      |       
|                                       |                                                                                                                                                       |                      |       
|LONG-TERM LIABILITIES                  |                                                                                                                                                       |                      |       
|                                       | Liability for employee termination benefits (Note 6)                                                                                                  |                      |       
|                                       | Deferred Income                                                                                                                                       |                      |       
|                                       | Other long-term liability (Note 9)                                                                                                                    |                      |       
|                                       |                                                                                                                                                       |                      |       
|                                       |                                                                                                                                                       |                      | 3,091 
|                                       |                                                                                                                                                       |                      |       
|                                       |                                                                                                                                                       |                      |       
|COMMITMENTS AND CONTINGENCIES (Note 7) |                                                                                                                                                       |                      |       
|                                       |                                                                                                                                                       |                      |       
|SHAREHOLDERS EQUITY (Note 8)          |                                                                                                                                                       |                      |       
|                                       | Ordinary shares, NIS 0.01 par value - authorized
  40,000,000
     shares, issued and outstanding 15,117,538
     and 14,929,867 shares, respectively |                      |       
|                                       | Additional paid-in capital                                                                                                                            |                      |       
|                                       | Deferred stock-based compensation                                                                                                                     |                      |       
|                                       | Accumulated other comprehensive income                                                                                                                |                      |       
|                                       | Accumulated deficit                                                                                                                                   |                      |       
|                                       |                                                                                                                                                       |                      |       
|                                       | Total shareholders equity                                                                                                                            |                      |       
|                                       |                                                                                                                                                       |                      |       
|                                       |                                                                                                                                                       |                      |       
|                                       | Total liabilities and shareholders equity                                                                                                            |                      | $     
|                                       |                                                                                                                                                       |                      |       
|                                       |                                                                                                                                                       |                      |       

The accompanying notes
are an integral part of the consolidated financial statements.

F-2

---

---

NOVA MEASURING INSTRUMENTS LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data)

|                                                                                                                                 |                                                               | Year ended
  December 31, |       
|-------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ------------------------- | ------
|                                                                                                                                 |                                                               |                           |       
|                                                                                                                                 |                                                               | 2003                      |       
|                                                                                                                                 |                                                               |                           |       
|                                                                                                                                 |                                                               |                           |       
|REVENUES:                                                                                                                        |                                                               |                           |       
|Product sales                                                                                                                    |                                                               | $                         | 21,152
|Services                                                                                                                         |                                                               |                           | 5,536 
|                                                                                                                                 |                                                               |                           |       
|                                                                                                                                 |                                                               |                           | 26,688
|                                                                                                                                 |                                                               |                           |       
|                                                                                                                                 |                                                               |                           |       
|COST OF REVENUES:                                                                                                                |                                                               |                           |       
|Product sales                                                                                                                    |                                                               |                           | 10,270
|Services                                                                                                                         |                                                               |                           | 6,265 
|                                                                                                                                 |                                                               |                           |       
|                                                                                                                                 |                                                               |                           | 16,535
|                                                                                                                                 |                                                               |                           |       
|GROSS PROFIT                                                                                                                     |                                                               |                           | 10,153
|                                                                                                                                 |                                                               |                           |       
|                                                                                                                                 |                                                               |                           |       
|OPERATING EXPENSES                                                                                                               |                                                               |                           |       
|                                                                                                                                 |                                                               |                           |       
|                                                                                                                                 |                                                               |                           |       
|Research and development expenses, net of
  participation 
     by the OCS of $2,321, $1,679 and $1,839, respectively (Note
  7) |                                                               |                           | 8,561 
|Technology for use in research and development (Note
  9)                                                                        |                                                               |                           | -     
|Sales and marketing expenses                                                                                                     |                                                               |                           | 6,534 
|General and administrative expenses                                                                                              |                                                               |                           | 1,898 
|Other operating expenses (Income) (Note 10)                                                                                      |                                                               |                           | (2,203
|                                                                                                                                 |                                                               |                           |       
|                                                                                                                                 |                                                               |                           | 14,790
|                                                                                                                                 |                                                               |                           |       
|                                                                                                                                 |                                                               |                           |       
|OPERATING LOSS                                                                                                                   |                                                               |                           | (4,637
|                                                                                                                                 |                                                               |                           |       
|INTEREST INCOME                                                                                                                  |                                                               |                           |       
|                                                                                                                                 | (net of related expenses of $28, $30 and $32,
  respectively) |                           |       
|                                                                                                                                 |                                                               |                           |       
|                                                                                                                                 |                                                               |                           |       
|LOSS FOR THE YEAR                                                                                                                |                                                               | $                         | (4,212
|                                                                                                                                 |                                                               |                           |       
|                                                                                                                                 |                                                               |                           |       
|LOSS PER SHARE                                                                                                                   |                                                               |                           |       
|                                                                                                                                 |                                                               |                           |       
|Loss per share                                                                                                                   |                                                               | $                         | (0.28 
|                                                                                                                                 |                                                               |                           |       
|                                                                                                                                 |                                                               |                           |       
|Shares used in calculation of loss per share                                                                                     |                                                               |                           | 14,994
|                                                                                                                                 |                                                               |                           |       
|                                                                                                                                 |                                                               |                           |       

The accompanying notes
are an integral part of the consolidated financial statements.

F-3

---

---

NOVA MEASURING INSTRUMENTS
LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY AND COMPREHENSIVE
LOSS(In thousands)

|                                                     |  | Share
  capital   |    | Additional
  Paid-in
  capital |  | Deferred
  stock-based
  compensation |    | Accumulated
  other
  Comprehensive
  Income (Loss) |                       |  |       |        |  
|---------------------------------------------------- |  | ----------------- | -- | ------------------------------ |  | ------------------------------------- | -- | --------------------------------------------------- | --------------------- |  | ----- | ------ | -
|                                                     |  |                   |    |                                |  |                                       |    |                                                     |                       | 
|                                                     |  | Ordinary
  shares |    | Deferred
  shares              |  |                                       |    |                                                     | Accumulated
  Deficit |  | Total |       
|                                                     |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|Balance
  as of January 1, 2001                      |  | $                 | 43 |                                |  | $                                     | 3  |                                                     |                       |  | $     | 73,219 |  
|Employee
  share-based plans                         |  | (*)               | -  |                                |  |                                       |    |                                                     |                       |  |       | 8      |  
|Amortization
  of deferred stock- based compensation |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|Forfeiture
  of employee share options               |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       | (453   | )
|Decrease
  in fair market value of derivatives       |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|Unrealized
  losses on investments                   |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|Loss
  for the year                                  |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|                                                     |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|Total
  comprehensive loss                           |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|                                                     |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|                                                     |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|Balance
  as of December 31, 2001                    |  | $                 | 43 |                                |  | $                                     | 3  |                                                     |                       |  | $     | 72,774 |  
|                                                     |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|Employee
  share-based plans                         |  | (*)               | -  |                                |  |                                       |    |                                                     |                       |  |       | 31     |  
|Amortization
  of deferred stock- based compensation |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|Forfeiture
  of employee share options               |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       | (191   | )
|Realization
  of losses on derivatives               |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|Realization
  of losses on investments               |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|Conversion
  of deferred shares into ordinary shares |  |                   | 3  |                                |  |                                       | (3 | )                                                   |                       |  |       |        |  
|Loss
  for the year                                  |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|                                                     |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|Total
  comprehensive loss                           |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|                                                     |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|                                                     |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|Balance
  as of December 31, 2002                    |  | $                 | 46 |                                |  | $                                     | -  |                                                     |                       |  | $     | 72,614 |  
|                                                     |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|                                                     |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|Employee
  share-based plans                         |  | (*)               | -  |                                |  |                                       |    |                                                     |                       |  |       | 318    |  
|Amortization
  of deferred stock- based compensation |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|Forfeiture
  of employee share options               |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       | (147   | )
|Increase
  in fair market value of derivatives       |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|Loss
  for the year                                  |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|                                                     |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|Total
  comprehensive loss                           |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|                                                     |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|                                                     |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  
|Balance
  as of December 31, 2003                    |  | $                 | 46 |                                |  | $                                     | -  |                                                     |                       |  | $     | 72,785 |  
|                                                     |  |                   |    |                                |  |                                       |    |                                                     |                       |  |       |        |  

The accompanying notes
are an integral part of the consolidated financial statements. (*)  Less than $1

F-4

---

---

NOVA MEASURING INSTRUMENTS
LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)

|                                  |                                                                                                              | Year ended
  December 31, |  
|--------------------------------- | ------------------------------------------------------------------------------------------------------------ | ------------------------- | -
|                                  |                                                                                                              |                           |  
|                                  |                                                                                                              | 2 0 0 3                   |  
|                                  |                                                                                                              |                           |  
|                                  |                                                                                                              |                           |  
|CASH FLOWS - OPERATING ACTIVITIES |                                                                                                              |                           |  
|                                  |                                                                                                              |                           |  
|                                  | Loss for the year                                                                                            |                           | $
|                                  | Adjustments to reconcile
  net loss for the year to net cash 
     used in operating activities  Schedule A |                           |  
|                                  |                                                                                                              |                           |  
|                                  |                                                                                                              |                           |  
|                                  | Net cash - operating
  activities                                                                            |                           |  
|                                  |                                                                                                              |                           |  
|                                  |                                                                                                              |                           |  
|CASH FLOWS - INVESTING ACTIVITIES |                                                                                                              |                           |  
|                                  |                                                                                                              |                           |  
|                                  | Technology for use in
  research and development                                                             |                           |  
|                                  | Decrease (increase) in
  short-term interest-bearing bank deposits                                           |                           |  
|                                  | Proceeds from held to
  maturity securities                                                                  |                           |  
|                                  | Investment in held to
  maturity securities                                                                  |                           |  
|                                  | Proceeds from available
  for sale securities                                                                |                           |  
|                                  | Investment in available
  for sale securities                                                                |                           |  
|                                  | Investment in long-term
  interest-bearing bank deposits                                                     |                           |  
|                                  | Additions to fixed assets                                                                                    |                           |  
|                                  |                                                                                                              |                           |  
|                                  |                                                                                                              |                           |  
|                                  | Net cash - investing
  activities                                                                            |                           |  
|                                  |                                                                                                              |                           |  
|                                  |                                                                                                              |                           |  
|                                  |                                                                                                              |                           |  
|                                  | CASH FLOWS - FINANCING ACTIVITIES                                                                            |                           |  
|                                  |                                                                                                              |                           |  
|                                  | Shares issued under
  employee share-based plans                                                             |                           |  
|                                  |                                                                                                              |                           |  
|                                  |                                                                                                              |                           |  
|                                  | Net cash - financing
  activities                                                                            |                           |  
|                                  |                                                                                                              |                           |  
|                                  |                                                                                                              |                           |  
|                                  | Increase (decrease)  in cash and cash equivalents                                                            |                           |  
|                                  | Cash and cash equivalents
  - beginning of year                                                              |                           |  
|                                  |                                                                                                              |                           |  
|                                  |                                                                                                              |                           |  
|                                  | Cash and cash equivalents
  - end of year                                                                    |                           | $
|                                  |                                                                                                              |                           |  
|                                  |                                                                                                              |                           |  
|                                  | SUPPLEMENTAL SCHEDULE OF CASH
  FLOW
       INFORMATION:                                                     |                           |  
|                                  |                                                                                                              |                           |  
|                                  | Taxes paid                                                                                                   |                           | $
|                                  |                                                                                                              |                           |  
|                                  |                                                                                                              |                           |  

The
accompanying notes are an integral part of the consolidated financial
statements.

F-5

---

---

NOVA MEASURING INSTRUMENTS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)

|SCHEDULE A | - | ADJUSTMENTS TO RECONCILE LOSS TO
  NET CASH USED IN OPERATING ACTIVITIES
|---------- | - | ------------------------------------------------------------------------

|                                                                                        |  | Year ended
  December 31, |       
|--------------------------------------------------------------------------------------- |  | ------------------------- | ------
|                                                                                        |  |                           |       
|                                                                                        |  | 2 0 0 3                   |       
|                                                                                        |  |                           |       
|Income and expense items
  not involving cash flows:                                    |  |                           |       
|                                                                                        |  |                           |       
|Depreciation                                                                            |  | $                         | 716   
|                                                                                        |  |                           |       
|Loss
  from realization of available for sale securities                                |  |                           | -     
|                                                                                        |  |                           |       
|Technology
  for use in research and development                                        |  |                           | -     
|                                                                                        |  |                           |       
|Amortization
  of deferred stock-based compensation                                     |  |                           | 540   
|                                                                                        |  |                           |       
|                                                                                        |  |                           |       
|Increase
  (decrease) in liability for employee
            termination
  benefits, net |  |                           | 168   
|                                                                                        |  |                           |       
|                                                                                        |  |                           | 1,424 
|                                                                                        |  |                           |       
|                                                                                        |  |                           |       
|Changes in assets and
  liabilities:                                                    |  |                           |       
|                                                                                        |  |                           |       
|Decrease
  (increase) in trade accounts receivable                                      |  |                           | (2,902
|                                                                                        |  |                           |       
|Decrease
  (increase) in other current assets                                           |  |                           | (182  
|                                                                                        |  |                           |       
|Decrease
  (increase) in inventories                                                    |  |                           | (1,002
|                                                                                        |  |                           |       
|Increase
  in other long-term assets                                                    |  |                           | (154  
|                                                                                        |  |                           |       
|Increase
  (decrease) in trade accounts payable                                         |  |                           | 2,049 
|                                                                                        |  |                           |       
|Decrease
  in other long-term liability                                                 |  |                           | (38   
|                                                                                        |  |                           |       
|Increase  in long-term deferred income                                                  |  |                           | 24    
|                                                                                        |  |                           |       
|Increase (decrease) in
  other current liabilities                                      |  |                           | (514  
|                                                                                        |  |                           |       
|                                                                                        |  |                           | (2,719
|                                                                                        |  |                           |       
|                                                                                        |  | $                         | (1,295
|                                                                                        |  |                           |       

The
accompanying notes are an integral part of the consolidated financial
statements.

F-6

---

---

NOVA MEASURING INSTRUMENTS
LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands,
except share and per share data)

|NOTE 1 | - | GENERAL
|------ | - | -------
|       |   |        
|       |   | A.     
|       |   |        
|       |   |        
|       |   |        
|       |   |        
|       |   |        
|       |   |        
|       |   |        
|       |   |        
|       |   |        
|       |   | B.     
|       |   |        
|       |   |        

F-7

---

---

NOVA MEASURING INSTRUMENTS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands,
except share and per share data)

|NOTE 2 | - | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                   
|------ | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |   |                                                                                                                                                                   
|       |   | The financial statements have been prepared in
  accordance with generally accepted accounting principles (GAAP) in the
  United States of America.             
|       |   |                                                                                                                                                                   
|       |   | The following is a summary of the significant
  accounting policies, which were applied in the preparation of these financial
  statements, on a consistent basis:
|       |   |                                                                                                                                                                   
|       |   | A.                                                                                                                                                                
|       |   |                                                                                                                                                                   
|       |   |                                                                                                                                                                   
|       |   |                                                                                                                                                                   
|       |   |                                                                                                                                                                   
|       |   |                                                                                                                                                                   
|       |   | B.                                                                                                                                                                
|       |   |                                                                                                                                                                   
|       |   |                                                                                                                                                                   
|       |   |                                                                                                                                                                   
|       |   | C.                                                                                                                                                                
|       |   |                                                                                                                                                                   
|       |   |                                                                                                                                                                   
|       |   |                                                                                                                                                                   
|       |   | D.                                                                                                                                                                
|       |   |                                                                                                                                                                   
|       |   |                                                                                                                                                                   
|       |   |                                                                                                                                                                   
|       |   | E.                                                                                                                                                                
|       |   |                                                                                                                                                                   
|       |   |                                                                                                                                                                   

F-8

---

---

NOVA MEASURING INSTRUMENTS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands,
except share and per share data)

|NOTE 2 | - | SIGNIFICANT ACCOUNTING
  POLICIES  (Cont.)
|------ | - | ------------------------------------------
|       |   |                                           
|       |   | F.                                        
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   | G.                                        
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   | H.                                        
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   | I.                                        
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   | J.                                        
|       |   |                                           
|       |   |                                           

F-9

---

---

NOVA MEASURING INSTRUMENTS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands,
except share and per share data)

|NOTE 2 | - | SIGNIFICANT ACCOUNTING
  POLICIES  (Cont.)
|------ | - | ------------------------------------------
|       |   |                                           
|       |   | K.                                        
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   | L.                                        
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           

F-10

---

---

NOVA MEASURING INSTRUMENTS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands,
except share and per share data)

|NOTE 2 | - | SIGNIFICANT ACCOUNTING
  POLICIES  (Cont.)
|------ | - | ------------------------------------------
|       |   |                                           
|       |   | L.                                        

| |                                                              |  | 2 0 0 3 |        | 2 0 0 2 |   | 2 0 0 1 |  
| | ------------------------------------------------------------ |  | ------- | ------ | ------- | - | ------- | -
| |                                                              |  |         |        |         |   |         |  
| | Pro
  forma loss                                             |  |         |        |         |   |         |  
| | Loss for the year, as
  reported                             |  | $       | (4,212 | )       | $ | (12,957 | )
| | Deduct   stock-based compensation
  determined under APB-25 |  |         | 540    |         |   | 1,073   |  
| | Add - stock-based compensation determined
  under SFAS 123   |  |         | (1,348 | )       |   | (2,265  | )
| |                                                              |  |         |        |         |   |         |  
| | Pro forma loss                                               |  | $       | (5,020 | )       | $ | (14,149 | )
| |                                                              |  |         |        |         |   |         |  
| |                                                              |  |         |        |         |   |         |  
| | Pro
  forma loss per share                                   |  |         |        |         |   |         |  
| |                                                              |  |         |        |         |   |         |  
| | Basic - as reported                                          |  | $       | (0.28  | )       | $ | (0.88   | )
| |                                                              |  |         |        |         |   |         |  
| | Basic - pro forma                                            |  | $       | (0.33  | )       | $ | (0.96   | )
| |                                                              |  |         |        |         |   |         |  

| |  | M. | Earnings (Loss) per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |    | Earnings (loss) per share are presented in
  accordance with SFAS 128 of the FASB, Earnings per Share. Pursuant to this
  standard, basic earnings (loss) per share exclude the dilutive effects of
  convertible securities and are computed by dividing income (loss) available
  to common shareholders by the weighted-average number of common shares
  outstanding for the period. Diluted earnings (loss) per share reflect the
  potential dilutive effect of all convertible securities. Due to the
  anti-dilutive effect, basic loss per share was equal to diluted loss per
  share for years 2003, 2002 and 2001. The number of potentially dilutive
  securities excluded from diluted earnings per share due to the anti-dilutive
  effect amounted to 2,608,475, 2,093,767 and 1,825,615 in 2003, 2002 and 2001,
  respectively.
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | N. | Derivative Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |    | SFAS No. 133, Accounting for Derivative Instruments
  and Hedging Activities as amended SFAS No. 138 and SFAS 149, requires,
  principally, the presentation of all derivatives as either assets or
  liabilities on the balance sheet and the measurement of those instruments at
  fair value. Gains and losses resulting from changes in the fair values of
  derivative instruments would be accounted for depending on the use of the
  derivative and whether it qualifies for hedge accounting.                                                                                                                                                                                                                                                                                                                                          
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |    | See Note 15 for disclosure of the derivative
  financial instruments in accordance with such pronouncements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | O. | Reclassification                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |    | Certain previously reported amounts have been
  reclassified in these financial statements in order to conform with the 2003
  financial statements presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-11

---

---

NOVA MEASURING INSTRUMENTS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands,
except share and per share data)

|NOTE 2 | - | SIGNIFICANT ACCOUNTING
  POLICIES  (Cont.)
|------ | - | ------------------------------------------
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           

F-12

---

---

NOVA MEASURING INSTRUMENTS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands,
except share and per share data)

|NOTE 2 | - | SIGNIFICANT ACCOUNTING
  POLICIES  (Cont.)
|------ | - | ------------------------------------------
|       |   |                                           
|       |   | P.                                        
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|       |   |                                           
|NOTE 3 | - | INVENTORIES                               

| | A. |                 |  | December
  31, |      
| | -- | --------------- |  | -------------- | -----
| |    |                 |  |                |      
| |    |                 |  | 2 0 0 3        |      
| |    |                 |  |                |      
| |    |                 |  |                |      
| |    | Raw materials   |  | $              | 1,050
| |    | Work in process |  |                | 2,637
| |    | Finished goods  |  |                | 465  
| |    |                 |  |                |      
| |    |                 |  | $              | 4,152
| |    |                 |  |                |      

| | B. | In the years ended December 31, 2003 and 2002 the
  Company wrote down inventory in the amounts of $725 and $325, respectively
| | -- | ------------------------------------------------------------------------------------------------------------------------------

F-13

---

---

NOVA MEASURING INSTRUMENTS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands,
except share and per share data)

|NOTE 4 | - | FIXED ASSETS, NET
|------ | - | -----------------

| |                                |  | December
  31, |      
| | ------------------------------ |  | -------------- | -----
| |                                |  |                |      
| |                                |  | 2 0 0 3        |      
| |                                |  |                |      
| | Cost:                          |  |                |      
| | Electronic equipment           |  | $              | 3,608
| | Office furniture and equipment |  |                | 364  
| | Leasehold improvements         |  |                | 1,695
| |                                |  |                |      
| |                                |  |                | 5,667
| |                                |  |                |      
| |                                |  |                |      
| | Accumulated
  depreciation:    |  |                |      
| | Electronic equipment           |  |                | 3,013
| | Office furniture and equipment |  |                | 226  
| | Leasehold improvements         |  |                | 1,003
| |                                |  |                |      
| |                                |  |                | 4,242
| |                                |  |                |      
| | Net book value                 |  | $              | 1,425
| |                                |  |                |      

|NOTE 5 | - | OTHER CURRENT LIABILITIES
|------ | - | -------------------------
|       |   |                          
|       |   |                          

| |                                        |  | December
  31, |      
| | -------------------------------------- |  | -------------- | -----
| |                                        |  |                |      
| |                                        |  | 2 0 0 3        |      
| |                                        |  |                |      
| |                                        |  |                |      
| | Accrued salaries and fringe
  benefits |  | $              | 2,838
| | Accrued warranty costs (See B
  below) |  |                | 2,558
| | Governmental institutions              |  |                | 1,249
| | Other                                  |  |                | 457  
| |                                        |  |                |      
| |                                        |  | $              | 7,102
| |                                        |  |                |      

| |  |  | B.   Accrued
  warranty costs:
| |  |  | ------------------------------

| |                                  |  | December
  31, |       
| | -------------------------------- |  | -------------- | ------
| |                                  |  |                |       
| |                                  |  | 2 0 0 3        |       
| |                                  |  |                |       
| |                                  |  |                |       
| | Balance as of beginning of year  |  | $              | 2,276 
| | Services provided under warranty |  |                | (1,424
| | Changes in provision             |  |                | 1,706 
| |                                  |  |                |       
| | Balance as of end of year        |  | $              | 2,558 
| |                                  |  |                |       

|NOTE 6 | - | ACCRUED SEVERANCE PAY                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------ | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|       |   | Israeli law and labor agreements determine the
  obligations of the Company to make severance payments to dismissed employees
  and to employees leaving employment under certain other circumstances. The
  obligation for severance pay benefits, as determined by Israeli law, is based
  upon length of service and the employees most recent salary. The liability
  is partially covered through insurance policies purchased by the Company and
  deposits in a severance fund.

F-14

---

---

NOVA MEASURING INSTRUMENTS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands,
except share and per share data)

|       |   | Severance-pay expense amounted to $614, $381 and
  $543 for 2003, 2002 and 2001, respectively.
|------ | - | ----------------------------------------------------------------------------------------------
|       |   |                                                                                               
|NOTE 7 | - | COMMITMENTS AND CONTINGENT
  LIABILITIES                                                      
|       |   |                                                                                               
|       |   | A.                                                                                            
|       |   |                                                                                               
|       |   | B.                                                                                            

| |  |  |  | Year |  | Amount (US dollars) | 
| |  |  |  | ---- |  | ------------------- | 
| |  |  |  |      |  |                     | 
| |  |  |  |      |  |                     | 
| |  |  |  | 2004 |  | 1,126               | 
| |  |  |  | 2005 |  | 975                 | 
| |  |  |  | 2006 |  | 975                 | 
| |  |  |  | 2007 |  | 805                 | 

| |  |    | Rental expense for the facilities amounted to $851,
  $884 and $881 for the years 2003, 2002 and 2001, respectively.                                                                
| |  | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    |                                                                                                                                                                                     
| |  | C. | The Company leases vehicles under various operating
  lease agreements, which expire on various dates, the latest of which is in
  2005. The minimum rental payments are as follows:

| |  |  |  | Year |  | Amount (US dollars) | 
| |  |  |  | ---- |  | ------------------- | 
| |  |  |  |      |  |                     | 
| |  |  |  | 2004 |  | 504                 | 
| |  |  |  | 2005 |  | 480                 | 

| |  |    | Vehicle lease expense amounted to $516, $665 and
  $757 for the years 2003, 2002 and 2001, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | D. | A major customer who was a related party until
  August 2001 (the Related Party), has notified the Company that a lawsuit
  has been filed against him by a third party. The suit alleges that the
  Related Party, while using the Companys products, has infringed upon
  numerous U.S. patents owned by the third party. According to the agreement
  between the Company and the Related Party, the Company is to assume
  responsibility and to indemnify the Related Party for any losses with regard
  to such suit. The Company is unable to determine at this time with any
  certainty the ultimate outcome of the aforementioned issue and its effect, if
  any, on the Companys financial condition, operating results and business.
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | E. | On February 2002 the Company signed a
  technology-license agreement, according to which the Company received a
  patent usage right as well as equipment in exchange for $1,502 and future
  payments of royalties of 5% of the net revenues of the products developed
  from the abovementioned technology.                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-15

---

---

NOVA MEASURING INSTRUMENTS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands,
except share and per share data)

|NOTE 8 | - | SHAREHOLDERS EQUITY
|------ | - | --------------------
|       |   |                     
|       |   | A.                  
|       |   |                     
|       |   |                     
|       |   |                     
|       |   |                     
|       |   |                     
|       |   | B.                  
|       |   |                     
|       |   |                     
|       |   |                     
|       |   | C.                  
|       |   |                     
|       |   |                     
|       |   |                     
|       |   |                     
|       |   |                     
|       |   |                     
|       |   |                     
|       |   |                     

F-16

---

---

NOVA MEASURING INSTRUMENTS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands,
except share and per share data)

|NOTE 8 | - | SHAREHOLDERS EQUITY (Cont.)
|------ | - | ----------------------------
|       |   |                             
|       |   | C.                          
|       |   |                             
|       |   |                             

| |                                        |  | 2 0 0 3         |   | 2 0 0 2                               |  | 2 0 0 1         |  
| | -------------------------------------- |  | --------------- | - | ------------------------------------- |  | --------------- | -
| |                                        |  |                 |   |                                       |  |                 |  
| |                                        |  | Share
  options |   | Weighted
  average
  exercise
  price |  | Share
  options |  
| |                                        |  |                 |   |                                       |  |                 |  
| |                                        |  |                 |   |                                       |  |                 |  
| | Outstanding -
       beginning of year |  | 1,922,402       |   | 3.99                                  |  | 2,292,132       |  
| | Granted                                |  | 1,010,000       |   | 2.09                                  |  | 46,500          |  
| | Exercised                              |  | (144,180        | ) | 1.66                                  |  | (294,403        | )
| | Terminated                             |  | (72,240         | ) | 5.38                                  |  | (54,041         | )
| | Forfeited                              |  | (94,769         | ) | 3.27                                  |  | (67,786         | )
| |                                        |  |                 |   |                                       |  |                 |  
| | Outstanding 
       year end          |  | 2,621,213       |   | 3.38                                  |  | 1,922,402       |  
| |                                        |  |                 |   |                                       |  |                 |  
| |                                        |  |                 |   |                                       |  |                 |  
| | Options exercisable at
       year-end |  | 1,290,609       |   |                                       |  | 1,149,186       |  
| |                                        |  |                 |   |                                       |  |                 |  

| |  |  | The following table summarizes
  information about share options outstanding as of December 31, 2003:
| |  |  | -----------------------------------------------------------------------------------------------------

| | Outstanding
  as of
  December 31, 2003 |  | Exercisable
  as of
  December 31, 2003 | 
| | --------------------------------------- |  | --------------------------------------- | 
| |                                         |  |                                         | 
| | Range of
  exercise
  prices            |  | Number
  outstanding                    | 
| |                                         |  |                                         | 
| | (US dollars)                            |  |                                         | 
| |                                         |  |                                         | 
| |                                         |  |                                         | 
| | 0.0025                                  |  | 65,704                                  | 
| | 2.06                                    |  | 910,000                                 | 
| | 2.46-3.69                               |  | 1,025,870                               | 
| | 5.16                                    |  | 116,272                                 | 
| | 6.27-7.37                               |  | 503,367                                 | 
| |                                         |  |                                         | 
| |                                         |  | 2,621,213                               | 
| |                                         |  |                                         | 

F-17

---

---

NOVA MEASURING INSTRUMENTS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands,
except share and per share data)

|NOTE 9                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | - | OTHER LONG-TERM LIABILITY         
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | ----------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                   
|In February 2002, the Company signed an agreement
  for the licensing of certain know-how and technology, to be used in one of
  the Companys specific research and development programs and which has no
  alternative use. In accordance with the principles set forth in SFAS 2 these
  costs have been charged to the statement of operations in the year ended
  December 31, 2002, at the present value of the minimum payments to be made
  under the agreement.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                   
|NOTE 10                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | - | OTHER OPERATING EXPENSES  (INCOME)
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                   
|The amount for the year ended December 31, 2003
  represents cancellation of a provision with respect to royalties to the OCS
  (see Note 7A.).                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                   
|The amount for the year ended December 31, 2001
  represents costs borne by the Company in connection with the breach of part
  of its operating lease commitments associated with the move to the new
  premises. Balance paid in full through December 31, 2003.                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                   
|NOTE 11                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | - | INCOME TAXES                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | A.                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                   

F-18

---

---

NOVA MEASURING INSTRUMENTS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands,
except share and per share data)

|NOTE 11 | - | INCOME TAXES(Cont.)
|------- | - | -------------------
|        |   |                    
|        |   | A.                 
|        |   |                    
|        |   |                    
|        |   |                    
|        |   |                    
|        |   |                    
|        |   |                    
|        |   |                    
|        |   |                    
|        |   |                    
|        |   | B.                 
|        |   |                    
|        |   |                    
|        |   |                    
|        |   | C.                 
|        |   |                    
|        |   |                    
|        |   |                    
|        |   | D.                 
|        |   |                    
|        |   |                    
|        |   |                    
|        |   |                    
|        |   |                    
|        |   |                    

F-19

---

---

NOVA MEASURING INSTRUMENTS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands,
except share and per share data)

|NOTE 11 | - | INCOME TAXES(Cont.)                                       
|------- | - | ----------------------------------------------------------
|        |   |                                                           
|        |   | E.                                                        
|        |   |                                                           
|        |   |                                                           
|        |   |                                                           
|        |   | F.                                                        
|        |   |                                                           
|        |   |                                                           
|        |   |                                                           
|        |   | G.                                                        
|        |   |                                                           
|NOTE 12 | - | GEOGRAPHIC AREAS AND MAJOR
  CUSTOMERS                    
|        |   |                                                           
|        |   | Sales by geographic area (as percentage of total
  sales):

| |  |                                                      | Year ended
  December 31, |    
| |  | ---------------------------------------------------- | ------------------------- | ---
| |  |                                                      |                           |    
| |  |                                                      | 2 0 0 3                   |    
| |  |                                                      |                           |    
| |  |                                                      | %                         |    
| |  |                                                      |                           |    
| |  |                                                      |                           |    
| |  | USA                                                  |                           | 62 
| |  | Europe -primarily
  Italy, France
       and Germany |                           | 10 
| |  | Japan                                                |                           | 21 
| |  | Other                                                |                           | 7  
| |  |                                                      |                           |    
| |  | Total                                                |                           | 100
| |  |                                                      |                           |    

| |  | Sales by major customers (as percentage of total
  sales):
| |  | ----------------------------------------------------------

| |  |                                | Year ended
  December 31, |   
| |  | ------------------------------ | ------------------------- | --
| |  |                                |                           |   
| |  |                                | 2 0 0 3                   |   
| |  |                                |                           |   
| |  |                                | %                         |   
| |  |                                |                           |   
| |  |                                |                           |   
| |  |                                |                           |   
| |  |                                |                           |   
| |  | Customer A                     |                           | 14
| |  | Customer B (the Related Party) |                           | 6 
| |  | Customer C                     |                           | 36
| |  | Customer D                     |                           | 29

Substantially all fixed assets are located in Israel.

F-20

---

---

NOVA MEASURING INSTRUMENTS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands,
except share and per share data)

|NOTE 13 | - | TRANSACTIONS AND BALANCES WITH
  RELATED PARTIES                                                                              
|------- | - | ------------------------------------------------------------------------------------------------------------------------------
|        |   |                                                                                                                               
|        |   | The total directors fees (including the chairman of
  the Board) for the year 2003 amounted to $122 (2002 - $50, 2001 -$146).
|        |   |                                                                                                                               
|NOTE 14 |  | FINANCIAL INSTRUMENTS                                                                                                         
|        |   |                                                                                                                               
|        |   | A.                                                                                                                            
|        |   |                                                                                                                               
|        |   |                                                                                                                               
|        |   |                                                                                                                               
|        |   |                                                                                                                               
|        |   |                                                                                                                               
|        |   | B.                                                                                                                            
|        |   |                                                                                                                               
|        |   |                                                                                                                               
|        |   |                                                                                                                               

F-21

---

---

EXHIBIT
INDEX

|Exhibit No. |  | Document Description                                                                                                                                                                                                              |  | Page No.
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|            |  |                                                                                                                                                                                                                                   |  |         
|            |  |                                                                                                                                                                                                                                   |  |         
|1.1         |  | Articles of Association (incorporated by reference
  to exhibit 3.1 to the Companys Registration Statement on Form F-1
  (registration number 333-11640))                                                                        |  |         
|            |  |                                                                                                                                                                                                                                   |  |         
|1.2         |  | First Amendment to the Companys Articles of
  Association (incorporated by reference to the Companys Current Report on
  Form 6-K filed on June 4, 2002)                                                                        |  |         
|            |  |                                                                                                                                                                                                                                   |  |         
|4.1         |  | 1997 Stock Option Plan (Plan 2) (incorporated by
  reference to exhibit 10.1 to the Companys Registration Statement on Form F-1
  (registration number 333-11640))                                                               |  |         
|            |  |                                                                                                                                                                                                                                   |  |         
|4.2         |  | Option Plan 3 (incorporated by reference to exhibit
  10.2  to the Companys Registration
  Statement on Form F-1 (registration number 333-11640))                                                                                |  |         
|            |  |                                                                                                                                                                                                                                   |  |         
|4.3         |  | Option Plan 4A and 4B (incorporated by reference to
  exhibit 10.3 to the Companys Registration Statement on Form F-1
  (registration number 333-11640))                                                                         |  |         
|            |  |                                                                                                                                                                                                                                   |  |         
|4.4         |  | Option Plan 5 (incorporated by reference to Exhibit
  4.4 to the Companys Annual Report for 20-F for 2002 filed May  9, 2002                                                                                                     |  |         
|            |  |                                                                                                                                                                                                                                   |  |         
|4.5         |  | Option Plan 6 (incorporated by reference to Exhibit
  4.1 to the Companys Registration Statement on Form S-8 filed December 24,
  2002 (registration number 333-102193))                                                         |  |         
|            |  |                                                                                                                                                                                                                                   |  |         
|4.6         |  | Employment Agreement between Nova and Giora Dishon
  (incorporated by reference to exhibit 10.4 to the Companys Registration
  Statement on Form F-1 (registration number 333-11640))                                            |  |         
|            |  |                                                                                                                                                                                                                                   |  |         
|4.7         |  | Employment Agreement between Nova and Moshe Finarov
  (incorporated by reference to exhibit 10.6 to the Companys Registration
  Statement on Form F-1 (registration number 333-11640))                                           |  |         
|            |  |                                                                                                                                                                                                                                   |  |         
|4.8         |  | Employment Agreement between Nova and Chai Toren
  (incorporated by reference to exhibit 10.7 to the Companys Registration
  Statement on Form F-1 (registration number 333-11640))                                              |  |         
|            |  |                                                                                                                                                                                                                                   |  |         
|4.9         |  | Employment Agreement between Nova and Ronen Frish
  (incorporated by reference to exhibit 10.8 to the Companys Registration
  Statement on Form F-1 (registration number 333-11640))                                             |  |         
|            |  |                                                                                                                                                                                                                                   |  |         
|4.10        |  | Agreements between Nova and the Office of the Chief
  Scientist in Israel (incorporated by reference to exhibit 10.10 to the
  Companys Registration Statement on Form F-1 (registration number 333-11640))                      |  |         
|            |  |                                                                                                                                                                                                                                   |  |         
|4.11        |  | Certificate of Approval from the Investment Center
  in Israel (incorporated by reference to exhibit 10.11 to the Companys
  Registration Statement on Form F-1 (registration number 333-11640))                                 |  |         
|            |  |                                                                                                                                                                                                                                   |  |         
|4.12        |  | Lease Agreement between Nova and Ef-Shar Ltd.
  (incorporated by reference to Exhibit 4.14 to the Companys Annual Report on
  Form 20-F filed on May 9, 2002)                                                                    |  |         
|            |  |                                                                                                                                                                                                                                   |  |         
|4.13        |  | Summary of Lease Agreement between Nova and Ef-Shar
  Ltd. (incorporated by reference to Exhibit 4.15 to the Companys Annual
  Report on Form 20-F filed on May 9, 2002)                                                         |  |         
|            |  |                                                                                                                                                                                                                                   |  |         
|4.14        |  | Letter Agreement between Barry Cox and the Company
  dated May 15, 2003 (incorporated by reference to Exhibit 4.1 to the Companys
  Registration Statement on Form S-8 filed on May 17, 2004 (registration number
  333-115556)) |  |         

E-1

---

---

|4.15 |  | Employee Stock Purchase Plan 1 (incorporated herein
  by reference to Exhibit 4.1 to the Companys Registration Statement on Form
  S-8 filed on March 24, 2003 (File No. 33-103981))                            |  |    
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
|     |  |                                                                                                                                                                                                                  |  |    
|4.16 |  | Letter of Indemnification and Exculpation for
  certain directors, officers and/or employees (incorporated herein by
  reference Annex A to the Companys Current Report on Form 6-K filed on
  October 8, 2002) |  |    
|     |  |                                                                                                                                                                                                                  |  |    
|4.17 |  | Option Plan 7A (incorporated by reference to Exhibit
  41. to the Companys Registration Statement on Form S-8 filed on May 17, 2004
  (registration number 333-115554))                                         |  |    
|     |  |                                                                                                                                                                                                                  |  |    
|8    |  | List of Subsidiaries (filed herewith)                                                                                                                                                                            |  | E-3
|     |  |                                                                                                                                                                                                                  |  |    
|12.1 |  | Certification required by Rule 13a-14(a) of the
  Securities Exchange Act of 1934, as amended (filed herewith)                                                                                                   |  | E-4
|     |  |                                                                                                                                                                                                                  |  |    
|12.2 |  | Certification required by Rule 13a-14(a) of the
  Securities Exchange Act of 1934, as amended (filed herewith)                                                                                                   |  | E-5
|     |  |                                                                                                                                                                                                                  |  |    
|13.1 |  | Certification Pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002 (filed herewith)                                                                                                                       |  | E-6
|     |  |                                                                                                                                                                                                                  |  |    
|13.2 |  | Certification Pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002 (filed herewith)                                                                                                                       |  | E-7
|     |  |                                                                                                                                                                                                                  |  |    
|14.1 |  | Consent of Brightman Almagor & Co. (filed
  herewith)                                                                                                                                                            |  | E-8

E-2

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---

Exhibit 8

List of
Subsidiaries

|Nova Measuring Instruments Inc.             | Delaware, USA
|------------------------------------------- | -------------
|Nova Measuring Instruments K.K.             | Japan        
|Nova Measuring Instruments Taiwan Ltd.      | Taiwan       
|Nova Measuring Instruments Netherlands B.V. | Netherlands  

E-3

---

---

CERTIFICATION

I,
Giora Dishon, certify that:

1.          I
have reviewed this annual report on Form 20-F of Nova Measuring Instruments
Ltd. 
          2.          Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
          3.          Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the company as of, and for,
the periods presented in this report;
          4.          The
companys other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-115(e) for the company and have:
(a)      Designed such
disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the company, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b)      Evaluated the
effectiveness of the companys disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(c)      Disclosed in
this report any change in the companys internal control over financial
reporting that occurred during the period covered by the annual report that has
materially affected, or is reasonably likely to materially affect, the
companys internal control over financial reporting; and 
          5.          The
companys other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
companys auditors and the audit committee of companys board of directors (or
persons performing the equivalent function):
(a)      All significant
deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely
affect the companys ability to record, process, summarize and report financial
information; and 
(b)      Any fraud,
whether or not material, that involves management or other employees who have a
significant role in the companys internal control over financial
reporting.

|Date:  June
  29, 2004     
|---------------------------
|                           
|/s/ Giora Dishon           
|                           
|Giora Dishon, President and
|Chief Executive Officer    

E-4

---

---

CERTIFICATION

I,
Chai Toren, certify that:

1.          I
have reviewed this annual report on Form 20-F of Nova Measuring Instruments
Ltd. 
          2.          Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
          3.          Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the company as of, and for,
the periods presented in this report;
          4.          The
companys other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-115(e) for the company and have:
(a)      Designed such
disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the company, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b)      Evaluated the
effectiveness of the companys disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(c)      Disclosed in
this report any change in the companys internal control over financial
reporting that occurred during the period covered by the annual report that has
materially affected, or is reasonably likely to materially affect, the
companys internal control over financial reporting; and 
          5.          The
companys other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
companys auditors and the audit committee of companys board of directors (or
persons performing the equivalent function):
(a)      All significant
deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely
affect the companys ability to record, process, summarize and report financial
information; and 
(b)      Any fraud,
whether or not material, that involves management or other employees who have a
significant role in the companys internal control over financial
reporting.

|Date:  June
  29, 2004 
|-----------------------
|                       
|/s/ Chai Toren         
|                       
|Chai Toren             
|Chief Financial Officer

E-5

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---

Exhibit 13.1

CERTIFICATION
PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

I,
Giora Dishon, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.  This Annual Report on Form 20-F of Nova
Measuring Instruments, Ltd. (the Company) for the period ended December 31,
2003 (the Report) fully complies with the requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended; and

2.  The information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.

|Date:  June
  29, 2004 |                                      
|---------------------- | -------------------------------------
|                       | /s/ Giora Dishon                     
|                       |                                      
|                       | Giora Dishon                         
|                       | President and Chief Executive Officer

E-6

---

---

Exhibit 13.2

CERTIFICATION
PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

I,
Chai Toren, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.  This Annual Report on Form 20-F of Nova
Measuring Instruments, Ltd. (the Company) for the period ended December 31,
2003 (the Report) fully complies with the requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended; and

2.  The information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.

|Date:  June
  29, 2004 |                        
|---------------------- | -----------------------
|                       | /s/ Chai Toren         
|                       |                        
|                       | Chai Toren             
|                       | Chief Financial Officer

E-7

---

---

Exhibit 14.1

Brightman Almagor & Co.

CONSENT OF
INDEPENDENT AUDITORS

As independent auditors,
we hereby consent to the incorporation by reference of our report dated
February 18, 2004 included in Novas Annual Report on Form 20-F for the fiscal
year ended December 31, 2003 into the Form S-8 Registration Statements for Nova
Measuring Instruments Ltd., filed with the Securities and Exchange Commission
on the following dates: March 5, 2002 (File No. 333-83734); December 24, 2002
(File No. 333-102193); March 24, 2003 (File No. 333-103981) and; May 17, 2004
(three files; File Nos. 333-115554, 333-115555, and 333-115556).

|                                    
|------------------------------------
|Brightman Almagor & Co.             
|                                    
|Certified Public Accountants        
|                                    
|A member of Deloitte Touche Tohmatsu
|                                    
|                                    
|Tel Aviv, Israel                    
|                                    
|                                    
|June 29, 2004                       

E-8

---

---