---

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# UNITED STATESSECURITIES AND
EXCHANGE COMMISSIONWashington, D.C. 20549

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Form 20-F

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|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, 2006

OR

|o | TRANSITION
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

OR

|o | SHELL
COMPANY REPORT PURSUANT  TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | --------------------------------------------------------------------------------------------

# Commission File Number
000-30668

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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)

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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
|Ordinary Shares, nominal value NIS 0.01 per share | The NASDAQ Global Market                 

# Securities registered
or to be registered pursuant to Section 12(g) of the Act:

None

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:

17,104,523 Ordinary Shares, NIS 0.01 nominal (par) value per share, as of December 31, 2006

Indicate by check mark if the
registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

# Yes o No x

If this report is an annual or
transition report, indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

# Yes o No x

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

# Yes x No o



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Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act. (Check one):

# Large accelerated filer o Accelerated filer o Non-accelerated filer x

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

# Item 17 o Item 18 x

If this is an annual report,
indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).

# Yes o No x



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# TABLE OF CONTENTS

|                                                                                     | Page
|------------------------------------------------------------------------------------ | ----
|
|
|
|
|Introduction                                                                         | ii  
|PART I                                                                               | 1   
|Item 1.  Identity of Directors, Senior Management and Advisors                       | 1   
|Item 2.  Offer Statistics and Expected Timetable                                     | 1   
|Item 3.  Key Information                                                             | 1   
|Item 4.  Information on the Company                                                  | 10  
|Item 4A. Unresolved Staff Comments                                                   | 25  
|Item 5.  Operating and Financial Review and Prospects                                | 25  
|Item 6.  Directors, Senior Management and Employees                                  | 35  
|Item 7.  Major Shareholder and Related Party Transactions                            | 42  
|Item 8.  Financial Information                                                       | 43  
|Item 9.  The Offer and Listing                                                       | 44  
|Item 10.  Additional Information                                                     | 46  
|Item 11. Quantitative and Qualitative Disclosures About Market Risk                  | 60  
|Item 12. Description of Securities Other than Equity Securities                      | 61  
|PART II                                                                              | 61  
|Item 13. Defaults, Dividend Arrearages and Delinquencies                             | 61  
|Item 14. Material Modification to the Rights of Security Holders and Use of Proceeds | 61  
|Item 15.  Evaluation of disclosure controls and procedures                           | 61  
|Item 16.  Reserved                                                                   | 62  
|Item 16A.  Audit Committee Financial Expert                                          | 62  
|Item 16B.  Code of Ethics                                                            | 62  
|Item 16C.  Principal Accountant Fees and Services                                    | 62  
|Item 16D.  Exemptions from the Listing Standards for Audit Committees                | 63  
|Item 16E.  Purchases of Equity Securities by the Issuer and Affiliates Purchasers    | 63  
|PART III                                                                             | 63  
|Item 17. Financial Statements                                                        | 63  
|Item 18. Financial Statements                                                        | 63  
|Item 19. Exhibits                                                                    | 63  
|Financial Statements                                                                 | F-1 
|Signatures                                                                           |     

- i -

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# Introduction

In
this Annual  Report,  the  "Company,"  "Nova,"  "we" or "our" 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, 2002, 2003, 2004, 2005 and 2006 and for each of the years in the five-year period
ended December 31, 2006 (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 U.S. 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,
including statements relating to our anticipated sales, revenues and expenses in 2007, our
expectations with respect to our ability to gain market share, add additional process
equipment manufacturers as partners and to develop and introduce new products, possible
outcomes of the litigation in which we are involved, possible outcomes of our efforts to
consummate and integrate our pending acquisition or of our efforts to identify, complete
and integrate future acquisition, anticipated growth of the semiconductor industry and
metrology markets and expected changes in the semiconductor industry, 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 cannot guarantee future results, levels of activity,
performance or achievements. We also 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 the semiconductor industry with
respect to the very cyclical nature of the industry and the very fast pace of technology
evolutions. Various other factors that could cause our actual results to differ materially
are set forth in Risk Factors starting on page 2 and elsewhere herein.

- ii -

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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, 2005 and 2006 and for
the years ended December 31, 2004, 2005 and 2006 have been derived from our audited
Consolidated Financial Statements included elsewhere in this annual report. These
financial statements have been prepared in accordance with U.S. GAAP, and audited by our
independent registered public accounting firm. The consolidated selected financial data as
of December 31, 2004, 2003 and 2002 and for the years ended December 31, 2003 and 2002
have been derived from other consolidated financial statements not included in this Form
20-F that were also prepared in accordance with U.S. GAAP and audited by our independent
registered public accounting firm. 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
annual report on Form 20-F.

# Summary of
Consolidated Financial Data

|                                                         | Year ended December 31,
|-------------------------------------------------------- | -----------------------
|
|
|
|
|
|Consolidated Statement of Operations Data:               |                        
|Revenues                                                 |                        
|Cost of revenues                                         |                        
|                                                         |                        
|Gross profit                                             |                        
|                                                         |                        
|Operating expenses:                                      |                        
|Research and development expenses, net                   |                        
|Sales and marketing expenses                             |                        
|General and administrative expenses                      |                        
|Other operating expenses (income)                        |                        
|                                                         |                        
|Total operating expenses                                 |                        
|                                                         |                        
|Operating loss                                           |                        
|Financing income, net                                    |                        
|Net loss                                                 |                        
|                                                         |                        
|                                                         |                        
|Loss per share:                                          |                        
|Basic and diluted loss per share                         |                        
|Shares used in calculation of basic and diluted loss per |                        
|share                                                    |                        

- 1 -

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|                                                     | December 31,
|---------------------------------------------------- | ------------
|
|
|
|
|
|Consolidated Balance Sheet Data:                     |             
|Working capital                                      |             
|Total assets                                         |             
|Capital stock (including additional paid-in capital) |             
|Shareholders' equity                                 |             

# Risk Factors

# Risks Related to Our
Business and Our Industry

Because substantially most of 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 still 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
reduce our sales.

The markets we target are highly
cyclical and it is difficult to predict the length and strength of any downturn or
expansion period.

The
semiconductor capital equipment market and industries, which are highly cyclical,
experienced in 2006 significant increases in sales, after a decline of more than 18% in
sales in 2005. Although we rely on market research companies, we cannot predict the length
and strength of the downturns or expansions. Furthermore, we have only a limited ability
to reduce expenses during any industry downturn because of the need for significant
ongoing expenditures related to engineering, research and development and worldwide
customer service and support operations. As a result, during future downturns, we may
incur additional losses greater than those we incurred in the past.

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 practically 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 severe and protracted cyclical
downturns and upturns. During cyclical downturns, we have in the past experienced, and
will likely in the future experience, material reductions in the demand for the type of
capital equipment and process technology that we offer and our sales and revenues might
decline again. 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.
| | - | --------------------------------------------------------------------------

As
a result, we may have difficulty achieving profitability.

- 2 -

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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 will suffer. In addition, the development of
new measurement technologies, new product introductions or enhancements by our competitors
could cause a decline in our 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, metal deposition 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.

If any of our systems fail to meet
or exceed our internal quality specifications, we cannot ship them until such time as they
have met such specifications. If we experience significant delays or are unable to ship
our products to our customers as a result of our internal processes, or for any other
reason, our business and reputation may suffer.

Our
products are complex and require technical expertise to design and manufacture. Various
problems occasionally arise during the manufacturing process that may cause delays and/or
impair product quality. We actively monitor our manufacturing processes to ensure that our
products meet our internal quality specifications. Any significant delays stemming from
the failure of our products to meet or exceed our internal quality specifications, or for
any other reasons, would delay our shipments. Shipment delays could harm our business,
revenues and reputation in the industry.

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 provide assurances
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 historically
generated losses and may incur future losses.

Since
our inception in 1993, we have incurred several years of losses and only a few profitable
years. We may incur a net loss in 2007 or in future years. As of December 31, 2006, we had
an accumulated deficit of approximately $52 million. We plan to increase our aggregate
operating expenses in 2007 relative to 2006. Accordingly, to achieve profitability in
2007, we will need to significantly increase our sales. In the future, our sales may not
grow and we may not achieve profitability.

- 3 -

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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. This trend may
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, shipments of systems and
timing of recognizing these revenues. Furthermore, our quarterly results are affected by
the highly cyclical nature of the semiconductor capital equipment market and industries.

We
also have a limited ability to predict revenues for future quarterly periods and, as a
result, face risks of revenue shortfalls. 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 depend on a small number of
large customers, and the loss of one or more of them would lower our revenues.

Like
our peers serving the semiconductor market, 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. 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. The loss of any one of our major customers
would adversely affect our sales and revenues. Furthermore, if any of our customers become
insolvent or have difficulties meeting their financial obligations to us for any 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., Rudolph Technologies Inc., and KLA-Tencor Corp., 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 semiconductor equipment manufacturers, such as Tokyo Electron Ltd.
Established companies, both domestic and foreign, compete with our product lines, and new
competitors are entering our market. Some 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. Accordingly, unless our
systems offer performance or cost advantages that outweigh a customers expense of
switching to our systems, it will be difficult for us to achieve significant sales from
that customer once it has selected another vendors system for an application. We
believe that our ability to compete successfully depends on a number of factors both
within and outside of our control, including:

| |  | the
contribution of our equipment to our customers' productivity;
| | - | -----------------------------------------------------------------

| |  | our
product quality and performance;
| | - | ------------------------------------

- 4 -

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---

| |  | 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;
| | - | --------------------------------

| |  | our
success in developing and marketing new products. and;
| | - | ----------------------------------------------------------

| |  | the
extendibility of our product
| | - | --------------------------------

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
2005 Rudolph Technologies Inc. acquired August Technologies Inc., in 2006 Nanometrics Inc.
acquired Soluris Inc. and Accent Technologies Inc., and in 2007 KLA-Tencor Corp. acquired
Therma-Wave 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 allow 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.

We may not be successful in our
efforts to identify, complete and integrate future acquisitions, which could disrupt our
current business activities and adversely affect our results of operations or future
growth.

Any
future acquisitions may involve many risks, including the risks of:

| |  | diverting
management's attention and other resources from our ongoing business concerns;
| | - | ----------------------------------------------------------------------------------------

| |  | entering
markets in which we have no direct prior experience;
| | - | -------------------------------------------------------------

| |  | improperly
evaluating new services, products and markets;
| | - | ---------------------------------------------------------

| |  | being
unable to maintain uniform standards, controls, procedures and policies;
| | - | ------------------------------------------------------------------------------

| |  | being
unable to integrate new technologies or personnel;
| | - | --------------------------------------------------------

| |  | incurring
the expenses of any undisclosed or potential liabilities; and
| | - | -----------------------------------------------------------------------

| |  | the
departure of key management and employees.
| | - | ----------------------------------------------

If
we are unable to successfully complete the acquisition or to effectively integrate any
future acquisitions, our ability to grow our business or to operate our business
effectively could be reduced, and our business, financial condition and operating results
could suffer. Even if we are successful in completing acquisitions, we cannot assure you
that we will be able to integrate the operations of the acquired business without
encountering difficulty regarding different business strategies with respect to marketing,
integration of personnel with disparate business backgrounds and corporate cultures,
integration of different point-of-sale systems and other technology and managing
relationships with other business partners.

One of our customers has no
cancellation fee with regard to cancellation of orders.

One
of our largest customers has no cancellation fee with regard to cancellation of its
orders. Because of that, our ability to rely on our backlog for future forecasting in so
far as it depends on that customer is impaired and can severely harm our financial
results.

- 5 -

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---

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 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 three and 12
months to complete. During this time, we may expend substantial funds and management
effort, but fail to make any sales. Lengthy sales cycles subject us to a number of
significant risks, including inventory obsolescence and fluctuations in operating results,
over which we have limited control.

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.

We
have obtained 51 U.S. patents and have 25 U.S. patent applications pending. In addition,
we have obtained 32 non-U.S. patents and have more than 50 non-U.S. patent applications
pending. In August 8, 2006, in connection with the acquisition by us of substantially all
the assets of HyperNex, Inc., HyperNex, Inc. assigned to us all of its right, title, and
interest in 8 U.S. patents, 3 non-U.S. patents, 6 patent applications filed in other
countries and 3 trademarks registered in the U.S. As of April 30, 2007, the assignment of
the 3 non-U.S. patents was not completed.

We
cannot assure 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
also 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 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.

Furthermore,
we may be required to institute legal proceedings to protect our intellectual property. If
such legal proceedings are resolved adversely to us, our competitive position and/or
results of operations could be harmed. For additional information on our intellectual
property, including information regarding a patent infringement lawsuit we commenced
against Nanometrics Inc., and information regarding a patent infringement lawsuits
Nanometrics commenced against us, see Intellectual Property starting on page
20 of this report.

- 6 -

---

---

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. For additional information on our intellectual property,
including information regarding a civil action we commenced against Nanometrics Inc., or
Nanometrics, information regarding civil actions Nanometrics commenced against us, and
information with respect to the settlement agreement we have recently reached with
Nanometrics, see Intellectual Property beginning on page 20 of this annual
report.

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 have an agreement for exclusive
supply of a critical component in our wide angle x-ray diffraction tool called CrystalX.
This exclusivity depends on purchase of a pre-defined number of these critical components
from the supplier and a loss of this exclusivity could allow a competitor to utilize this
unique component and successfully compete with our offering.

The
exclusivity depends on volume of purchases. The design of this component provides unique
advantages to our system which in the hands of our competitors may allow them to
successfully compete with us. Developing an alternative supplier for this specific
component is not trivial.

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, Singapore, Europe 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.

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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 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 as well
as in China. 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, 2006, we had 17,104,523 ordinary shares outstanding,
of which 7,827,839 shares were held by four shareholders.

Because as of April 20, 2007 five
of our shareholders control approximately 56% 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 20, 2007, five of our shareholders controlled approximately 56% of our
outstanding ordinary shares (not including options or warrants currently exercisable or
exercisable within 60 days of April 20, 2007). 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 an ordinary majority vote of shareholders as set in the
Companys articles of association. Even if these five shareholders do not vote
together, each has the ability to influence the outcome of corporate actions requiring the
vote of shareholders as set in the Companys article of association.  For
additional information on our major shareholders, see Major shareholders on
page 42.

The market price of our ordinary
shares may be affected by a limited trading volume and may fluctuate significantly

There
has been a limited public market for our ordinary shares and there can be no assurance
that an active trading market for our ordinary shares will continue. An absence of an
active trading market could adversely affect our shareholders ability to sell our
ordinary shares in short time periods. Our ordinary shares have experienced, and are
likely to experience in the future, significant price and volume fluctuations, which could
adversely affect the market price of our ordinary shares without regard to our operating
performance.

# 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,
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 Political and economic conditions in Israel starting on
page 24.

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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 until the age of 40 for those serving in combat units
and until the age of 45 for non combatants. This time-period may be extended by the
Military Chief of General Staff and the approval of the Minister of Defense or by a
directive of the Minister of Defense 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
including during the 2nd Lebanon war of July 2006. 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. These programs impose restrictions
on our ability to use the technologies developed under these programs. In addition, 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, Trade and Labor 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 certain
conditions, including paying royalties related to grants received and making specified
investments in fixed assets. Some of these programs also restrict our ability to
manufacture particular products and transfer particular technology, which was developed as
part of the approved enterprises outside of Israel, by requiring approval of
the research and development committee nominated by the Office of the Chief Scientist of
the Israeli Ministry of Industry, Trade and Labor under applicable law. Such approval may
be given only if the recipient abides by all the provisions of the law and related
regulations. Approval to manufacture products outside of Israel or consent to the transfer
of technology, if requested, might not be granted.

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 each of 2004, 2005 and 2006,
we recorded an aggregate of $1.9 million, in conditional grants under Israeli government
programs. As of December 31, 2006, our contingent liability to the Office of the Chief
Scientist for grants received was approximately $6.2 million. See also Note 9A 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. Also, the
Israeli government may reduce or eliminate these benefits in the future. The termination
or reduction of these grants or tax benefits could harm our business, financial condition
and results of operations. In addition, if we increase our activities outside 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 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 most of our
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. However, payment in the local currency of the country
where the foreign judgment was given shall be acceptable, subject to applicable foreign
currency restrictions.

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 Global 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 Global Market 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.

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 proceeds. 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 2006 we were not a passive foreign investment company. Nonetheless,
because of the difficulty determining the value of our assets, there is a risk that we
were a passive foreign investment company in 2006. Currently we expect that we will not be
a passive foreign investment company in 2007. However, passive foreign investment 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 and 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, 2007 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.

|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 processes. We have since expanded our product
offering to include systems designed for lithography and etch, and are continuing to
develop new products and additional applications for our current products. These new
offerings have contributed approximately $4 million to our sales in 2006.

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In
April 2000, we conducted an initial public offering pursuant to which we sold 3,000,000
ordinary shares for consideration of net proceeds of $49 million. In connection with the
public offering, our shares were listed for trading on the Nasdaq Global Market (formally
known as 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, in accordance with the provision of the relevant foreign
securities law applicable to the company.

In
August 2006,we completed the purchase of substantially all the assets of HyperNex,
Inc., or HyperNex, a Delaware corporation located at State College, Pennsylvania and
assumed certain liabilities, including liabilities accruing after the closing relating to
contracts assumed by us.

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.

# Overview

We
are a worldwide leading designer, developer and producer of integrated process control
metrology systems and design, manufacture and sell leading edge stand-alone metrology used
in the manufacturing process of semiconductors. Metrology systems measure various thin
film properties and critical circuit dimensions 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 25 semiconductor manufacturers
that had the highest capital equipment expenditures in 2006, 21 use our systems. The
majority of our integrated metrology systems are sold to process equipment manufacturers.
These process equipment manufacturers integrate our metrology systems into their process
equipment which is then sold to the semiconductor manufacturers. Our systems were first
installed in 1995 and, since that time, we have sold more than 1,500 metrologysystems.

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.

Prior
to the introduction of 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. We believe that in several instances during the manufacturing process, our
integrated approach offers considerable advantages over the conventional stand-alone
approach to metrology control, enabling manufacturers using our integrated equipment to
reduce costs and to improve production efficiency, yield and quality.

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We
have always emphasized our integrated metrology solutions as this continues to be an area
where we have a leading position. In addition, in the past few years we developed and
started manufacturing stand-alone metrology systems as well. 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. Today, both stand alone
and integrated metrology solutions have reached a level of maturity allowing semiconductor
manufactures to choose how to use either technology and make decisions based on merit
specific to the process step in question, always balancing between the amount of data
attained and the use made of the data for capabilities such as automated process control.
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 and used in a customized way to meet specific customer needs.

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 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 decreased from $223
billion in 2000 to $178 billion in 2003, but then increased to $220 billion in 2004, $235
billion in 2005 and $259 in 2006. 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. Furthermore, the diversification
semiconductor types has led to a situation that each discrete device offers macro size
market opportunities and thus an increase or decline in any one market does not
necessarily drag with it the entire semiconductor manufacturing field.

The
increased use of semiconductors has been accompanied by an 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 and raised source/drain. 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.

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 has 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 in 2006 for facilities capable of manufacturing 300 mm
wafers. We believe that the process control equipment market, which includes the metrology
segment, will grow in the future at a rate greater than the overall process equipment
market since process control equipment is in the future expected to consume a larger
portion of the overall costs of semiconductor manufacturing equipment.

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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. In addition, the semiconductor industry, and the semiconductor capital
equipment market in particular, are highly cyclical. Therefore, while we anticipate demand
for semiconductors will increase and the market for semiconductors capital equipment will
expand, it is likely that there will be periodic downturns which may be severe and
protracted.

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
well over a dozen 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 dies. 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
isthen 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.

Tomeet 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

We
believe that one of the major challenges to achieving improvements in semiconductor
manufacturing cost productivity is continuously improving 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, mis-processing and operator skills. We believe that in order to
improve cost productivity, earn an acceptable return on their investment in capital
equipment and to meet the demand for improved semiconductor device performance,
semiconductor manufacturers must find ways to improve overall equipment efficiency.

Process
Control. The steps used to create semiconductors are 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.

The
Need for Effective Process Control Tools. 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 and 65nm 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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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. It is estimated that in 2006, 80% of equipment sales have moved towards 300mm
processing.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | Increase
in foundry manufacturing.Asa result of the rising investment needed 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. This trend of shifting to foundries for
manufacturing needs has progressed even further in 2006 with technology leaders such as
Texas Instruments announcing that they will also be outsourcing process development to
Taiwan Semiconductor Instruments, Limited.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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. 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
process control systems, and integrated process control systems in particular.

We
believe that in certain process steps, 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 plan to continue to
maintain a major 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 sometimes be addressed through the use of stand-alone metrology equipment.

# The Nova Approach

Integrated
Metrology

Our
integrated metrology systems provide semiconductor manufacturers with effective and
efficient process control by measuring wafers and their properties without removing the
wafer from the process equipment. All 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.

- 15 -

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---

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

| |  | utilize
the process equipment wafer handling system to allow measurement of the sample wafers
while processing other wafers and avoid the need for the costly additional wafer handling
required by stand-alone metrology systems;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 as early as possible.
| | - | ----------------------------------------------

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. We believe the drive toward more efficient manufacturing operations in the
face of increasing complexity will continue the trend of adopting integrated metrology
solutions such as those we offer to multiple processes.

Stand-alone
Metrology

As
stated above, we pioneered the area of integrated metrology and to-date revenues from that
product continue to represent the larger portion of our overall revenues. With the
adoption of our technology and the formation of long standing relationships with leading
manufacturers, we have come to realize that our technology can be extended beyond
integrated metrology into areas such as stand alone metrology. Accordingly, in the past
several years we developed a stand alone metrology tool to perform measurements similar to
those performed by our integrated metrology tools. The expression stand alone
metrology generically describes free standing metrology equipment which sits inline,
i.e., next to the processing equipment and receives cassettes or FOUPS of wafers to allow
sampling of a few or several wafers from each cassette it receives. There are several
types of stand alone metrology tools each of which performs a distinct type of
measurement, e.g., defect inspection, electrical performance, microscopic analysis, cross
sections, etc. Our specific focus is in the area of optical CD measurement which is
generally utilized in order to characterize critical dimensions on a wafer, their width,
shape and profile. This technology is today utilized in several areas of the fab such as
photolithography, etch, CMP, selective deposition of thin films, etc. The key advantage
offered by this technique is that it is non destructive and extremely fast with very high
accuracy and repeatability.

We
introduced this concept in 2006 and while it was well accepted we cannot assure you that
these products will be purchased by customers in amounts sufficient to generate
significant revenues or any profits.

# 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 lithography processes as well as Cu electroplating and
sputtering of Cu barrier and seed materials. Because of our open architecture policy, our
integrated metrology solutions can work with most models of CMP and etch tools made by the
major process equipment manufacturers, for both 200 mm 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.

- 16 -

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---

Our
suite of technological capabilities includes:

| |  | 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, Ellipsometers measure the change in
the reflected lights polarization. By using multiple light angles and/or 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 measurements on very small selected 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Wide
Angle X-Ray Diffraction. This technology enables measurement of microstructure of
polycrystalline materials. The system is based on collecting a diffracted x-ray signal on
a large area detector. The parameters that can be measured using this technique are:
phase, phase volume fraction, texture, texture volume fraction, relative grain-size and
layer thickness. This technology was originally developed by HyperNex  a company
that in August of 2006 we purchased substantially all its assets and assumed itscertain
liabilities.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

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 and 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 applications as well as X-Ray based microstructure
monitoring for advanced physical vapor deposition and electroplating applications. Our
integrated thickness monitoring system for chemical mechanical polishing process 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
conventional chemical mechanical polishing equipment as well as to newer, high throughput
polishers. Following is a summary of our products.

- 17 -

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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 at the end of 2000, and since
then has replaced the NovaScan 840 and accounted for the majority of our sales for 200 mm
production lines.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
NovaScan 3030 and 3060 are the second generation of the 300mm measuring system, with
improved optics and motion system enabling high speed measurement, and with broad
spectral rage (ultraviolet to infrared) 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 300 mm production lines. The NovaScan 3060 was introduced in 2002.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
NovaScan 2020Cu has the same basic platform as the NovaScan 2040, with additional
hardware and software improvements, enabling the system to answer the unique requirements
of copper chemical mechanical polishing 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 the same basic platform as the NovaScan 3030, with additional
hardware and software improvements, enabling the system to answer the unique requirements
of 300 mm copper CMP monitoring. The system went through field-testing during 2002 and
was released for sale in the beginning of 2003.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
NovaScan 840CVD system 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 chemical mechanical polishing 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 3090 CMP system is a scatterometry-based system for the chemical mechanical
polishing metrology needs measuring thin films thicknesses in one, two or three
dimensions. The system went through field-testing and was released for sale in 2005.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
NovaScan 3090 CD system 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 2003 and was released for sale in 2004. The systems are
sold as integrated metrology systems and as stand-alone systems with third-party
automation modules.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
NovaScan 3090 SA is similar in performance to the NovaScan 3090 CD, providing full two
and three dimension profiling capabilities in a stand-alone configuration. The systems
are utilized in lithography, etch, thin film deposition and chemical mechanical polishing
process. The system was released for sale in 2005.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
NovaScan 3090Next system is the next generation metrology targeted at 45nm and 32nm
technology nodes. The NovaScan 3090Next provides up to 50% throughput improvement, better
accuracy and tool to tool matching and higher polarized spectral range enabling
measurement of smaller features. The NovaScan 3090Next is available as integrated
metrology and as standalone metrology systems.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 18 -

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---

| |  | CrystalX
II is the newest addition to Novas product line and is the result of the Hypernex
acquisition. Employing Wide Angle X-Ray Diffraction (WA-XRD) CrystalX II answers one of
the most critical requirements of IC manufacturing for measurements that provide insight
into electrical performance of semiconductor devices. The system quickly identifies
changes and irregularities in film microstructure that degrade device performance,
reliability and yield - variations that are undetected by other metrology
techniques.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | NovaMars
is an advanced scatterometry modeling and application development software tool enabling
complex 2D, 3D and in-die measurements. Process engineers can harness the power and
flexibility of the tool to develop their own scatterometry applications by themselves
thus keeping the details of their process within the fab. Its user interface and high
level of automation provide for easier and faster application development and eliminate
discrepancies between different developers, enabling the best solution, independent of
user proficiency. The NovaMars is offered as an option together with the 3090 &3090Next
product family.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | NovaNet
is 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | NovaHPC
(High Power Computer) supports the NovaMars Application Development Tool and enables
effective and timely results. Scalable and user configurable infrastructure with Novas
proprietary task management software addresses the growing needs of IC manufacturing
metrology. NovaHPC is just one of the few solutions available for cost effectiveness and
computation power growth flexibility. The standalone modular rack:
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | HPC
| | - | ---

| | n | TurboHPC
| | - | --------

| | n | Grid
computing connectivity enabled
| | - | -----------------------------------

| | n | Web-based
management SW
| | - | -----------------------

| | NovaHPC
Value-Added Benefits: accelerates recipe set-up library building, Scalable
infrastructure, invest as you grow and Low-cost entry level using grid computing with
existing computation resources.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

While
we continue to emphasize our integrated metrology solutions, we offer our products as
stand-alone equipment as well, thereby significantly expanding our potential available
markets. While we have succeeded in penetrations of standalone metrology in 2006, our
revenues remain substantially dependent on sales of our CMP product line.

# 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 in thin film metrology and x-ray metrology, and
include measurement instruments, optical modeling, image acquisition, pattern
recognition, equipment integration and fab automation. Our research and development
staff consists of about 80 highly skilled members, including independent
contractors. Since June 2003, our research and development operations have been
certified as ISO9001/2000 quality standard.

- 19 -

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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 2004, 2005 and 2006, our
research and development expenses, net of participation by the Office of the Chief
Scientist, were $8.7 million, $9.3 million and $9.2 million, respectively, representing,
24%, 31% and 19% of our respective total revenues for those years. We anticipate that our
research and development expenses, net, will be approximately $9 million in 2007.

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 51 U.S. patents and 32 non-U.S. patents and hold an
exclusive license to one U. S. patent. The U.S. patents we hold have expiration dates
ranging from 2014 to 2023. We also have 25 U.S. patent applications pending and more
than 50 applications pending in other countries.  Our patents and
applications principally cover various aspects of optical measurement systems
and methods, integrated process control implementation concepts, and optical,
opto-mechanical and mechanical design. We have also registered four trademarks in the
United States and five trademarks in countries other than the U.S. In August 8, 2006,
HyperNex assigned all of its right, title, and interest in 8 U.S. patents, 2 non-U.S.
patents, 6 patent applications filed in other countries and 4 trademarks registered in the
U.S. As of April 30, 2007, the assignment of the 3 non-U.S. patents was not completed.

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. We may
also have to commence legal proceedings against third parties to protect our intellectual
property, as we have done recently.

In
March 2005, we filed a civil action in the United States District Court for the Northern
District of California against Nanometrics seeking to enforce our U.S. Patent No.
6,752,689. This patent relates to an integrated optical measuring system. In the
civil action, we seek an injunction against Nanometrics from infringing patent No.
6,752,689, monetary damages for infringement, attorneys fees and costs and expenses.
Nanometrics has filed a counterclaim seeking judgment declaring the patent invalid, that
Nanometrics does not infringe the patent and awarding Nanometrics costs and fees.

In
April 2006, Nanometrics filed a civil action in the United States District Court for the
Northern District of California against us and our wholly-owned subsidiary, Nova Inc.
alleging infringement of its U.S. No. Re:34,783. This patent relates to measurements
reflectance of materials. In the civil action, Nanometrics is seeking an injunction
for monetary damages for willful infringement, attorneys fees, and costs and expenses. We
filed our answer and counterclaim in May 2006, seeking a declaration that
Nanometrics patent is invalid and unenforceable, and that neither us nor Nova Inc.
infringe the patent. Nova filed a request for re-examination of the Nanometrics
patent with the U.S. Patent & Trademark Office (PTO). This request for re-examination
was accepted by the PTO for review in December 2006. Thereafter, Nova filed a motion with
the court for a stay in the patent litigation case pending completion of the
re-examination process of the patent in the lawsuit by the PTO. After reading and
considering the arguments presented by the parties, the court granted Novas motion
to stay.

- 20 -

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---

In
October 2006, Nanometrics filed a lawsuit with the United States District Court for the
Northern District of California alleging Nova is infringing U.S. Patent Numbers 5,867,276,
and 7,115,858 B1.

In
April 2007, we reached a settlement with Nanometrics regarding all three patent suits
between the companies. We agreed to dismiss, without prejudice, all pending patent
litigation between the two parties, and have further agreed not to file patent suits
against the other and/or any supplier or customer of the other party for patent
infringement based on offers to sell, actual sales, manufacturing, purchase or use of any
equipment of the other party for a period of one year. The settlement, which received the
court approval, terminated the three lawsuits pending in the U.S. District Court for the
Northern District of California.

From
time to time, we receive communications from 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. Other than the litigation with Nanometrics described above we are not
presently involved in any material legal proceeds in which a third party has asserted that
we have violated their intellectual property rights.If, however, we become
involved in any such litigation and its outcome is adverse to us, it may result in a loss
of proprietary rights, subject us to significant liabilities, including treble damages in
some instances, require us to seek licenses from third parties which may not be available
on reasonable terms or at all, or prevent us from selling our products. Furthermore, any
litigation relating to intellectual property, even if we are ultimately successful, could
result in substantial costs and diversion of time and effort by our management. This in
and of itself could have a negative impact on us.

While,
other than the litigation with Nanometrics described above, we are not currently involved
in any material legal proceedings in which a third party has asserted that we have
violated their intellectual property rights, 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 PTO, is unenforceable at this
time, and may or may not survive the reexamination. If the PTO 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.

In
September 2006, we invited companies to submit bids to license some of our patents. These
patents have substantial value because the industry is on the threshold of widespread
adoption of integrated metrology and the methods covered by the patents are critical for
advanced manufacturing of semiconductors. We were pioneering the use of an auction model
to set a market price for patent licenses by offering to the highest bidder licenses for
six of our patents pertaining to the use of a lithography tool with integrated metrology
in semiconductor processing lines. Participants in the auction also have the option to bid
for full ownership of the patents, which represent only a small portion of Novas
extensive patent portfolio. The auction covers two groups of patents:

| |  | Integrated
Metrology group  which consists of four patents that generally relate to a
lithography track with an integrated optical measurement capability that can be used for
various types of metrology applications including overlay registration, critical
dimensions, and macro defect inspection.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Advanced
Process Control group  which consists of two patents related to methods for
photolithographic processing involving making a spectrophotometric measurement and using
it to influence the processing time, focus or exposure of a processing tool.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Bids
may be as follows:

| |  | A
license for a particular model of semiconductor processing equipment, including customer
rights to use.
| | - | ---------------------------------------------------------------------------------------------------------

| |  | A
license for practice of the patents at a particular semiconductor fabrication facility or
set of facilities.
| | - | --------------------------------------------------------------------------------------------------------------

| |  | Complete
acquisition of the patents (or one of the two groups).
| | - | ---------------------------------------------------------------

- 21 -

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In
January 2007, we extended the original January 15, 2007 deadline for receiving bids
relating to the IP auction until February 15, 2007. We are currently negotiating and
considering the bids submitted pursuant to this auction.

For
additional information regarding our intellectual property, seeOur
Technology starting on page 16.

# 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 features and benefits of our systems can improve equipment yields,
overall equipment efficiency and increase productivity, 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 metrology systems such as those we manufacture.
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, and that we are able to continuously enhance our
products with functionality demanded by these two distinct types of customers.

To
further enhance our marketing efforts, we have established a system of integrated sales
and support activities with key process equipment manufacturers. 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 as partners as we
introduce new integrated process control systems that can be integrated with different
types of equipment.

We
also 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 113 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.

We
serve all sectors of the integrated circuit manufacturing industry including logic, ASIC,
foundries and memory manufactures. 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.

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,
|------------ | -----------------------
|
|
|
|
|
|U.S.         |                        
|Europe       |                        
|Japan        |                        
|Asia-Pacific |                        
|             |                        
|Total        |                        
|             |                        

- 22 -

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The
semiconductor industry is dominated by a small number of large companies. As a result,
while our overall customer base is diverse, our sales are highly concentrated among a
relatively small number of customers. 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,
|--------------------------- | -----------------------
|
|
|
|
|Total revenues from five    |                        
|largest customers           |                        
|                            |                        
|Range of revenues from five |                        
|largest customers           |                        

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. A loss of any of our major customers may likewise cause us to suffer a
material decrease in sales and revenue.

The
highly competitive nature of the market for semiconductor capital equipment affects our
ability to successfully implement our marketing and sale efforts. 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. For integrated process control, an adequate business model, internal
organization and unique process equipment manufacturer agreements and partnerships are
also significant factors. We believe we compete favorably on the basis of these factors in
the markets we serve.

Our
current integrated products primarily compete with products manufactured by Nanometrics
Inc. We have gained market share with the successful launch of NovaScan 3090 but we expect
our integrated products to face intense competition in 2007 and in the coming years. In
the scatterometry field, used in CMP and etch processes, we face intense competition in
both integrated and stand-alone metrology, from several companies.

# 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 manufacturing operations received the ISO 9002 quality mark by
an international certification institute in October 1999. Since then, we have upgraded our
quality systems to conform to ISO 9001/2000 requirements.

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.

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

We
have our manufacturing facility, which is located in Ness-Ziona, Israel divided into 2
buildings. 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.

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# Our Subsidiaries

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

|Name of Subsidiary                          | Country of Incorporation
|------------------------------------------- | ------------------------
|
|
|
|
|Nova Measuring Instruments Inc.             | Delaware, U.S.          
|Nova Measuring Instruments K.K.             | Japan                   
|Nova Measuring Instruments Taiwan Ltd.      | Taiwan                  
|Nova Measuring Instruments Netherlands B.V. | Netherlands             

# Capital Expenditures

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. For additional
information on our capital expenditures, see Liquidity and Capital Resources
starting on page 33.

# Properties and Equipment

Our
main facilities, located in Ness-Ziona, Israel, occupy approximately 5,500 square meters,
including: approximately 1,300 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. Our current lease commitment
relating to our facilities in Israel expires at the beginning of 2008.

Our
U.S. subsidiary leases approximately 400 square meters in Arizona, 300 square meters in
Santa Clara for use as a pre-sale and support facility and also 450 square meters in State
College, Pennsylvania for use as a research and development facility. Our Japanese and
Taiwan subsidiaries lease approximately 200 and 300 square meters for use as a service and
pre-sale facility, respectively. At the end of 2005 our Netherlands subsidiary closed its
offices which occupied approximately 100 square meters.

We
believe that our facilities and equipment are in good operating condition and adequate for
their present usage.

# 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.

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. In 2006, for approximately one month, battles took place between the Israeli
military and Lebanese guerilla units. 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 the
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.

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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 the 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 may affect the Company ability to trade with
European companies.

Military
Service. Many of the Companys male employees in Israel are currently obligated
to perform annual reserve duty in the Israel Defense Forces. In addition, virtually all
such employees are subject to being called to active duty at any time under emergency
circumstances. 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 the Company of any expansion or reduction of such
obligations.

# Government Regulation

For
information relating to the impact of certain government regulations on our business,
seeConditional Grants from the Office of the Chief Scientist starting
on page 34.

|Item 4A. | Unresolved
Staff Comments
|-------- | -------------------------

Not
applicable.

|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 a worldwide leading designer, developer and producer of integrated metrology systems
for the semiconductor manufacturing industry and a 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 and directly to semiconductor manufacturers.

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.

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In
2003, demand for semiconductors started to increase and, as a result, demand for capital
equipment by semiconductor manufacturers also increased. This increased demand continued
in 2004. Accordingly, our financial results for 2003 and 2004 improved. In 2005, however,
demand for capital equipment decreased and the decrease is reflected in our financial
results for 2005, in which we suffered steeper losses than in 2003 and 2004. In 2006 we
experienced significant growth and our sales grew 60% compared to 2005. This growth was a
result of an overall upturn in the industry as well as successful proliferation of our
latest model the NovaScan 3090. However, we cannot predict with certainty how long the
industry upturn will last and whether we will be able to further increase our sales and
revenues in the following years.

We
derive our revenues principally from sales of our metrology systems and services relating
to our systems. In 2006, product sales produced 79% of our total revenues and services
produced 21%. Presently, we have no significant long-term debt and continue to finance our
operations mainly from the proceeds of our initial public offering in 2000. As of the end
of 2006, we had working capital of $16 million, including cash and cash equivalents,
short-term deposits and held to maturity securities of $10 million, and no significant
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 our 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. Furthermore, because our
systems range in price from $100,000 to over $1,000,000, 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 sales
outstanding; 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 2006,
warranty costs amounted to approximately 10% of sale price. Factors that affect warranty
costs include the number of systems installed in a specific site or territory and the
maturity of the products. Costs of production include materials, labor, and write-off per
product during product life time, and ranged from 30% to 43% of the sale price in 2006,
depending on the product. Factors that affect cost of production include sales volume,
product configuration, product maturity, and actual sale price. Our average inventory
levels in 2006 were approximately 16% of yearly sales. In 2006, average days sales
outstanding for total revenues were 65 and ranged between 53 and 71 days over the four
quarters of 2006. Geographical distribution analysis of installation at end users sites of
our products reveals an increase in the installation of our products in Asia Pacific
(excluding Japan) 38% in 2005 to 49% in 2006. In Japan the installation of our products
decreased from 22% of sales in 2005 to 7% in 2006.

# Significant Events in
2006 and Outlook for 2007

For
Nova, the most significant event in 2006 was the 60% increase in revenues year over year.
This increase was supported by the successful penetration of the new NovaScan 3090 product
family, for integrated and stand alone products.

An
additional significant event in 2006 was our first M&A activity, the acquisition of
substantially all assets and assumption of certain liabilities of HyperNex in August 2006.

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In
2007, Nova will focus on continuing development of its current chemical mechanical
polishing (CMP), copper CMP and optical critical dimension systems as well as
investing in the products and technologies included in its long-term strategy, and
products related to the new acquisition, in the x-ray segment. 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 45 nm and below and new
processes and materials. We believe that in 2007 our opportunities will most likely come
from the increased need for monitoring and control resulting from decreasing feature
sizes, and the accelerating move to new 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. Since 2004, this percentage decreased and we expect it to continue to decrease as
copper CMP equipment is expected to dominate the CMP equipment market. We can not foresee
what will ultimately be the process control needs for copper CMP, and whether the products
and solutions we will bring to market for the copper CMP market will be accepted in the
market.

# 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 in 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.

Revenue recognition

We
recognize revenues from the sale of products when all the following criteria have been
met: a persuasive evidence of an arrangement exists, title has transferred, the price is
fixed or determinable, collection of resulting receivables is probable and there are no
remaining significant obligations.

In
accordance with EITF 00-21 for arrangements containing multiple elements, fair value of
each element is determined based on specific objective evidence and revenue is allocated
to each element based upon its fair value. The revenue relating to the undelivered
elements is deferred at estimated fair value until delivery of the deferred elements. If
specific objective evidence of fair value does not exist for all elements to support the
allocation of the total fee among all delivered and undelivered elements of the
arrangement, revenue is deferred until such evidence exist for the undelivered elements,
or until all elements are delivered, whichever is earlier.

Service
contracts (which sometimes include application support) generally specify fixed payment
amounts for periods longer than one month, and are recognized on a straight line basis
over the term of the contract. Revenue from sale of spare parts is usually recognized upon
shipment of the parts.

Other
service revenue (training, time & material, etc.) is recognized upon completion of
work.

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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 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. 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-off

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
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.

# 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. However, we expect
that U.S. sales as a percentage of total sales may decrease if the portion of our sales
directly to semiconductor manufacturers, rather than through process equipment
manufacturers, will increase. In 2004, 67% of our revenues were derived from U.S.
customers, 11% were from European customers, 18% were from Japanese customers, and 4% were
from Asian (other than Japanese) customers. In 2005, 66% of our revenues were derived from
U.S. customers, 11% were from European customers, 18% were from Japanese customers, and 5%
were from Asian (other than Japanese) customers. In 2006, 68% of our revenues were derived
from U.S. customers, 10% were from European customers, 13% were from Japanese customers,
and 9% were from Asian (other than Japanese) and customers from other regions.

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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.

|             | 2004 | 2005 | 2006
|------------ | ---- | ---- | ----
|
|
|
|
|USA          |      |      |     
|Europe       |      |      |     
|Japan        |      |      |     
|Asia-Pacific |      |      |     
|             |      |      |     
|Total        |      |      |     

Historically,
a substantial portion of our revenues has come from a small number of customers. In 2004,
2005 and 2006, our five largest customers accounted for 82%, 83% and 79% of our revenues,
respectively. In, 2004, 2005 and 2006, our single largest customer accounted for 45%, 48%
and 46% of our revenues, respectively. We anticipate that our revenues will continue to
depend on a limited number of major customers, although the companies considered being
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
sales cycle for our systems typically ranges from 3 to 12 months and depends upon the
status of our systems integration with a particular manufacture and model of process
equipment, 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
2006, our inventory levels at the end of each quarter ranged from $6.6 million to $9.1
million. We planned our 2006 inventories for sales of 200 mm systems and 300 mm systems
according to our expectation that approximately 80% of equipment sales would be for 300 mm
equipment and that the NovaScan 3090 would account for most of our sales of 300 mm
systems. Actual sales in 2006 were similar to this plan. In 2007, we anticipate continued
proliferation of the new NovaScan 3090 product series for the 300 mm market, and expect
that overall 300mm sales will account for over 80% of our revenues. If our actual sales
are significantly different from our expectations, we may have to write-off some of our
inventory.

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. In general, 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 by 60% in 2006 following an 18% decrease in 2005 and a 38% increase in
2004.

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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
|-------------------------------------- | ----------------------------
|
|
|
|
|Revenues from products sale            |                             
|Revenues from services                 |                             
|                                       |                             
|Total revenues                         |                             
|                                       |                             
|Cost of products sale                  |                             
|Cost of services                       |                             
|                                       |                             
|Total cost of revenues                 |                             
|                                       |                             
|Gross profit                           |                             
|                                       |                             
|Operating expenses:                    |                             
|Research and development expenses, net |                             
|Sales and marketing expenses           |                             
|General and administrative expenses    |                             
|Other operating income                 |                             
|                                       |                             
|Total operating expenses               |                             
|                                       |                             
|Operating loss                         |                             
|                                       |                             
|Financing income, net                  |                             
|                                       |                             
|                                       |                             
|Net Loss                               |                             

# Comparison of Years
Ended December 31, 2006 and 2005

Revenues.Our revenues in 2006 increased by $18.2 million, or 60%, compared to 2005,
          with revenues attributable to product sales accounting for $38.3 million, an
          increase of $16.3 million, or 74%, compared to 2005, and services accounting for
          $10.0 million, an increase of $1.9 million, or 23%, compared to 2005. The
          increase in product sales revenue in 2006 was attributed mainly to the increased
          demand for our integrated metrology products and the successful penetration and
          revenues from our stand-alone Optical CD product, which was accompanied by the
          general upturn in the semiconductor industry in 2006. Revenues from services
          accounted for 21% of total revenues in 2006, compared to 27% of total revenues
          in 2005. The decrease in the percentage of our revenues from services is
          attributed mainly to the increase in product revenues in 2006 relative to 2005.
          The increase in service revenues is attributed mainly to new service contracts.

We
expect that sales from our main integrated process control product line targeting the CMP
market, including dielectric, copper and etch, will continue to account for a substantial
portion of our revenues for at least the next year, and that the new stand alone product
lines sales will gradually become more significant following wider market penetration. 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. In
2007, we expect service revenue to increase relative to 2006 as the warranty periods for
additional systems will expire and we expect customers to buy service contracts for these
systems.

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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 2006 was $18.7 million, an increase of $7.3 million, or 64%, compared to
2005. This increase is attributable to the increased volume of systems sold in 2006. As a
percentage of total revenues, our cost of revenues attributable to product sales in 2006
increased to 38.8% from 37.9% in 2005. This increase is attributable to the higher sales
volume of products with lower gross margins. In the years ended December 31, 2006 and 2005
we wrote-off inventories in the amounts of $0.4 million and $0.1 million, respectively.
Our cost of revenues attributable to services in 2006 was $9.0 million, an increase of
$1.1 million, or 14%, compared to 2005. This increase is attributable mainly to labor and
material costs relating to new service contracts.

Our
gross profit increased by 90% to $20.6 million in 2006 from $10.8 million in 2005. Our
gross profit represented 42.5% and 35.9% of our total revenues in 2006 and 2005,
respectively. Our gross profits increased from 2005 to 2006 due to the higher volume of
revenues, and was partially offset by revenues from lower gross margins products.

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 by 1% from $9.3 million in 2005 to $9.2
million in 2006, after offsetting conditional grants received or receivable from the
Office of the Chief Scientist of $1.9 million in 2006 and 2005, each. In 2006 research and
development expenses, net, represented 19% of our revenues compared to 31% of our revenues
in 2005, due to the significant increase in our revenues in 2006.

Approximately
$5 million of our research and development expenses, net, in 2006, resulted from our
research and development efforts relating to the introduction of new NovaScan 3090 models,
to current products activities, and to creating a new technology infrastructure for
scatterometry based metrology solutions. We believe that meeting the needs of
semiconductor manufacturers with respect to the manufacture of semiconductors with
features ranging from 90 nm to below 45 nm will allow us to maintain our position as a
market leader in integrated process control equipment. Approximately $3 million of our
research and development expenses, net, in 2006, was related to developing a technology
infrastructure for next generation metrology tools platform, both for stand-alone and for
integrated metrology market segments. The balance was related mainly to development costs
related to the x-ray technology which we acquired in August 2006.

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 by 26% from $7.0 million in 2005 to $8.8 million in 2006.
Sales and marketing expenses represented 23% and 18%, respectively, of our revenues in
2005 and 2006. The decrease as a percentage of revenue is related to the higher volume of
revenues in 2006. This decrease was offset with $1.8 million higher sales and marketing
costs in 2006, related to evaluations, commissions and managerial transition costs in the
Asia Pacific and Japan regions.

General
and Administrative. General and administrative expenses are comprised of salaries and
related expenses and other non-personnel related expenses such as legal expenses. Our
general and administrative expenses increased 42% from $3.6 million in 2005 to $5.1
million in 2006. This increase is attributed mainly to an increase in legal expenses
related to the Nanometrics intellectual property infringement law suit. General and
administrative expenses represented 12% and 11% of our revenues in 2005 and 2006,
respectively. The decrease in general and administrative expenses as a percentage of
revenues from 2005 to 2006 is a result of the increase in our revenues in 2006, which was
offset mainly by the increase of our legal costs as described above.

# Comparison of Years
Ended December 31, 2005 and 2004

Revenues.Our revenues in 2005 decreased by $6.7 million, or 18.1%, compared to 2004,
          with revenues attributable to product sales accounting for $22.0 million, a
          decrease of $7.3 million, or 24.9%, compared to 2004, and services accounting
          for $8.2 million, an increase of $0.6 million, or 8.3%, compared to 2004. The
          decrease in product sales revenue in 2005 was attributed to the competition in
          the 300 mm integrated metrology market, including the delay in introduction of
          our NovaScan 3090 product series during 2004, and also to the general slowdown
          in the semiconductor industry in the first half of 2005. Revenues from services
          accounted for 27.1% of total revenues in 2005, as compared to 20.4% of total
          revenues in 2004. The increase in the percentage of our revenues from services
          is attributed mainly to an increase in service contracts revenues and a decrease
          in revenues from product sales.

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We
expect that sales from our main integrated process control product line targeting the CMP
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
(integrated and stand-alone process control systems for etch) will gradually become more
significant following wider market adoption of integrated metrology for 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. In 2006, we
expect service revenue to increase relative to 2005 as the warranty periods for additional
systems will expire and we expect customers to buy service contracts for these systems.

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 2005 was $11.4 million, a decrease of $3.0 million, or
20.8%, compared to 2004. This decrease is attributable mainly to the decreased volume of
systems sold. As a percentage of total revenues, our cost of revenues attributable to
product sales in 2005 decreased to 37.9% from 39.1% in 2004. This decrease is attributable
to the mixture of products sold. Inventory write-down did not have significant affect on
our cost of goods sold in 2005 or in 2004. Our cost of revenues attributable to services
in 2005 was $7.9 million, an increase of $1.2 million, or 17.5%, compared to 2004. This
increase is attributable to an increase in labor and material costs relating to service
contracts and installations at new customer sites.

Our
gross profit decreased by 31.2% to $10.8 million in 2005 from $15.7 million in 2004. Our
gross profit represented 35.9% and 42.6% of our total revenues in 2005 and 2004,
respectively. Our gross profits decrease from 2004 to 2005 is attributable mainly to the
lower volume of systems sold.

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, increased 7.3% from $8.7 million in 2004 to $9.3
million in 2005, after offsetting conditional grants received or receivable from the
Office of the Chief Scientist of $1.9 million in 2005 and 2004, each. In 2005 research and
development expenses, net, represented 30.9% of our revenues compared to 23.5% of our
revenues in 2004, due to the significant decrease in our revenues in 2005.

Approximately
$5 million of our research and development expenses, net, in 2005, resulted from our
research and development efforts relating to the introduction of new NovaScan 3090 models
for the next manufacturing technology nodes and creating a new technology infrastructure
for scatterometry based metrology solutions. We believe that meeting the needs of
semiconductor manufacturers with respect to the manufacture of semiconductors with
features ranging from 90 nm to below 45 nm will allow us to maintain our position as a
market leader in integrated process control equipment. The balance of the research and
development expenses, net, was related to current products activities, such as engineering
improvements, new versions of software and application support and developments, as well
as to new software products for scatterometry based metrology and also to developing a
technology infrastructure for next generation metrology tools, both for stand-alone and
for integrated metrology market segments.

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 by 6% from $6.6 million in 2004 to $7.0 million in 2005.
Sales and marketing expenses represented 23.1% and 18.1%, respectively, of our revenues in
2005 and 2004. This increase as a percentage of revenue is related to lower volume of
revenues in 2005.

- 32 -

---

---

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 55.6% from $2.3 million in 2004 to $3.6 million in 2005. This increase
is attributed mainly to increase of legal expenses of about $0.6 million mainly due to
Nanometrics IP infringement law suit and executives retirement payments of about $0.3
million. General and administrative expenses represented 6.3% and 12.0% of our revenues in
2004 and 2005, respectively. The increase in general and administrative expenses as a
percentage of revenues from 2004 to 2005 is a result of a decrease in our revenues in 2005
and the increase of our general and administration expenses as described above.

# Liquidity and Capital
Resources

As
of December 31, 2006 we had working capital of $15.9 million compared to working capital
of $14.8 million as of December 31, 2005. This increase is attributed primarily to the
increase in trade account receivables and inventory during 2006.

Cash
and cash equivalents, short-term and long-term deposits and securities held to maturity as
of December 31, 2006 were $15.2 million compared to $22.8 million as of December 31, 2005.

Trade
accounts receivable increased from $6.8 million as of December 31, 2005 to $10.3 million
as of December 31, 2006. Inventories increased from $6.6 million as of December 31, 2005
to $9.0 million as of December 31, 2006.

Operating
activities in 2006 used cash of $5.1 million compared to $7.4 million in 2005. Operating
activities in 2006 used less cash relative to 2005, mainly due to the decrease in
operational losses in 2006, which was partially offset by the increase in working capital.
Financing activities generated $3.4 million of cash in 2006, compared to $0.7 million in
2005.

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

|                               | 2006 | 2005 | 2004
|------------------------------ | ---- | ---- | ----
|
|
|
|
|Electronic equipment           |      |      |     
|Office furniture and equipment |      |      |     
|Leasehold improvements         |      |      |     
|                               |      |      |     
|Total                          |      |      |     

The
investment in capital expenditures was financed mainly from the cash reserves of the
Company. The increase in capital expenditures for electronic equipment in 2006 and 2005
was due to our investments in information systems improvements (software and hardware),
electronic equipment used in our research and development labs and systems for our
demonstration centers and application development. Although we currently have no
significant capital commitments, we expect to spend up to $2 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
demonstration centers.

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, which include a $5 million private placement that
was completed during March 2007, 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.

- 33 -

---

---

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
starting on page 60.

# Off-Balance Sheet
Arrangements

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

# Contractual Obligation

As
of December 31, 2006 we had contractual obligations as described in the following table:

|                            | Total | Less than 1 year | 1-3 years
|--------------------------- | ----- | ---------------- | ---------
|
|
|
|
|Operating Lease Obligations |       |                  |          
|Purchase Obligations        |       |                  |          
|Other Long Term Liabilities |       |                  |          
|                            |       |                  |          
|Total                       |       |                  |          

# Research and Development

For
information regarding our research and development activities, see Research and
Development starting on page 19.

# 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, Trade and Labor. 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 5% 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 the products
developed with these grants in Israel. 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 and know-how may be transferred
outside of Israel, only if prior approval is received from the Office of the Chief
Scientist. This approval may be given only if we abide by all the provisions of the law
and related regulations. Ordinarily, as a condition to obtaining approval to manufacture
outside Israel, we would be required to pay increased royalties and as a condition to
obtaining approval to transfer know-how outside Israel, ordinarily we would be required to
pay a lump sum, all as defined under the relevant law. 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. If we wish to transfer know-how, the terms for approval
shall be determined according to the character of the transaction and the consideration
paid to us for such transfer. Approval of the transfer of technology to another Israeli
company 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.

- 34 -

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---

As
of December 31, 2006 we received conditional grants from the Office of the Chief Scientist
totaling $9.8 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, 2006, our
contingent liability to the Office of the Chief Scientist for conditional grants received
was approximately $6.2 million. See also Note 9A to our consolidated financial statements
contained elsewhere in this report.

The
funds available for conditional grants from the Office of the Chief Scientist were reduced
for 2004 and 2005, and the Israeli authorities have indicated that the government may
further reduce or abolish grants of this kind in the future. Even if these conditional
grants are maintained, we might not receive them 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 the Chief Scientist, in 2006, 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 the 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, however, the provisions
of the law and related regulations regarding the restrictions on the transfer of know-how
outside of Israel apply to these programs. 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, 2006, we had received approximately $3 million in
grants from the Office of Chief Scientist in connection with these programs.

|Item 6. | Directors,
Senior Management and Employees
|------- | ------------------------------------------

The
following is the list of senior management and directors as of April 20, 2006:

|Name               | Age | Position                                                 
|------------------ | --- | ---------------------------------------------------------
|
|
|
|
|Micha Brunstein    | 62  | Chairman of the board of directors                       
|Giora Dishon       | 62  | Director and co-founder                                  
|Moshe Finarov      | 55  | Director and co-founder                                  
|Avi Kerbs          | 60  | Director                                                 
|Joseph Ciechanover | 73  | Director                                                 
|Alon Dumanis       | 57  | Director                                                 
|Naama Zeldis       | 44  | External Director                                        
|Dan Falk           | 62  | External Director                                        
|Gabi Seligsohn     | 41  | President and Chief Executive Officer                    
|Dror David         | 38  | Chief Financial Officer                                  
|Avi  Magid         | 46  | Executive Vice President Global Business Management Group
|David Scheiner     | 47  | Chief Technology Officer                                 
|Avron Ger          | 46  | Vice President Thin Film Business Unit                   
|Gabi Sharon        | 45  | Vice President Operations                                

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---

Our
directors (other than the external directors) serve as such until the next annual general
meeting of our shareholders. Our external directors, in accordance with Israeli law, serve
for a three-year term, which may be renewed for one additional three-year term and
thereafter for additional three-year terms, if both the audit committee and the board of
directors confirm that in light of the expertise and contribution of the external
director, the extension of such external directors term would be in the interest of
our company. Mr. Dan Falk was elected in 2005. Ms. Zeldis was elected in 2006.

Dr.
          Micha Brunstein was named chairman of our board of directors in June 2006,
          after serving as member of our board of directors from November 2003. During the
          years 1990 and 1999, Dr. Brunstein served as 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 a board member of Ham-let Ltd., a company
          listed on the Tel Aviv Stock Exchange and Valor Computerized Systems Ltd., a
          company listed on the Frankfurt Stock Exchange. He is a chairman and serves on
          boards of directors of several privately owned companies. Dr. Brunstein holds a
          B.Sc. in Mathematics and Physics from the Hebrew University, Jerusalem, and a
          M.Sc. and a Ph.D. in Physics from Tel Aviv University.

Dr.
          Giora Dishonis a co-founder of Nova and served as President and Chief
          Executive Officer since Novas formation in 1993 until August 2006. 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 Managing Director at AVX
          Israel Ltd., a manufacturer of electronic devices. Dr. Dishon holds a B.Sc. in
          Chemistry, a M.Sc. and a Ph.D. in Materials Science from the Hebrew University,
          Jerusalem, Israel.

Dr. Moshe Finarovis a co-founder of Nova and a member of our board of
          directors. He has served as Chief Technology Officer and VP Technology from
          Novas formation in 1993 until August 2006. From 1989 to 1993 he served as
          Senior Physicist at Orbotech Ltd. and from 1974 to 1988 he was employed at
          PULSAR and ENIMS Scientific Research Institutes in Moscow. Dr. Finarov holds a
          Ph.D in Semiconductor Physics and a M.Sc. in Microelectronics from Moscow Steel
          & Alloys Institute. He is named on approximately 40 U.S. patents and
          published approximately 40 papers.

Mr.
          Avi Kerbs has served as a director of Nova since 1993. He serves as the
          President and Chief Executive Officer of Teuza Management & Development
          Ltd., the management company of Teuza-A Fairchild Technology Venture Ltd., a
          venture capital company and has served in this capacity 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 holds a B.Sc. in Industrial Engineering and Management and
          a M.Sc. in Management from the Technion  Israel Institute of Technology.
          Mr. Kerbs serves as a member of the Technions Board of Governors and the
          Haifa University Board of Governors and is the Chairman of the Scientific
          Academic Club of Haifa University. Mr. Kerbs is also a member of the Board of
          the United Cerebral Palsy Research and Educational Foundation in the U.S. 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 holding
          approximately 1.5% of Novas outstanding shares as of April 20, 2007, and
          served as chairman of the board of directors of El-Al Israel Airlines from 1995
          until 2001. He served as a chairman of Israel Discount Bank from
          1986 to 1993 and the President and a member of the board of directors of
          PEC Israel Economic Corporation, a diversified investment company which merged
          later into Discount Investment Corp. Since 1995, Mr. Ciechanover has been a
          member of the board of directors of United Retail Group, Inc. and serves on the
          audit and compensation committees. United Retail Group, Inc.s stock is
          publicly traded in the United States. He has been a member of the board of
          directors of Harel Investment Co. since 1995. Mr. Ciechanover holds a law degree
          from the Hebrew University, Jerusalem, an LL.M. from the University of
          California at Berkeley and a Ph.D. in philosophy from Boston University, Boston,
          Massachusetts.

- 36 -

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---

Dr.
          Alon Dumanis, has served as a director of Nova from
2002. He is the Chief Executive Officer of Docor International Management, a Dutch
investment company, subsidiary of The Van-Leer Group Foundation. Dr. Dumanis is a member
of the board of Directors of Tadiran Communications (TASE-TDCM), a former member of the
board of directors of El Al Israel Airlines (TASE-LY), and a former member of the board of
directors of Inventech Investments Co. Ltd. (TASE-IVTC), a shareholder of the Company.
Previously, Dr. Dumanis was the Head of the Material Command in the Israel Air Force at
the rank of Brigadier General. Dr. Dumanis currently serves as chairman and member of
several national steering committees and is the author of many papers published in a
number of subject areas, including technology and management. Dr. Dumanis holds a Ph.D. in
Aerospace Engineering from Purdue University, West Lafayette, Indiana, USA.

Mr.
          Dan Falk was elected as the Companys
external director in accordance with the provisions of the Israeli Companies Law in 2005.
Mr. Falk is a business consultant to public and private companies. During 1999 to 2000 Mr.
Falk served as Chief Executive Officer and Chief Operating Officer of Sapiens
International NV. Prior to that, Mr. Falk served as Executive Vice President and Chief
Financial Officer of Orbotech Ltd. Mr. Falk serves as a member of various
companies boards of directors such as Orbotech Ltd., Nice Systems Ltd., Ormat
Technologies, Inc., Attunity Ltd., ClickSoftware Technologies, Ltd., Orad Hi-tech Systems
Ltd., Jacada Ltd., Dmatek Ltd., Poalim Ventures1, Plastopil Ltd. (all of which are
companies publicly traded in the United States or other countries)  and Netafim Ltd.

Ms.
          Naama Zeldiswas elected as the Companys external director in
          accordance with the provisions of the Israeli Companies Law in 2006. Ms. Zeldis
          has been serving as Chief Financial Officer of Netafim Ltd. since December 2005.
          Prior to that, she served as Chief Financial Officer of EDS Israel, Radguard,
          and Director of Finance of RAD Data Communications. Ms. Zeldis has been serving
          as a member of the board of directors and of the audit committee of Metalink
          since Dec. 2006. Metalink is traded both in NASDAQ and in the Tel Aviv Stock
          Exchange. Ms. Zeldis holds a B.A. in Economics and an M.A. in Business
          Administration, majoring in Financing, from the Hebrew University of Jerusalem
          and a B.A. in Accounting from the Tel-Aviv University.

Mr.
          Gabi Seligsohn has served as the President and Chief Executive Officer since
          August 2006. Having joined Nova in 1998, Mr. Seligsohn has served in several key
          positions in the company including as the Executive Vice President, Global
          Business Management Group from August 2005 to August 2006. From August 2002
          until August 2005 he was President of Novas US Subsidiary, Nova Inc.
          Previous to that he was Vice President Strategic Business Development at Nova
          Inc. where he established Novas OEM group managing the Applied Materials
          and Lam Research accounts between the year 2000 to 2002. From 1998 to 2000 he
          served as global strategic account manager for the Companys five leading
          customers. Mr. Seligsohn joined Nova after two years service as Sales Manager
          for key financial accounts at Digital Equipment Corporation. Mr. Seligsohn holds
          an LL.B. from the University of Reading, Reading, England.

Mr.
          Dror Davidhas served as our Chief Financial Officer. From 1998 to 2005, he
          served in various managerial positions in Nova including Vice President of
          Resources, Operations Manager and Global Controller. From 1994 to 1998, Mr.
          David served as an Audit and Tax Consultant with Brightman, Almagor & Co.
          Mr. David holds a B.A. in Accounting & Economics from Bar-Ilan University
          and an MBA from Derby University of Britain.

Mr.
          Avi Magid has served as Executive Vice President Global Business Management
          since November 2006. From 2001 to 2006, Mr. Magid served as managing director
          and Vice President at Kulicke & Soffa, a leading supplier of semiconductor
          assembly equipment. From 2000 to 2001, Mr. Magid served as Deputy Managing
          Director for Business Development at K&S Micro Swiss LTD. Prior, Mr. Magid
          served as managing director and Deputy Managing Director for Sales &
          Marketing at Semitec Santa Clara CA. Mr. Magid holds a BA in Industrial
          Engineering from Polytechnic University-Pomona, Pomona, California.

Dr.
          David Scheinerhas served as Chief Technology Officer since September 2006.
          Dr. Scheiner joined Nova in 1996 and initially served in several positions
          including Applications Group Manager and Physics Group Manager. From 2000 to
          2005 he served as R&D Manager. Dr. Scheiner holds a B.Sc. and MSc. in
          Electrical Engineering from the Technion Israel Institute of Technology,
          Haifa, Israel and a Ph.D. in Physics from the Weizmann Institute of Science,
          Rehovot, Israel.

Mr.
          Avron Gerhas served as Vice President Thin Film Business Unit since
          September 2006. Mr. Ger joined Nova in 1996 and held service management
          positions as well as key product management and marketing positions. Mr. Ger
          holds a B.Sc in Electronics from the Technion  Israel Institute of
          Technology, Haifa, Israel.

- 37 -

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---

Mr.
          Gabi Sharonis serving as Vice President of Operations since September 2006.
          Having joined Nova in 1995, Mr. Sharon served in several key positions in the
          company including as Global Customer Support Manager from September 1995 to
          September 2004. From September 2004 until September 2006 Mr. Sharon managed the
          Product Development Division, spearheaded the NovaScan 3090 product line and its
          successful market launch. For a period of 2 years, from 2004 to 2006, he
          also served as the Product Marketing Manager led the initial penetration of the
          Copper CMP market.  Prior to joining Nova Mr. Sharon served as Project
          Manager in ECI Israel. Mr. Sharon holds B.Sc. in Computer Science from
          Northeastern University, Boston Massachusetts, and M.Sc. in Technology
          Management from Polytechnic University, New York.

# Voting agreement

We
are not aware of any voting agreement currently valid.

# Compensation

The
aggregate direct remuneration paid or payable to all persons who served in the capacity of
executive officer during 2006 was approximately $770,000 including approximately $240,000,
which was set aside for pension and retirement benefits and including amounts expended by
us for automobiles made available to our executive officers.

The
total amount paid or payable to the directors, including external directors, for 2006 was
$325,000 (not including payments made during 2006 to directors who have also served as
executive officers. Such payments are included in the executive compensation for the year
2006 disclosed above). As of April 20, 2007, 1,717,205 options to purchase our ordinary
shares were outstanding to certain executive officers and directors (consisting of 14
persons), of which 931,625 options are currently exercisable or exercisable within 60 days
of April 20, 2007. See Share ownership Section.

# Board of Directors
Committees

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

TheAudit Committee is comprised of Dan Falk, Joseph Ciechanover and Naama Zeldis. The
functions of the audit committee according to Israeli Law are to locate and monitor
deficiencies in the management of the Company, including in consultation with the
independent auditors and the internal auditor, and to advise the board of directors on how
to correct such deficiencies. The audit committee is also responsible to assist the board
of directors in fulfilling its responsibility for oversight of the quality and integrity
of accounting, auditing and financial reporting practices of the Company. Furthermore, 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 to
oversee the qualifications, independence, appointment, compensation and performance of the
Companys independent auditors. The audit committee operates under a charter adopted
by the board of directors.

TheCompensation Committeeis comprised of Joseph Ciechanover, Micha Brunstein and Dan
Falk. The function of the compensation committee is described in the approved charter of
the committee, and includes assisting to the board of directors in discharging its
responsibilities relating to compensation of the Companys directors and executives
and the overall compensation programs. The primary objective of the committee is to
develop and implement compensation policies and plans that are appropriate for the Company
in light of all relevant circumstances and which provide incentives that further the
Companys long-term strategic plans and are consistent with the culture of the
Company and the overall goal of enhancing enduring shareholder value.

TheInvestment Committeeis comprised of Naama Zeldis, Avi Kerbs, and Joseph Ciechanover.
The function of the investment committee is described in the approved charter of the
committee, and includes evaluation of the Companys financial strategies and
policies.

- 38 -

---

---

TheNominating and Corporate Governance Committeeis comprised of Alon Dumanis, Dan
Falk and Micha Brunstein. The function of the nominating committee is described in the
approved charter of the committee, and includes responsibility for identifying individuals
qualified to become board members and recommending that the board select the director
nominees for election at the general meeting of shareholders. The Nominating and Corporate
Governance Committee is also responsible for developing and recommending to the board of
directors a set of corporate governance guidelines applicable to the company, periodically
reviewing such guidelines and recommending any changes thereto.

The
Strategic Committeeis comprised of Micha Brunstein, Avi Kerbs, Alon Dumanis, Giora
Dishon, Moshe Finarov and Gabi Seligsohn. The function of the strategic committee is
described in the approved charter of the committee, and includes assisting the board in
fulfilling its responsibilities for overseeing and facilitating the development and
implementation of the companys long-term and short-term strategic planning.

All
committees are acting according to written charters that were approved by our board of
directors.

# Employees

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

|                              | as of December 31,
|----------------------------- | ------------------
|
|
|
|
|Total Personnel               |                   
|                              |                   
|Located in Israel             |                   
|Located abroad (mainly U.S.)  |                   
|                              |                   
|In operations                 |                   
|In research and development   |                   
|In Global Business            |                   
|In general and administration |                   

As
of December 31, 2006, we employed a total of 280 persons worldwide, not including 19
independent contractors and temporary employees, of which 83 were in research and
development, 60 were in operations, 116 were in global business and 21 were in general and
administration. As of December 2006, 168 of our employees were based in Israel and 112
were located abroad.

We
were a member of the Industrialists Association in Israel, an employers union until
December 31, 2006. 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. As of December 31, 2006, we have been providing 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 employed by Nova Measuring
Instruments Ltd. The laws principally concern matters such as paid vacation, paid sick
days, length of workday, payment for overtime and severance payments upon the retirement
or death of an employee or termination of employment.

# Share Ownership

Giora
Dishon, former President and Chief Executive Officer, current director and co-founder, and
Moshe Finarov, former Vice President, Director of Technology, current director and
co-founder, beneficially owned 708,042 (including 61,100 shares held by a trustee pursuant
to Israeli tax laws) and 646,941 ordinary shares of the Company, respectively, as of April
20, 2007. All other directors and executive officers each beneficially owned less than 1%
of the Companys shares. In addition, the following table sets forth information
regarding options held by our directors and officers currently exercisable or exercisable
within 60 days as of April 20, 2007.

- 39 -

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---

|Name                                 | Ordinary Shares
Underlying Options | Expiration Dates | Exercise Prices
($/share)
|------------------------------------ | ---------------------------------- | ---------------- | -------------------------
|
|
|
|
|Giora Dishon                         |                                    |                  |                          
|Moshe Finarov                        |                                    |                  |                          
|14 directors and officers as a group |                                    |                  |                          

All
other directors and executive officers each beneficially owned less than 1% of the
Companys shares.

We
currently have six active share option plans.

As
of December 31, 2006, options to acquire 5,190,462 ordinary shares had been issued under
these plans, of which 240,298 options to acquire shares have been exercised, 1,370,324
have been cancelled and 2,477,770 were exercisable. The active share option plans are
described below:

Option
Plan 4  As of December 31, 2006, options to purchase 757,401 ordinary shares at
exercise prices of $6.27 or $7.37 per share were granted; 5,594 options were exercised,
363,465 options were exercisable and 388,342 options had been cancelled;

Option
Plan 5  As of December 31, 2006, options to purchase 972,161 ordinary 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 were granted; 128,722 options were exercised, 413,170 options were
exercisable and 430,269 options had been cancelled;

Option
Plan 6  As of December 31, 2006, options to purchase 960,000 ordinary shares at an
exercise price of $2.06, the fair market value of Novas stock on the date of grant
were granted; 85,982 options were exercised, 628,245 options were exercisable and 245,773
options had been cancelled. On September 29, 2005, our shareholders have approved
amendments to the plan allowing our board of directors to accelerate the vesting dates
and to determine an exercise price which is different from the fair market value of our
shares at the date of grant;

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, 2006, 20,000 options were exercised, 35,000 options were
exercisable and 20,000 options had been cancelled;

Option
Plan 7A  As of December 31, 2006, options to purchase 600,000 ordinary shares at
exercise prices of $4.01 and $5.15, the fair market value of Novas stock on the
date of grant, were granted; 478,035 were exercisable and 121,965 options had been
cancelled. On September 29, 2005, our shareholders have approved amendments to the plan
allowing our board of directors to accelerate the vesting dates and to determine an
exercise price which is different from the fair market value of our shares at the date of
grant;

Option
Plan 7B  As of December 31, 2006, options to purchase 650,000 shares at an exercise
price of $3.40, the fair market value of Novas stock on the date of grant, were
granted; 512,125 were exercisable and 137,875 had been cancelled. On September 29, 2005,
our shareholders approved amendments to the plan allowing our board of directors to
accelerate the vesting dates and to determine an exercise price which is different from
the fair market value of our shares at the date of grant;

Option
Plan 7C  As of December 31, 2006, options to purchase 153,000 ordinary shares at an
exercise prices of $2.20, the fair market value of Novas stock on the date of grant,
were granted, 47,730 options were exercisable. As of December 31, 2006, no options under
this plan were exercised; and

Option
Plan 8  As of December 31, 2006 options to purchase 1,022,900 ordinary shares at an
exercise prices of $1.79, $1.90, $1.95, $2.18 or $2.50, the fair market value of
Novas stock on the date of grant were granted. As of December 31, 2006, no options
under this plan were exercisable and 26,100 options had been cancelled. Furthermore, in
February 19, 2007, we granted options to purchase 207,000 ordinary shares at exercise
price of $2.87, the closing price of the Companys ordinary shares on Nasdaq on the
trading day immediately following the last day of the blackout period proceeding the board
of directors approval.

- 40 -

---

---

In
addition to the option plans described above, in 2003, we 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 a total of 138,505 ordinary shares under this plan.

On
December 20, 2006 the board of directors resolved to amend the Companys incentive
plans to clarify that the blackout period pursuant to the Companys blackout policy
shall be excluded from the 30-day exercise period allowed under the various incentive
plans following the termination of employment.

On February 19, 2007, the board of
directors adopted an Equity Based Compensation Policy, according to which the exercise
price of granted options will be as provided by the applicable incentive plan, provided,
however, that in the event that the grant approval takes place during a blackout period,
the exercise price of the options granted will be equal to the closing price of our
ordinary shares on Nasdaq on the trading day immediately following the last day of the
blackout period (with the exception of approvals subject to shareholder approvals, in
which case, the exercise price shall be the closing price on the day of the shareholder
approval).

The
following table summarizes information about share options outstanding as of December 31,
2006:

|Outstanding as of
December 31, 2006 | Exercisable as of
December 31, 2006
|----------------------------------- | -----------------------------------
|
|
|
|
|1.13-1.95                           |                                    
|2.06                                |                                    
|2.17-3.69                           |                                    
|4.01                                |                                    
|5.15                                |                                    
|6.27-7.37                           |                                    
|                                    |                                    
|                                    |                                    
|                                    |                                    

On
August 8, 2006, pursuant to the Amended and Restated Asset Purchase Agreement with
HyperNex and its stockholders, we issued 1,208,000 ordinary shares to HyperNex, which were
distributed by HyperNex to its stockholders and 392,000 restricted shares were allocated
to managers and employees of HyperNex. Ordinary shares issued to HyperNex managers will
vest over a thirty (30) month period as follows: (i) a third of the these shares vested on
November 8, 2006, which is three (3) months after grant date; (ii) a third of these shares
will vest on November 8, 2007, which is fifteen (15) months after grant date; and (iii) a
third of these shares will vest thirty (30) months after grant date. The ordinary shares
issued to employees of HyperNex will vest over a three (3) year period with a third of
such shares vesting on each anniversary as of the grant date. The Amended and Restated
Asset Purchase Agreement, also provides the recipients of our ordinary shares with certain
limited piggy-back registration rights. These piggy-back registration rights are subject
to certain customary carve-outs and limitations as well as other limitations set forth in
the Amended and Restated Asset Purchase Agreement.

- 41 -

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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 20, 2007:

|Name                                           | Number of Ordinary
Shares Beneficially
Owned* | Percentage of Ordinary
Shares
Beneficially Owned
|---------------------------------------------- | --------------------------------------------- | ------------------------------------------------
|
|
|
|
|Clal Electronics Industries Ltd.(1)            |                                               |                                                 
|Austin W. Marxe & David Greenhouse(2)          |                                               |                                                 
|Rima Managenent, LLC(3)                        |                                               |                                                 
|Richard Mashaal(3)                             |                                               |                                                 
|Teuza - A Fairchild Technology Venture Ltd.(4) |                                               |                                                 
|Teuza Management & Development (1991) Ltd.(4)  |                                               |                                                 
|Tamir Fishman Ventures II, L.L.C.(5)           |                                               |                                                 
|Shai Saul(5)                                   |                                               |                                                 
|Michael Elias(5)                               |                                               |                                                 
|Tamir Fishman & Co. Ltd.(5)                    |                                               |                                                 
|Eldad Tamir(5)                                 |                                               |                                                 
|Danny Fishman(5)                               |                                               |                                                 
|Giora Dishon(6)                                |                                               |                                                 

* Applicable percentages are based on
19,107,567 ordinary shares outstanding on April 20, 2007

|(1) | The
information was provided by Clal Electronics Industries Ltd. Includes
               872,092 ordinary shares issuable upon exercise of warrants currently
               exercisable.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The
information is based upon Amendment No. 4 to Schedule 13G filed with the
               Commission by Messrs. Marxe and Greenhouse on February 15, 2006. Includes
               536,778 shares held by Special Situations Cayman Fund, L.P., 77,631 shares
held                by Special Situations Technology Fund, L.P., 397,869 shares held by
Special                Situations Technology Fund II, L.P., 109,246 shares held by
Special Situations                Fund III, L.P. and 1,246,313 shares held by Special
Situations Fund III, QP,                L.P.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The
information is based upon Schedule 13G filed with the Commission by Rima
               Management, LLC and Richard Mashaal on March 23, 2007. Based upon such
Schedule                13G, the reporting persons disclaim beneficial ownership in the
shares reported                therein except to the extent of their pecuniary interest
therein. Includes                581,393 ordinary shares issuable upon exercise of
warrants currently                exercisable.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The
information was provided by Avi Kerbs, President and Chief Executive Officer
               of Teuza Management & Development Ltd., the management company of
Teuza-A                Fairchild Technology Venture Ltd.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | The
information is based upon Amendment No. 2 to Schedule 13G filed with the
               Commission by, among others, Tamir Fishman Ventures II, LLC (TFV),
               on March 30, 2005: (i) five limited partnerships and a corporation
directly                beneficially own, in the aggregate, 1,175,600 shares; (ii) TFV
beneficially owns                1,175,600 shares as the sole general partner of the five
limited partnerships                and by virtue of its management rights with respect
to the corporation; (c) Shai                Saul, is one of the managing members of TFV;
(d) Michael Elias is one of the                managing members of TFV and reports having
sole voting and dispositive power                over an additional 7,250 shares; (e)
Tamir Fishman & Co. Ltd is one of the                managing members of TFV and
reports directly owning 5,100 additional shares; (f)                Eldad Tamir and Danny
Fishman are each Co-President and Co-CEO of Tamir Fishman                & Co. Ltd.
The total number of shares beneficially owned collectively by                this group
is 1,182,850.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | The
information was provided by Giora Dishon. Includes 61,100 ordinary shares
               held by a trustee according to the tax laws of Israel and 281,236 ordinary
               shares issuable upon exercise of options immediately exercisable or
exercisable                within 60 days of April 20, 2007.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

All
the shareholders of the company have the same voting rights.

The Company
believes that, as of December 31, 2006, approximately 40% of its ordinary shares were held
by U.S. holders, and there were approximately 45 record holders in the U.S.

- 42 -

---

---

# 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

In
2002, we obtained directors and officers liability insurance for our officers and
directors with coverage in an aggregate amount of $5,000,000. This coverage was renewed in
2003, 2004 and 2005. In 2007, we obtained directors and officers liability insurance
for our officers and directors with coverage in an aggregate amount of $7,500,000. This
directors and officers liability insurance shall be presented for the approval and
ratification of the shareholders according to the Companies Law at the General Annual
Meeting to be held in 2007. In addition, we undertook to indemnify our officers and
directors. Following the 2005 amendment to the Companies Law, on August 31, 2006, the
shareholders at the Annual General Meeting approved an amended letter of indemnification
to be given to our directors and officers. The aggregate indemnification amount that the
Company will pay to all its officers and directors pursuant to these letters of
indemnification shall not exceed $10,000,000 or 30% of the Companys shareholders
equity, according to the most recent consolidated financial statement prior to the date of
indemnification payment, the higher of the two. Prior to that, we undertook to indemnify
our officers and directors up to an aggregate amount of $15,000,000.

The
Companys undertakings under the indemnification letter are subject to its
undertaking made under its registration statement filed with the Commission according to
which it shall not be bound to indemnify and exculpate its directors and officers if a
court of competent jurisdiction determines that such indemnification is not lawful.

For
information relating to option granted to officers and directors, see Share
Ownership starting on page 39.

On
November 30, 2006 our shareholders approved the employment agreements with Dr. Giora
Dishon and Dr. Moshe Finarov, our directors and co-founders as advisors to our Chief
Executive Officer. The agreements are in effect as of July 1, 2006. Pursuant to his
employment agreement, Dr. Dishon is being paid a gross monthly salary of $15,000 payable
in NIS and was granted options to purchase up to 100,000 ordinary shares under our Stock
Option Plan No. 8. Pursuant to the employment agreement with Dr. Finarov, Dr. Finarov is
being paid a gross monthly salary of $14,000 payable in NIS and was granted options to
purchase up to 100,000 ordinary shares under our Stock Option Plan No. 8. The employment
agreements contain a change of control provisions pursuant to which the vesting of the
100,000 options shall be accelerated in certain circumstances.

On
August 31, 2006 our shareholders approved an agreement with Dr. Micha Brunstein, our
chairman of the board of directors. The term of engagement commenced as of June 19, 2006
and continues for an unlimited period, unless terminated in certain circumstances as
stated in the agreement. Pursuant to the agreement, Dr. Brunstein is being paid a gross
annual fee of $110,000 payable monthly in NIS and was granted options to purchase up to
150,000 ordinary shares under our Stock Option Plan No. 8. The employment agreement
contains a change of control provisions pursuant to which the vesting of the 150,000
options shall be accelerated in certain circumstances.

On
February 28, 2007, we entered into a Share Purchase Agreement with four investors,
including Clal Electronics Industries Ltd., pursuant to which such investors purchased in
the aggregate 1,937,983 ordinary shares of the Company, at a price of $2.58 per share, for
gross proceeds of $5 million. In connection with this transaction, we issued warrants to
these investors to purchase 1,453,485 additional ordinary shares at an exercise price of
$3.05 per share.

|Item 8. | Financial
Information
|------- | ---------------------

# Consolidated Financial
Statements

See
Financial Statements on page 63 of this report and pages F-1 through F-23.

- 43 -

---

---

# Significant Changes

None.

# 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, apart from those
mentioned below.

In
March 2005, we filed a civil action in the United States District Court for the Northern
District of California against Nanometrics Inc. seeking to enforce our U.S. Patent No.
6,752,689 and in April 2006 Nanometrics filed a civil action in the United States District
Court for the Northern District of California against us and our wholly-owned subsidiary,
Nova Inc. seeking to enforce their U.S. Patent No. Re:34,783. Nova had filed a request for
re-examination of the Nanometrics patent with the PTO. This request for
re-examination was accepted by the PTO for review in December 2006. Nova filed with the
court a motion for a stay in the patent litigation case pending completion of the
re-examination process of the patent in the lawsuit by the PTO. After reading and
considering the arguments presented by the parties, the Court granted Novas motion
to stay. In October 2006, Nanometrics filed a lawsuit with the District Court of Northern
California alleging Nova infringes U.S. Patent Numbers 5,867,276, and 7,115,858 B1. In
April 2007, we reached a settlement with Nanometrics of all three patent suits between
companies. We agreed to dismiss, without prejudice, all pending patent litigation between
the two parties, and have further agreed not to file patent suits against the other and/or
any supplier or customer of the other party for patent infringement based on offers to
sell, actual sales, manufacturing, purchase or use of any equipment of the other party for
a period of one year. The settlement, which received the court approval, terminated the
three lawsuits pending in the U.S. District Court for the Northern District of California.
For additional information regarding this litigation, see Intellectual
Property starting on page 20.

# 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 take advantage of certain 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 a 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 starting on page 51.

The
distribution of dividends may also be limited by the 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 of association provide that
dividends will be paid at the discretion of, and upon resolution by, our Board of
Directors however, the board of directors at its discretion, may transfer the decision in
this matter to the general meeting.

# 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 Global Market of our ordinary shares. The
shares began trading on Nasdaq 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.

- 44 -

---

---

Nasdaq Global Market

|                                   | Price per share (US$)
|---------------------------------- | ---------------------
|
|
|
|
|Yearly highs and lows              |                      
|2002                               |                      
|2003                               |                      
|2004                               |                      
|2005                               |                      
|2006                               |                      
|                                   |                      
|Quarterly highs and lows           |                      
|                                   |                      
|2005                               |                      
|Second quarter                     |                      
|Third quarter                      |                      
|Fourth quarter                     |                      
|2006                               |                      
|First quarter                      |                      
|Second quarter                     |                      
|Third quarter                      |                      
|Fourth quarter                     |                      
|2007                               |                      
|First quarter                      |                      
|Second Quarter (until May 7, 2007) |                      
|                                   |                      
|Monthly highs and lows             |                      
|                                   |                      
|November 2006                      |                      
|December 2006                      |                      
|January 2007                       |                      
|February 2007                      |                      
|March 2007                         |                      
|April 2007                         |                      

Tel Aviv Stock Exchange*

|                                   | Price per share (NIS)
|---------------------------------- | ---------------------
|
|
|
|
|Yearly highs and lows              |                      
|2002                               |                      
|2005                               |                      
|2006                               |                      
|                                   |                      
|Quarterly highs and lows           |                      
|                                   |                      
|2005                               |                      
|Second quarter                     |                      
|Third quarter                      |                      
|Fourth quarter                     |                      
|2006                               |                      
|First quarter                      |                      
|Second quarter                     |                      
|Third quarter                      |                      
|Fourth quarter                     |                      
|2007                               |                      
|First quarter                      |                      
|Second Quarter (until May 7, 2007) |                      
|                                   |                      
|Monthly highs and lows             |                      
|                                   |                      
|November 2006                      |                      
|December 2006                      |                      
|January 2007                       |                      
|February 2007                      |                      
|March 2007                         |                      
|April 2007                         |                      

* During the years 2003 and 2004
there has been no market activity at the TASE

- 45 -

---

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|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.

Approval
of Related Party Transaction; Corporate Borrowings.The Israeli Companies Law, to
which the company is subject, 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 may have and all related material
information known about any existing or proposed transaction with the company. The
approval of the board of directors is required for a transaction between the company and
its office holder or between the company and another person in which the office holder has
a personal interest that is not an extraordinary 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 and
including with respect to indemnification, insurance and exemptions, the transaction
requires the approval of the audit committee, 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 an 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 do
not have personal interest in approving the transaction 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 a companys voting rights.

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 require approval by the audit committee, board of
directors and shareholders. Arrangements as to compensation of officer employment terms,
if considered extraordinary transaction, require approval by the audit
committee and board of directors.

- 46 -

---

---

Under
regulations promulgated under the Companies Law regarding payment of compensation to
external directors, compensation of external directors shall be comprised of annual
compensation and a per meeting payment ranging as stated in the regulations. 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 duties which exceed the duties
imposed upon them under Israeli law, the maximum amount payable to the external directors
is NIS 100,000 per annum and NIS 3,000 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. Alternatively, the compensation of external directors may be linked to
the compensation of other directors subject to certain restrictions. Additionally,
external directors may be 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.

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 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.
Each ordinary share is entitled to one vote at all shareholders meetings.

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 third (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 to a later date if said date is indicated in the prior written
notice or if the Company has sent to the shareholders a prior notice of no less than 72
hours before the date set for the postponed meeting. 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. The Companies Law and regulations
determine that prior notice of no less than 21 days should be given to the companys
shareholders, prior to convening a meeting. In the event that the issue to be resolved is
an issue listed in Article 87 to the Companies Law and is to be voted upon pursuant to a
proxy solicitation, a notice of no less than 35 days should be given to the companys
shareholders.

Subject
to anti-terror legislations, 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.

- 47 -

---

---

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, which may be renewed for
additional three year terms, if both the audit committee and the board of directors
confirm that in light of the expertise and contribution of the external director, the
extension of such external directors term would be in the interest of our company.
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,
including at least two thirds of the voting present shareholders (shares held by
abstaining shareholders are not considered) which are not controlling shareholders or the
aggregate number of shares voting against the proposal shall not exceed 1% of company
voting shareholders.

The
Companies Law provides that Israeli public companies must have at least two external
directors. 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 additional three year terms 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 (shares
held by abstaining shareholders shall not be considered) or (ii) the aggregate number of
shares voting against the proposal has not exceeded 1% of the companys voting
shareholders. 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 external director is made by the shareholders at a meeting
at which such external director is granted a reasonable opportunity to express his
position such a resolution requires the same majority of votes that elected the external
director) (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.

According
to an amendment made to the Companies Law, an external director is qualified for
nomination as an external director, only if he/she has either professional qualifications
or accounting and financial expertise. The amendment also provides that at least one of
the external directors must have accounting and financial expertise. At the time of
nomination, an Israeli company shall be required to nominate an external director who has
professional qualifications or accounting and financial expertise provided that at least
one of the external directors to serve the company has accounting and financial expertise.
However, a company whose shares are traded in certain exchanges outside of Israel,
including Nasdaq Global Market, such as our company, is not required to nominate at least
one external director who has accounting and financial expertise as long as another
independent director for audit committee purposes who has such expertise serve on board of
directors pursuant to the applicable foreign securities laws. In such case all external
directors will have professional qualification.

Regulations
adopted pursuant to that recent legislation provide that a director with accounting and
financial expertise is a director that due to his education, experience and skills has
high expertise and understanding in business-accounting matters and financial statements
in a way that enables him to deeply understand the financial statements of the company and
to facilitate discussion with respect to the way the financial data should be presented.
The assessment of the accounting and financial expertise of a director shall be made by
the board of directors, who shall take into consideration, inter alia, the
education, experience and knowledge of the director in the following subjects:

| | (1) | Accounting
matters and audit accounting matters, which are typical to the sector                in
which the company works and of companies with the same size and complexity as
               of the company;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The
duties and obligations of the auditing accountant; and
| | --- | ----------------------------------------------------------

| | (3) | Preparing
of financial statements and their approval according to applicable                law,
including securities law.
| | --- | --------------------------------------------------------------------------------------------------------------------------

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The
regulations also provide that a director with professional qualifications is a director
who meets one of the following conditions:

| | (1) | A
holder of an academic degree in one of the following: economics, business
               administration, accounting, law, or public administration;
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | A
holder of another academic degree or is otherwise a graduate of higher
               education in a major field of business of the company or in other field
which is                relevant to the role;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | He
has experience of at least five years in one of the following, or that he has
               cumulative experience of at least five years in two or more of the
following:
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (a) | A
senior position in the business management of a corporation which has a
               significant scope of business;
| | --- | -----------------------------------------------------------------------------------------------------------------------

| | (b) | A
senior public position or in a senior role in the public service; or
| | --- | ----------------------------------------------------------------------

| | (c) | A
senior position in the companys major fields of business.
| | --- | ------------------------------------------------------------

According
to the Companies Law, the board of directors of a public company must establish the
minimum number of board members that are to have accounting and financial expertise while
considering, inter alia, the nature of the company, its size, the scope and
complexity of its operations and the number of directors stated in the articles of
association of the company.

In
April 2006, the board of directors resolved that the minimum number of board members that
need to have accounting and financial expertise, including the external director with
accounting and financial expertise is one (1).

The
board of directors determined that each of Mr. Dan Falk and Ms. Naama Zeldis has
accounting and financial expertise as described in the regulations promulgated pursuant to
Companies law, and that, therefore, the requirements of the minimum number of board
members that need to have accounting and financial expertise, as set by the board of
directors, has been met.

Our
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, subject to specific events as detailed in our Articles of Association and
relevant rules.

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sLaw, an acquisition
pursuant to which a purchaser shall hold a controlling stake, that is defined
as 25% or more of the voting rights if no other shareholder holds a controlling stake, 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 45% of the voting rights, may
not be performed 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
an 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.

Acquisition.
          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.

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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 any type
of controlling means 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 any type of
controlling means of the acquiring company) object to and do not vote in favor of the
merger. If a person holds 25% or more of any type of controlling means 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 30 days have passed from the time that
the general meeting of each ofthe merging companies was held and at least 50 days
have passed from the date on which the merger proposal was sent to 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 150,000,000 NIS (approximately $33,000,000, an amount
which is adjusted on an 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

On
April 24, 2006, we entered into an Asset Purchase Agreement with HyperNex, a Delaware
corporation located at State College, Pennsylvania and its shareholders providing for the
acquisition by us of substantially all the assets of HyperNex and our assumption of
certain specified liabilities, including liabilities accruing after the closing relating
to contracts assumed by Nova. In August 2006, Nova and HyperNex amended and restated the
Asset Purchase Agreement to reduce the amount of shares to be issued by Nova from 1.8
million, as originally agreed, to 1.6 million to reflect the assumption of certain
additional liabilities. On August 8, 2006 we completed the purchase of substantially all
the assets of HyperNex and assumed certain liabilities, including those accruing after the
closing which relate to contracts assumed by us. 1,208,000 ordinary shares were issued to
HyperNex, which were distributed to the preferred stockholders of HyperNex. 392,000 of
ordinary shares were allocated to managers and the employees of HyperNex. Shares issued to
HyperNex managers will vest over a thirty (30) month period as follows: (i) a third of the
these shares vested on November 8, 2006 which is three (3) months after grant date; (ii) a
third of these shares will vest on November 8, 2007 which is fifteen (15) months after
grant date; and (iii) a third of these shares will vest thirty (30) months after grant
date. The shares issued to employees of HyperNex will vest over a three (3) year period
with a third of such shares vesting on each anniversary as of the grant date. The Asset
Purchase Agreement, as amended and restated, also provides the recipients of our ordinary
shares with certain limited piggy-back registration rights with respect to our ordinary
shares they receive. These piggy-back registration rights are subject to certain customary
carve-outs and limitations as well as other limitations set forth in the Amended and
Restated Asset Purchase Agreement. In connection with the closing, each HyperNex employee
receiving shares also entered into a restricted stock agreement with respect to our
ordinary shares received, an employment agreement and a non-compete agreement.

On
February 28, 2007, we entered into a Share Purchase Agreement with four investors,
including Clal Electronics Industries Ltd., pursuant to which such investors purchased in
the aggregate 1,937,983 ordinary shares of the Company, at a price of $2.58 per share, for
gross proceeds of $5 million. In connection with this transaction, we issued warrants to
these investors to purchase 1,453,485 additional ordinary shares at an exercise price of
$3.05 per share.

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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.

# Israeli 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. Although the Company considers that the
transfer pricing policy adopted with foreign affiliates is economically fair, we cannot be
sure that our policy will accord with any future interpretation.

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 49% 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
allowed the Company 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.

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. This change is not expected to have material affect on the companys
financial results and tax payments.

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. This
change is not expected to have material affect on the companys financial results and
tax payments.

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# General Corporate Tax
Structure

Income
not eligible for approved enterprise benefits is taxed in 2006 at a regular
corporate tax rate of 31%. The tax rate will be reduced in subsequent tax years as
follows: in 2007 29%, in 2008 27%, in 2009 26% and thereafter 25%. This change does not
have a material effect on our financial statements. However, the effective rate of tax
payable by a company which derives income from an approved enterprise may be
considerably lower  see discussion 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 Trade and Labor, 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 35% (or less as described above), 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.

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 2012.

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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.

On
April 1, 2005, an amendment to the Investment Law came into effect (the
Amendment) and has significantly changed the provisions of the Investment Law. The
Amendment limits the scope of enterprises which may be approved by the Investment Center
by setting criteria for the approval of a facility as a Privileged Enterprise, such as
provisions generally requiring that at least 25% of the Privileged Enterprises
Income will be derived from export. Additionally, the Amendment enacted major changes in
the manner in which tax benefits are awarded under the Investment Law so that companies no
longer require Investment Center approval in order to qualify for tax benefits. However,
the Investment Law provides that terms and benefits included in any certificate of
approval already granted will remain subject to the provisions of the law as they were on
the date of such approval. Therefore, the Israeli companies with Approved Enterprise
status will generally not be subject to the provisions of the Amendment. As a result of
the amendment, tax-exempt income generated under the provisions of the new law, will
subject the Company to taxes upon distribution or liquidation.

# 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;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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.

# Taxation of our
Shareholders

# Capital Gain Tax

Capital
gain tax is imposed on the disposal of capital assets by an Israeli resident, and
on the disposal of such assets by a non- Israel resident if those assets are either (i)
located in Israel; (ii) are shares or a right to a share in an Israeli resident
corporation (iii) represent, directly or indirectly, rights to assets
located in Israel. The Israeli Tax Ordinance distinguishes between Real Gain
and the Inflationary Surplus. Real Gain is the excess of the total capital
gain over Inflationary Surplus computed generally on the basis of the increase in the
Israeli CPI between the date of purchase and the date of disposal.

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The
capital gain accrued by individuals on the sale of an asset purchased on or after January
1, 2003 will be taxed at the rate of 20%. However, if the individual shareholder is a
Controlling Shareholder (i.e., a person who holds, directly or
indirectly, alone or together with other, 10% or more of one of the Israeli resident
companys means of control at the time of distribution or at any time during the
preceding 12 months period) such gain will be taxed at the rate of 25%. In addition,
capital gain derived by an individual claiming deduction of financing expenses in respect
of such gain will be taxed at the rate of 25%. The real capital gain derived by
corporation will be generally subject to tax at the rate of 25%. However, the real capital
gain derived from sale of securities, as defined in Section 6 of the Inflationary
Adjustment Law, by a corporation, which was subject upon December 31, 2005 to the
provisions of Section 6 of the Inflationary Adjustment Law, will be taxed at the corporate
tax rate (31% in 2006). The capital gain accrued at the sale of an asset purchased prior
to January 1, 2003 will be subject to tax at a blended rate. The marginal tax rate for
individuals (up to 49% in 2006) and the regular corporate tax rate for corporations (31%
in 2006) will be applied to the gain amount which bears the same ratio to the total gain
realized as the ratio which the holding period commencing at the acquisition date and
terminating on January 1, 2003 bears to the total holding period. The remainder of the
gain realized will be subject to capital gains tax at the rates applicable to an asset
purchased after January 1, 2003 (see aforementioned).

Individual
and corporate shareholder dealing in securities in Israel are taxed at the tax rates
applicable to business income (in 2006  31% tax rate for a corporation and a
marginal tax rate of up to 49% for individual). Notwithstanding the foregoing, if the
shareholder is a non-Israeli resident, then such taxation is subject to the provision of
any applicable double tax treaty. Moreover, capital gain derived from the sale of the
Shares by a non-Israeli shareholder may be exempt under the Israeli income tax ordinance
from Israeli taxation provided the following cumulative conditions are met: (i) the Shares
were purchased upon or after the registration of the Shares at the stock exchange, (ii)
the seller doesnt have a permanent establishment in Israel to which the derived
capital gain is attributed, and (iii) if the seller is a corporation, less than 25% of its
means of control are held by Israeli resident shareholders. In addition, the sale of the
Shares may be exempt from Israeli capital gain tax under an applicable tax treaty. Thus,
the U.S.-Israel Double Tax Treaty exempts U.S. resident from Israeli capital gain tax in
connection with such sale, provided (i) the U.S. resident owned, directly or indirectly,
less than 10% of an Israeli resident companys voting power at any time within the 12
 month period preceding such sale; (ii) the seller, being an individual, is present
in Israel for a period or periods of less than 183 days at the taxable year; and (iii) the
capital gain from the sale was not derived through a permanent establishment of the U.S.
resident in Israel.

Either
the seller, the Israeli stockbrokers or financial institution through which the sold
securities are held are obliged, subject to the above mentioned exemptions, to withhold
tax upon the sale of securities from the real capital gain at the rate of 25% in respect
of a corporation and 20% in respect of an individual.

Generally,
within 30 days of a transaction a detailed return, including a computation of the tax due,
should be submitted to the Israeli Tax Authority, and an advanced payment amounting to the
tax liability arising from the capital gain is payable. At the sale of traded securities,
the aforementioned detailed return may not be submitted and the advanced payment should
not be paid if all tax due was withheld at source according to applicable provisions of
the Israeli income tax ordinance and regulations promulgated thereunder. Capital gain
isalso reportable on the annual income tax return.

# Dividends

A
distribution of dividend from income attributed to an approved enterprise will
be subject to tax in Israel at the rate of 15%, subject to a reduced rate under any
applicable double tax treaty. A distribution of dividend from income, which is not
attributed to an Approved Enterprise to an Israeli resident individual will
generally be subject to income tax at a rate of 20%. However, a 25% tax rate will apply if
the dividend recipient is a Controlling Shareholder (i.e., a person who holds,
directly or indirectly, alone or together with other, 10% or more of one of the Israeli
resident companys means of control at the time of distribution or at any time during
the preceding 12 months period). If the recipient of the dividend is an Israeli resident
corporation, such dividend will be exempt from income tax provided the income from which
such dividend is distributed was derived or accrued within Israel.

Under
the Israeli Income Tax Ordinance, a non-Israeli resident (either individual or
corporation) is generally subject to an Israeli income tax on the receipt of dividends at
the rate of 20% (25% if the dividends recipient is a Controlling Shareholder
(as defined above)); those rates are subject to a reduced tax rate under an applicable
double tax treaty. Thus, under the Double Tax Treaty concluded between the State of Israel
and the U.S. the following rates will apply in respect of dividends distributed by an
Israeli resident company to a U.S. resident: (i) if the U.S. resident is a corporation
which holds during that portion of the taxable year which precedes the date of payment of
the dividend and during the whole of its prior taxable year (if any), at least 10% of the
outstanding shares of the voting stock of the Israeli resident paying corporation and not
more then 25% of the gross income of the Israeli resident paying corporation for such
prior taxable year (if any) consists of certain type of interest or dividends  the
tax rate is 12.5%, (ii) if both the conditions mentioned in section (i) above are met and
the dividend is paid from an Israeli resident companys income which was entitled to
a reduced tax rate applicable to an approved enterprise under the Israeli Law
for the Encouragement of Capital Investments of 1959 the tax rate is 15%, and (iii)
in all other cases, the tax rate is 25%. The aforementioned rates under the Israel U.S.
Double Tax Treaty will not apply if the dividend income was derived through a permanent
establishment of the U.S. resident in Israel.

- 55 -

---

---

An
Israeli resident company whose shares are listed in a stock exchange is obligated to
withhold tax, upon the distribution of a dividend attributed to an approved
enterprises income, from the amount distributed, at the following rates: (i) Israeli
resident corporation  15%, (ii) Israeli resident individual  15%, and (iii)
non-Israeli resident  15%, subject to a reduced tax rate under an applicable double
tax treaty. If the dividend is distributed from an income not attributed to the approved
enterprise, the following withholding tax rates will apply: (i) Israeli resident
corporation  0%, (ii) Israeli resident individual  20% (iii) non-Israeli
resident  20%, subject to a reduced tax rate under an applicable double tax treaty.

# U.S. Taxation

The
following describes the material United States federal income tax consequences of the
purchase, ownership and disposition of our 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;
| | - | -------------------------

- 56 -

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---

| |  | 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.

# 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 Dividends starting on page
55. 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 or 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, gain 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.

- 57 -

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# Passive Foreign
Investment Companies

In
general, a foreign (that is, non-U.S.) corporation will be a passive foreign investment
company (a PFIC) 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.

If
a corporation is treated as a PFIC 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 (both as described below), 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 PFIC 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 PFIC, 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 PFIC. Under the income test, less than 75% of our gross income was
passive income in 2006. 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 and there is no definitive method set forth in the
Code, U.S. Treasury Regulations or administrative or judicial interpretations thereof for
determining the value of a foreign corporations assets under the asset test. While
there are no definitive rules, the legislative history of the U.S. Taxpayer Relief Act of
1997 indicates that for purposes of the PFIC assets test, the total value of a
publicly-traded foreign corporations assets generally will be treated as equal to
the sum of the aggregate value of its outstanding stock plus its liabilities.

For
2006, while we continued to have substantial amounts of cash and short-term deposits and
the market value of our ordinary shares continued to decrease, a determination of the
value of our assets by reference to the market value of our ordinary shares and our
liabilities results in a conclusion that the average value of our passive assets did not
exceed 50% of the average value of our gross assets in 2006. Nonetheless, there is a risk
that we were a PFIC in 2006 or we will be a PFIC in 2007 or subsequent years because, as
indicated above, there are no definitive rules regarding the manner in which a company
should value its assets for purposes of the PFIC asset test.

Available
Elections. If we will be treated as a PFIC 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. If a U.S. holder makes a
qualified electing fund election (a QEF election) for all taxable years that
the U.S. holder holds our ordinary shares and during which we are treated as a PFIC, 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. In order to make (or maintain) a QEF election,
the U.S. holder must annually complete and file IRS From 8621. In addition, we must make
certain information regarding our net capital gains and ordinary earnings available to the
U.S. holder and permit our books and recorded to be examined to verify such information.
Therefore, if you determine that we are a PFIC for any year and make a request to us in
writing at the address on the cover our latest Annual Report on Form 20-F, Attention Chief
Financial Officer, for the information required to make a QEF election, we will promptly
make the information available to you and comply with any other applicable requirements of
the Code.

- 58 -

---

---

A
QEF election, once made with respect to us, applies to the tax year for which it was made
and to all subsequent tax years, unless the election is invalidated or terminated, or the
IRS consents to revocation of the election. If you make a QEF election and we cease to
qualify as a PFIC in a subsequent tax year, the QEF election will remain in effect,
although it will not be applicable during those tax years in which we do not qualify as a
PFIC. Therefore, if we  after ceasing to qualify as a PFIC  again qualify as a
PFIC in a subsequent tax year, the QEF election will be effective and you will again be
subject to the rules described above for US holders making QEF elections in such tax year
and any subsequent tax years in which we qualify as a PFIC. A QEF election also remains in
effect even after you dispose of all of your direct and indirect interest in our ordinary
shares. As a result, if you subsequently acquire any of our ordinary shares or an interest
in any of our ordinary shares, you will again be subject to the rules described above for
US holders making a QEF election for each tax year in which we qualify as a PFIC.

Alternatively,
if a U.S. holder elects to mark-to-market its ordinary shares, the U.S. holder
will generally include in its income any excess of the fair market value of our ordinary
shares at the close of each taxable year over the holders adjusted basis in such
ordinary shares. 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 ordinary shares. An election to mark-to-market generally will apply to the taxable
year in which the election is made and all subsequent taxable years. A mark-to-market
election applies to the tax year for which the election is made and to each subsequent
year, unless our ordinary shares cease to be marketable, as specifically defined, or the
IRS consents to revocation of the election. No view is expressed regarding whether our
ordinary shares are marketable for these purposes or whether the election will be
available.

If
a U.S. holder makes either the QEF election or the mark-to-market election, 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. The
elections must be made with the U.S. holders federal income tax return for the year
of election, filed by the due date of the return (as it may be extended) or, under certain
circumstances provided in applicable Treasury Regulations, subsequent to that date.

The
foregoing discussion relating to the QEF election and mark-to-market elections assumes
that a U.S. holder makes the applicable election with respect to the first year in which
Nova qualifies as a PFIC. If the election is not made for the first year in which Nova
qualifies as a PFIC, the procedures for making the election and the consequences of
election will be different.

A
number of specific rules and requirements apply to both the QEF election and the
mark-to-market election, and you are urged to consult your tax advisor concerning our PFIC
status and the various elections you can make.

# 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 28%. 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.

- 59 -

---

---

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, 100 Fifth Street, N.E.,
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 2006 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 2006, the value of the NIS increased against the
dollar by 8.62%, while the consumer price index in Israel decreased approximately 0.1 %.
During 2005, the value of the NIS decreased against the dollar by 5.6%, while the consumer
price index in Israel increased 2.39%.During 2004, the value of the NIS increased against
the dollar by 1.62%, while the consumer price index in Israel increased 2.38%. 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, 2006, 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 2006, the value of the Euro increased against the dollar by approximately 11.5%.
The strength of the dollar against the Euro and the NIS has decreased the average dollar
value of expenses valued in those currencies.

Based
upon historical US dollar currency movement, the Company does not believe that reasonably
possible near-term changes in the US dollar currency of 5% will result in a material
effect on future earnings, financial position or cash flows of the Company.

In
2004, the Company entered into currency-forward and currency-put options transactions
(NIS/dollar) to insure (NIS/dollar) the rate in 2004. The total accumulated sum insured in
the year was approximately $7.7 million with settlement dates through 2005, and the
results of these transactions did not have, as expected, any material effect on the
operational results of the Company.

In
2005, the Company entered into currency-forward and currency-put and currency call options
transactions (NIS/dollar, Euro/dollar, Yen/dollar) to insure (NIS/dollar, Euro/dollar,
Yen/dollar) the rate in 2005. The total accumulated sum insured in the year was
approximately $4.25 million with settlement dates through 2005, and the results of these
transactions did not have, as expected, any material effect on the operational results of
the Company.

- 60 -

---

---

In
2006, the Company entered into currency-forward transactions (NIS/dollar, Euro/dollar,
Yen/dollar) to insure (NIS/dollar, Euro/dollar, Yen/dollar) the rate in 2006. The total
accumulated sum insured in the year was approximately $15.2 million with settlement dates
through 2006, 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 net proceeds of $49 million. As of March 31, 2007,
approximately $26 million of the net proceeds had been used for working capital
requirements and $7 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
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, as
amended (the Exchange Act)) were effective so as to provide reasonable
assurance 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.

In
designing and evaluating our disclosure controls and procedures, we and our management
recognize that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives, and our
management necessarily was required to apply its judgment in evaluating and implementing
possible controls and procedures.

Changes in internal
controls

During
the fiscal year ended December 31, 2006 there were no changes in our internal controls
over financial reporting that materially affected, or is reasonably likely to materially
affect, our internal controls over financial reporting.

In
early 2006, and before publishing the financial results for year 2005, we initiated a
review of our recognition of revenues in 2004 and for the first three quarters of 2005. As
a result of this review, we concluded that we did not properly recognize revenues from
multiple deliverables sales arrangements in 2004 which included upgrade commitments or
trade-in rights. We also concluded that we did not properly recognize revenues in the
first three quarters of 2005 from multiple deliverables sales arrangements that included
upgrade commitments or trade-in rights, and in the first quarter of 2005 from extended
warranty contracts. This review led us to restate our 2004 financial statements and to
correct our financial results for the first three quarters of 2005.

- 61 -

---

---

Accordingly,
we implemented several additional disclosure controls in 2006, including a quarterly
review of all purchase orders and agreements governing the purchase orders, stricter
controls to ensure that all multiple deliverables sales arrangements are properly approved
by management in writing, and monitoring of the accuracy and proper use of new computer
systems which are used to allocate revenue from warranty contracts.

|Item 16. | Reserved
|-------- | --------

Reserved.

|Item 16A. | Audit
Committee Financial Expert
|--------- | --------------------------------

Our
Board of Directors has determined that our Audit Committee includes one audit committee
financial expert, as defined by Item 16A of Form 20-F, Mr. Dan Falk. Mr. Dan Falk is an
independent director as such term is defined by Rule 4200(15) of the NASDAQ Stock Market.

|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 About
Nova.

|Item 16C. | Principal
Accountant Fees and Services
|--------- | --------------------------------------

During
each of the last two fiscal years, Brightman Almagor & Co., an independent registered
accounting firm and a member firm of Deloitte Touche Tohmatsu (Deloitte &
Touche) has acted as the our registered public accounting firm and independent
auditors.

Audit
Fees

Deloitte
& Touche billed the Company approximately $43,000 for audit services for fiscal 2005,
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 $57,000 for audit services in fiscal 2006.

Audit-Related
Fees

Deloitte
& Touche did not bill for any audit-related services in 2005 or 2006, 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 2005. Deloitte & Touche billed the Company approximately $4,000
for tax advice in fiscal 2006.

All
Other Fees

Deloitte
& Touche billed the Company approximately $5,000 for SEC compliance related services
other than Audit Fees and Tax Fees described above for fiscal 2005. Deloitte & Touche
billed the Company approximately $4,000 for services related to the Office of Chief
Scientist and Investment Center other than Audit Fees and Tax Fees described above for
fiscal 2005.

- 62 -

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---

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 2005 and 2006, the Companys Audit Committee approved all of the services
provided by Deloitte & Touche.

|Item 16D. | Exemptions
from the Listing Standards for Audit Committees
|--------- | ----------------------------------------------------------

The
Company has not obtained any exemption from applicable audit committee listing standards.

|Item 16E. | Purchases
of Equity Securities by the Issuer and Affiliates Purchasers
|--------- | ----------------------------------------------------------------------

In
2006, neither the Company nor any affiliated purchaser (as defined in the Exchange Act)
purchased any of the Companys ordinary shares.

# PART III

|Item 17. | Financial
Statements
|-------- | --------------------

Not
applicable.

|Item 18. | Financial
Statements
|-------- | --------------------

See
pages F-1 through F-23.

|Item 19. | Exhibits
|-------- | --------

See
Exhibit Index.

- 63 -

---

---

# NOVA MEASURING
INSTRUMENTS LTD.

# CONSOLIDATED FINANCIAL
STATEMENTS 
AS OF DECEMBER 31, 2006



---

---

# NOVA MEASURING
INSTRUMENTS LTD.

# CONSOLIDATED FINANCIAL
STATEMENTS 
AS OF DECEMBER 31, 2006

Contents

|                                                                                | Page    
|------------------------------------------------------------------------------- | --------
|
|
|
|
|Report of Independent Registered Public Accounting Firm                         | F-2     
|                                                                               
|Consolidated Financial Statements                                              
|                                                                               
|Balance Sheets- December 31, 2006 and 2005                                      | F-3     
|                                                                               
|Statements of Operations - Years Ended December 31, 2006, 2005 and 2004         | F-4     
|                                                                               
|Statements of Changes in Shareholders' Equity and Comprehensive Income (Loss) -
|Years Ended December 31, 2006, 2005 and 2004                                    | F-5     
|                                                                               
|Statements of Cash Flows - Years Ended December 31, 2006, 2005 and 2004         | F-6-F-7 
|                                                                               
|Notes to Consolidated Financial Statements                                      | F-8-F-23



---

---

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM 
TO THE SHAREHOLDERS OF NOVA MEASURING
INSTRUMENTS LTD.

We have audited the consolidated
balance sheets of Nova Measuring Instruments Ltd. (the Company) and its
subsidiaries as of December 31, 2006 and 2005, 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, 2006. 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 the 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. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, 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,
2006 and 2005, and their consolidated results of operations and cash flows for each of the
three years in the period ended December 31, 2006, in conformity with accounting
principles generally accepted in the United States of America

Brightman Almagor & Co.
Certified Public Accountants (Israel)
A member firm of Deloitte Touche Tohmatsu
Tel Aviv, Israel
February 28, 2007

F - 2

---

---

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

|                                                             | As of December 31,
|------------------------------------------------------------ | ------------------
|
|
|
|
|CURRENT ASSETS                                               |                   
|Cash and cash equivalents                                    |                   
|Short-term interest-bearing bank deposits                    |                   
|Short-term investments                                       |                   
|Held to maturity securities                                  |                   
|Trade accounts receivable (net of $14 for doubtful accounts) |                   
|Inventories (Note 4)                                         |                   
|Other current assets                                         |                   
|                                                             |                   
|                                                             |                   
|                                                             |                   
|LONG-TERM ASSETS                                             |                   
|Long-term interest-bearing bank deposits                     |                   
|Held to maturity securities                                  |                   
|Other long-term assets                                       |                   
|Severance pay funds (Note 8)                                 |                   
|                                                             |                   
|                                                             |                   
|                                                             |                   
|                                                             |                   
|FIXED ASSETS, NET (Note 5)                                   |                   
|                                                             |                   
|                                                             |                   
|INTANGIBLE ASSETS, NET (Note 6)                              |                   
|                                                             |                   
|                                                             |                   
|Total assets                                                 |                   
|                                                             |                   
|                                                             |                   
|CURRENT LIABILITIES                                          |                   
|Trade accounts payable                                       |                   
|Deferred revenue                                             |                   
|Other current liabilities (Note 7)                           |                   
|                                                             |                   
|                                                             |                   
|                                                             |                   
|LONG-TERM LIABILITIES                                        |                   
|Liability for employee severance pay (Note 8)                |                   
|Deferred revenue                                             |                   
|Other long-term liability                                    |                   
|                                                             |                   
|                                                             |                   
|                                                             |                   
|COMMITMENTS AND CONTINGENCIES (Note 9)                       |                   
|                                                             |                   
|SHAREHOLDERS' EQUITY (Note 10)                               |                   
|Ordinary shares, NIS 0.01 par value - authorized 40,000,000  |                   
|shares, issued and outstanding 17,104,523                    |                   
|and 15,457,471 shares, respectively                          |                   
|Additional paid-in capital                                   |                   
|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 - 3

---

---

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

|                                                               | Year ended December 31,
|-------------------------------------------------------------- | -----------------------
|
|
|
|
|REVENUES:                                                      |                        
|Product sales                                                  |                        
|Services                                                       |                        
|                                                               |                        
|                                                               |                        
|                                                               |                        
|                                                               |                        
|COST OF REVENUES:                                              |                        
|Product sales                                                  |                        
|Services                                                       |                        
|                                                               |                        
|                                                               |                        
|                                                               |                        
|GROSS PROFIT                                                   |                        
|                                                               |                        
|                                                               |                        
|OPERATING EXPENSES:                                            |                        
|                                                               |                        
|Research and development, net of participation                 |                        
|by the Office of Chief Scientist of $1,862, $1,896 and $1,926, |                        
|respectively (Note 9)                                          |                        
|Sales and marketing                                            |                        
|General and administrative                                     |                        
|                                                               |                        
|                                                               |                        
|                                                               |                        
|                                                               |                        
|OPERATING LOSS                                                 |                        
|                                                               |                        
|INTEREST INCOME, NET                                           |                        
|                                                               |                        
|                                                               |                        
|NET LOSS FOR THE YEAR                                          |                        
|                                                               |                        
|                                                               |                        
|LOSS PER SHARE:                                                |                        
|                                                               |                        
|Basic and diluted  loss per share                              |                        
|                                                               |                        
|                                                               |                        
|Shares used in calculation of basic and diluted loss per share |                        
|                                                               |                        

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

F - 4

---

---

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

|                                                    | Ordinary
shares | Additional
Paid-in
Capital | Deferred
stock-based
compensation | Accumulated
other
Comprehensive
Income (loss) | Accumulated
Deficit | Total
Comprehensive
Income (loss) | Total
Shareholders'
Equity (loss)
|--------------------------------------------------- | --------------- | -------------------------- | --------------------------------- | --------------------------------------------- | ------------------- | --------------------------------- | ---------------------------------
|
|
|
|
|Balance as of January 1, 2004                       |                 |                            | $                                 | 46                                            |                     | $                                 | 72,785                           
|                                                    |                 |                           
|Employee share-based plans                          |                 |                            | (*)                               | -                                             |                     |                                   | 548                              
|Amortization of deferred equity- based compensation |                 |                            |                                   |                                               |                     |                                   |                                  
|Change in fair market value of hedging derivatives  |                 |                            |                                   |                                               |                     |                                   |                                  
|Net loss for the year                               |                 |                            |                                   |                                               |                     |                                   |                                  
|                                                    |                 |                            |                                   |                                               |                     |                                   |                                  
|Total comprehensive loss                            |                 |                            |                                   |                                               |                     |                                   |                                  
|                                                    |                 |                            |                                   |                                               |                     |                                   |                                  
|                                                    |                 |                           
|Balance as of December 31, 2004                     |                 |                            | $                                 | 46                                            |                     | $                                 | 73,333                           
|Shares issued under employee share-based plans      |                 |                            | (*)                               | -                                             |                     |                                   | 275                              
|Equity-based compensation                           |                 |                            |                                   |                                               |                     |                                   | 28                               
|Amortization of deferred equity- based compensation |                 |                            |                                   |                                               |                     |                                   |                                  
|Change in fair market value of hedging derivatives  |                 |                            |                                   |                                               |                     |                                   |                                  
|Net loss for the year                               |                 |                            |                                   |                                               |                     |                                   |                                  
|                                                    |                 |                            |                                   |                                               |                     |                                   |                                  
|Total comprehensive loss                            |                 |                            |                                   |                                               |                     |                                   |                                  
|                                                    |                 |                            |                                   |                                               |                     |                                   |                                  
|                                                    |                 |                           
|Balance as of December 31, 2005                     |                 |                            | $                                 | 46                                            |                     | $                                 | 73,636                           
|                                                    |                 |                           
|Employee share-based plans                          |                 |                            | (*)                               | -                                             |                     |                                   | 83                               
|Restricted shares issued to employees               |                 |                            |                                   | 1                                             |                     |                                   | 346                              
|Equity-based compensation                           |                 |                            |                                   |                                               |                     |                                   | 315                              
|Shares issued in acquisition                        |                 |                            |                                   | 3                                             |                     |                                   | 2,305                            
|Change in fair market value of hedging derivatives  |                 |                            |                                   |                                               |                     |                                   |                                  
|Net loss for the year                               |                 |                            |                                   |                                               |                     |                                   |                                  
|                                                    |                 |                            |                                   |                                               |                     |                                   |                                  
|Total comprehensive loss                            |                 |                            |                                   |                                               |                     |                                   |                                  
|                                                    |                 |                            |                                   |                                               |                     |                                   |                                  
|                                                    |                 |                           
|Balance as of December 31, 2006                     |                 |                            | $                                 | 50                                            |                     | $                                 | 76,685                           
|                                                    |                 |                            |                                   |                                               |                     |                                   |                                  

(*)
          Less than $1

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)

|                                                                                     | Year ended December 31,
|------------------------------------------------------------------------------------ | -----------------------
|
|
|
|
|CASH FLOWS - OPERATING ACTIVITIES                                                    |                        
|                                                                                     |                        
|Net loss for the year                                                                |                        
|Adjustments to reconcile net loss to net cash used in operations:                    |                        
|Depreciation and amortization                                                        |                        
|Net recognized gains on investments                                                  |                        
|Amortization of deferred equity-based compensation                                   |                        
|Increase (decrease) in liability for employee termination benefits, net              |                        
|Decrease (increase) in trade accounts receivable                                     |                        
|Decrease (increase) in other current assets and other long term assets               |                        
|Increase in inventories                                                              |                        
|Increase (decrease) in trade accounts payables and other       long-term liabilities |                        
|Increase (decrease) in short term and long-term deferred income                      |                        
|Increase (decrease) in other current liabilities                                     |                        
|                                                                                     |                        
|Net cash - operating activities                                                      |                        
|                                                                                     |                        
|CASH FLOWS - INVESTING ACTIVITIES                                                    |                        
|                                                                                     |                        
|Decrease (increase) in short-term interest-bearing bank deposits                     |                        
|Decrease (Increase) in short term investments                                        |                        
|Proceeds from held to maturity securities                                            |                        
|Investment in short-term held to maturity securities                                 |                        
|Investment in long-term held to maturity securities                                  |                        
|Investment in long-term interest-bearing bank deposits                               |                        
|Acquisition of assets and liabilities - Schedule A                                   |                        
|Additions to fixed assets                                                            |                        
|                                                                                     |                        
|                                                                                     |                        
|Net cash - investing activities                                                      |                        
|                                                                                     |                        
|CASH FLOWS - FINANCING ACTIVITIES                                                    |                        
|                                                                                     |                        
|Shares issued under employee share-based plans                                       |                        
|                                                                                     |                        
|                                                                                     |                        
|Net cash - financing activities                                                      |                        
|                                                                                     |                        
|Decrease in cash and cash equivalents                                                |                        
|Cash and cash equivalents - beginning of year                                        |                        
|                                                                                     |                        
|Cash and cash equivalents - end of year                                              |                        
|                                                                                     |                        

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

F - 6

---

---

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

# SCHEDULE A 
ACQUISITION OF ASSETS AND LIABILITIES

|Acquisition of Assets and liabilities | 2 0 0 6
|------------------------------------- | -------
|
|
|
|
|Working Capital                       |        
|Long lived assets                     |        
|Other identifiable intangible assets  |        
|Long term liabilities                 |        
|Goodwill arising on acquisition       |        
|                                      |        
|                                      |        
|                                      |        
|Issuance of shares                    |        
|                                      |        
|Cash paid, net                        |        
|                                      |        

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

F - 7

---

---

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

|NOTE 1 |  | GENERAL
|------ | - | -------

| | A. | Business
Description
| | -- | --------------------

| | Nova
Measuring Instruments (the Company) was incorporated in May 1993 and
commenced operations in October 1993 in the design, development and production of
integrated process control systems, used in the manufacturing of semiconductors. In
October 1995, the Company began manufacturing and marketing its systems. In addition, the
Company is continuing research and development for the next generation of its products
and additional applications for such products. The Company operates in one operating
segment.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company has wholly owned
subsidiaries in the United States of America (the U.S.), Japan, The
Netherlands and Taiwan. All companies (the subsidiaries) are mainly engaged in
pre-sale activities and providing technical support to customers.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
industry in which the Company operates is characterized by rapid technological
development in a competitive environment. Substantially most of the Companys
current sales are derived from a single product line for usage exclusively by the
semiconductor industry, whose business is highly cyclical. The Company depends on a
limited number of suppliers, and at times a sole supplier. Any disruption or termination
of the suppliersoperations may adversely affect the Companys production
capabilities. In addition, certain of the Companys development projects are in the
early stages and there can be no assurance that these projects will be successful.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
ordinary shares of the Company are traded on the NASDAQ Global Market since April, 2000.
The ordinary shares are also traded on the Tel-Aviv Stock Exchange, since June, 2002.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Use
of Estimates in the Preparation of Financial Statements
| | -- | -----------------------------------------------------------

| | 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 as
of the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those estimates.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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
|------ | - | -------------------------------

| | The
Companys consolidated 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. | Financial
Statements in U.S. Dollars
| | -- | ------------------------------------

| | The
currency of the primary economic environment in which the operations of the Company and
its subsidiaries are conducted is the U.S. dollar (the dollar). Accordingly,
the Company uses the dollar as its functional and reporting currency. Certain of the
dollar amounts in the financial statements may represent the dollar equivalent of other
currencies, including the New Israeli Shekel (NIS), and may not be
exchangeable for dollars.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Transactions
and balances denominated in dollars are presented at their dollar amounts. Non-dollar
transactions and balances are remeasured into dollars in accordance with the principles
set forth in Statement of Financial Accounting Standards (SFAS) No. 52, Foreign
Currency Translation of the Financial Accounting Standards Board (FASB).
Net financing income includes translation gains (losses), which were immaterial for all
years presented.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Principles
of Consolidation
| | -- | ---------------------------

| | The
Companys consolidated financial statements include the financial statements of the
Company and its wholly owned subsidiaries (the Group), after elimination of
material intercompany transactions and balances.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Cash
and Cash Equivalents
| | -- | -------------------------

| | Cash
and cash equivalents are comprised of cash and demand deposits in banks and other
short-term, highly liquid investments (primarily interest-bearing time deposits and
commercial papers) with maturity dates not exceeding three months from the date of
deposit.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Allowance
for Doubtful Accounts
| | -- | -------------------------------

| | The
allowance for doubtful accounts is computed on the specific identification basis.
| | -------------------------------------------------------------------------------------

| | E. | Held
to Maturity Securities
| | -- | ---------------------------

| | Securities
held to maturity include investments in debt securities that the Company has positive
intent and ability to hold to maturity. Securities held to maturity are measured at
amortized cost.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | Inventories
| | -- | -----------

| | Inventories
are presented at the lower of cost or market. Cost is determined as follows: Raw
materials-on the average cost basis. Finished goods and work in process  on actual
production cost basis (materials, labor and indirect manufacturing costs).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.)
|------ | - | ---------------------------------------

| | G. | Fixed
assets
| | -- | ------------

| | Fixed
assets are presented at cost, net of accumulated depreciation. Annual depreciation is
calculated based on the straight-line method over the shorter of the estimated useful
lives of the related assets or terms of the related leases. Estimated useful life, in
years, is as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                | Years
| | ------------------------------ | -----
|
|
|
|
| | Electronic equipment           | 2-7  
| | Office furniture and equipment | 7-17 

| | Leasehold
improvements are amortized using the straight-line method, over the shorter of the lease
term, including renewal options, or the useful lives of the improvements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived
Assets of the FASB, management reviews long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable based on estimated future undiscounted cash flows. If so indicated an
impairment loss would be recognized for the difference between the carrying amount of the
asset and its fair value.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | H. | Acquisition-related
intangible assets
| | -- | -------------------------------------

| | The
Company accounts for its business combinations in accordance with SFAS No. 141 Business
Combinations (SFAS 141) and the related acquired intangible assets and
goodwill in accordance with SFAS No. 142 Goodwill and Other Intangible Assets (SFAS
142). SFAS 141 specifies the accounting for business combinations and the criteria
for recognizing and reporting intangible assets apart from goodwill.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Goodwill
is the amount by which the acquisition cost exceeds the fair values of identifiable
acquired net assets on the date of purchase. SFAS 142 requires that good will not be
amortized but instead be tested for impairment in accordance with the provisions of SFAS
142 at least annually and more frequently upon the occurrence of certain events.
Acquisition-related intangible assets are reported at cost, net of accumulated
amortization. Purchased technology and customer base are presented at cost, net of
accumulated amortization, and are amortized over their estimated useful lives of 4 to 6
years using the straight-line method.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | I. | Accrued
Warranty Costs
| | -- | ----------------------

| | Accrued
warranty costs are calculated in respect of the warranty period on the Companys
products (generally one year) and are based on the Companys prior experience and in
accordance with managements estimate. See Note 7B for disclosure with regard to
accrued warranty costs.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | J. | Revenue
Recognition
| | -- | -------------------

| | Revenues
from the sale of products are recognized when all the following criteria have been met: a
persuasive evidence of an arrangement exists, title has transferred, the price is fixed
or determinable, collection of resulting receivables is probable and there are no
remaining significant obligations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with EITF 00-21 for arrangements containing multiple elements, fair value of
each element is determined based on specific objective evidence and revenue is allocated
to each element based upon its fair value. The revenue relating to the undelivered
elements is deferred at estimated fair value until delivery of the deferred elements. If
specific objective evidence of fair value does not exist for all elements to support the
allocation of the total fee among all delivered and undelivered elements of the
arrangement, revenue is deferred until such evidence exist for the undelivered elements,
or until all elements are delivered, whichever is earlier.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.)
|------ | - | ---------------------------------------

| | J. | Revenue
Recognition (cont.)
| | -- | ---------------------------

| | Service
contracts (which sometimes include application support) generally specify fixed payment
amounts for periods longer than one month, and are recognized on a straight line basis
over the term of the contract. Revenue from sale of spare parts is usually recognized
upon shipment of the parts.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
Service Revenue (Training, Time & Material, etc.) is recognized upon completion of
work.
| | ----------------------------------------------------------------------------------------------

| | K. | Research
and Development
| | -- | ------------------------

| | Research
and development costs are charged to operations as incurred. Amounts received or
receivable from the Government of Israel through the Office of the Chief Scientist (OCS)
as participation in certain research and development programs are offset against research
and development costs. The accrual for grants receivable is determined based on the terms
of the programs, provided that the criteria for entitlement have been met.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | L. | Income
Taxes
| | -- | ------------

| | The
Group accounts for income taxes utilizing the asset and liability method in accordance
with SFAS No. 109, Accounting for Income Taxes of the FASB. Current tax
liabilities are recognized for the estimated taxes payable on tax returns for the current
year. Deferred tax liabilities or assets are recognized for the estimated future tax
effects attributable to temporary differences between the income tax bases of assets and
liabilities and their reported amounts in the financial statements, and for tax loss
carryforwards. Measurement of current and deferred tax liabilities and assets is based on
provisions of enacted tax laws, and deferred tax assets are reduced, if necessary, by the
amount of tax benefits, the realization of which is not considered likely than not based
on available evidence.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | M. | Equity-Based
Compensation
| | -- | -------------------------

| | On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment, (SFAS 123(R)) which requires
companies to recognize the cost of employee services received in exchange for awards of
equity instruments based upon the grant-date fair value of those awards.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.)
|------ | - | ---------------------------------------

| | M. | Equity-Based
Compensation (Cont.)
| | -- | ---------------------------------

| | SFAS
123(R) supersedes the Companys previous accounting under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard as of January 1, 2006. In
accordance with the modified prospective transition method, the Companys
Consolidated Financial Statements for prior periods have not been restated to reflect,
and do not include, the impact of SFAS 123(R). Stock-based compensation expense
recognized under SFAS 123(R) in 2006 was $315, which consisted of stock-based
compensation expense related to employee stock options.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Prior
to the adoption of SFAS 123(R), the Company measured compensation expense for its
employee equity-based compensation plans using the intrinsic value method under APB 25
and related interpretations. As the exercise price of all options granted under these
plans was not below the fair market price of the underlying common stock on the grant
date, no equity-based compensation cost for stock options was recognized in the
Consolidated Statements of Operations in 2005 and 2004 under the intrinsic value method.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Stock
Options
| | -------------

| | The
fair value of each option grant is estimated on the date of grant using the Black-Scholes
option pricing model. This model was developed for use in estimating the value of
publicly traded options that have no vesting restrictions and are fully transferable. The
weighted average assumptions used in the model are outlined in the following table:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                          | 2006 
| | ------------------------ | -----
|
|
|
|
| | Risk-free interest rate  | 4.7% 
| | Expected life of options | 4.8  
| | Expected volatility      | 64.9%
| | Expected dividend yield  | None 

| | Restricted
Stock Awards
| | -----------------------

| | As
part of the Hypernex Inc. asset and liabilities acquisition (see Note 3) the Company
granted restricted stock awards to certain of its employees who were formerly employed by
Hypernex Inc. The restricted stock awards (the Award Shares) are ordinary
shares of the Company that vest over a period of up to 3 years from the grant date
..Vesting of the Award Shares is subject to the employees continuing service to the
Company. The compensation expense related to these awards was determined using the market
value of the Companys common stock on the date of the grant; compensation is
recognized over the service period.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pro
Forma Information under SFAS 123 for Periods Prior to 2006
| | --------------------------------------------------------------

| | Prior
to 2006, the Company followed the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation(SFAS 123),
as amended.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
purposes of estimating fair value in accordance with SFAS 123, the Company utilized the
Black-Scholes option-pricing model. The following assumptions were utilized in such
calculations for the years 2004 and 2003. No stock were granted during 2005 (all in
weighted averages):
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                          | 2004   
| | ------------------------ | -------
|
|
|
|
| | Risk-free interest rate  | 4.7%   
| | Expected life of options | 7 years
| | Expected volatility      | 56%    
| | Expected dividend yield  | none   

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.)
|------ | - | ---------------------------------------

| | M. | Equity-Based
Compensation (Cont.)
| | -- | ---------------------------------

| | Had
compensation cost for the Companys stock option plans been determined based on fair
value at the grant dates for all awards made in 2005 and 2004 in accordance with SFAS
123, as amended, the Companys pro forma loss per share would have been as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                            | 2 0 0 5 | 2 0 0 4
| | ---------------------------------------------------------- | ------- | -------
|
|
|
|
| | Pro forma net loss                                         |         |        
| | Net loss for the year, as reported                         |         |        
| | Deduct  - stock-based compensation determined under APB-25 |         |        
| | Add - stock-based compensation determined under SFAS 123   |         |        
| |                                                            |         |        
| | Pro forma net loss                                         |         |        
| |                                                            |         |        
| |                                                            |         |        
| | Pro forma loss per share                                   |         |        
| |                                                            |         |        
| | Basic and diluted- as reported                             |         |        
| |                                                            |         |        
| | Basic and diluted- pro forma                               |         |        
| |                                                            |         |        

| | In
November 2005, the Companys Board of Directors approved a plan to accelerate
the vesting of certain outstanding stock options.  Based on this action, most of the
stock options outstanding as of December 29, 2005 were vested and became fully
exercisable as of that date. Aside from the acceleration of the vesting date, the terms
and the conditions of the stock option award agreements governing the underlying stock
options grants remained unchanged. As a result of this plan, options to purchase
approximately 1,126,145 shares became exercisable. This action result in stock option
total expense in the Consolidated Statements of Operations over the next three years in
accordance with SFAS 123 (revised 2004) Share-Based Payment (SFAS 123(R))
to be approximately $1,491 lower than the expense would have been if the vesting had not
been accelerated. As a result of the accelerated vesting, the pro forma stock-based
employee compensation expense for 2005 increased by $28.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | N. | Loss
per Share
| | -- | --------------

| | Loss
per share is presented in accordance with SFAS 128 of the FASB, Earnings per Share. Pursuant
to this standard, basic earnings (loss) per share excludes the dilutive effects of
convertible securities and is 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 reflects 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 2006, 2005 and 2004. The number of potentially
dilutive securities excluded from diluted earnings per share due to the anti-dilutive
effect amounted to 1,362,037, 2,444,175 and 754,109 in 2006, 2005 and 2004, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---

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

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

| | O. | Derivative
Financial Instruments
| | -- | --------------------------------

| | SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities as
amended by 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 14 for disclosure of the derivative financial instruments in accordance with such
pronouncements.
| | ----------------------------------------------------------------------------------------------------------

| | P. | New
Accounting Pronouncements
| | -- | -----------------------------

| | In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
No. 157). The purpose of SFAS No. 157 is to define fair value, establish a framework for
measuring fair value, and enhance disclosures about fair value measurements. The
measurement and disclosure requirements are effective for the Company beginning in the
first quarter of fiscal year 2008. The Company is currently evaluating the impact that
SFAS No. 157 will have on its financial statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and FinancialLiabilities (SFAS No. 159). SFAS No. 159
permits companies to choose to measure certain financial instruments and certain other
items at fair value. The standard requires that unrealized gains and losses on items for
which the fair value option has been elected be reported in earnings. SFAS No. 159
is effective for the Company beginning in the first quarter of fiscal year 2008, although
earlier adoption is permitted. The Company is currently evaluating the impact that SFAS
No. 159 will have on its financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxesaninterpretation of FASB Statement No. 109 (FIN
48). The interpretation contains a two-step approach to recognizing and measuring
uncertain tax positions accounted for in accordance with SFAS No. 109, Accounting
for Income Taxes. The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates that it is more likely than not
that the position will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as the
largest amount which is more than 50% likely of being realized upon ultimate settlement.
The Company currently estimates that the adoption of FIN 48 is not expected to have a
material effect on the Companys financial position and results of operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 3 |  | BUSINESS
COMBINATION:
|------ | - | ---------------------

| | On
August 8, 2006, Nova completed the acquisition of substantially all of HyperNex Incs
(HyperNex) assets and assumed responsibility of most of HyperNex liabilities.
HyperNEx, Inc, a privately held Company focused on Wide-angle X-Ray Diffraction systems.
The total purchase price was $3,885, and it includes the issuance of the Companys
1.2 million common stock valued at $2,308, $789 funds remitted to HyperNex and estimated
direct transaction costs of $788. The acquisition has been accounted for under the
purchase method of accounting in accordance with SFAS No. 141 and SFAS No. 142. Under the
purchase method of accounting, the total estimated purchase price is allocated to the net
tangible and identifiable intangible assets and to liabilities assumed based on their
respective estimated fair values.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

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

|NOTE 3 |  | BUSINESS
COMBINATION (Cont.):
|------ | - | -----------------------------

| | The
allocation of the purchase price is detailed hereafter:
| | -----------------------------------------------------------

| |                                 | 2 0 0 6
| | ------------------------------- | -------
|
|
|
|
| | Property and equipment, net     |        
| | Inventory                       |        
| | Identifiable intangible assets: |        
| | Purchased technology            |        
| | Costumer base                   |        
| | Goodwill                        |        
| |                                 |        
| |                                 |        
| | Total assets acquired           |        
| |                                 |        
| | Trade accounts payable          |        
| | Current liabilities             |        
| | Long term liabilities           |        
| |                                 |        
| | Total liabilities assumed       |        
| |                                 |        
| | Net assets acquired             |        
| |                                 |        

|NOTE 4 |  | INVENTORIES
|------ | - | -----------

| | A. | 
| | -- | 

| |                 | As of December 31,
| | --------------- | ------------------
|
|
|
|
| | Raw materials   |                   
| | Work in process |                   
| | Finished goods  |                   
| |                 |                   
| |                 |                   
| |                 |                   

| | B. | In
the years ended December 31, 2006 and 2005 the Company wrote-off inventories in
the amounts of $393 and $116, respectively.
| | -- | ------------------------------------------------------------------------------------------------------------------------------

|NOTE 5 |  | FIXED
ASSETS, NET
|------ | - | -----------------

| |                                            | As of December 31,
| | ------------------------------------------ | ------------------
|
|
|
|
|
| | Electronic equipment                       |                   
| | Office furniture and equipment             |                   
| | Leasehold improvements                     |                   
| |                                            |                   
| |                                            |                   
| |                                            |                   
| | Accumulated depreciation and amortization: |                   
| | Electronic equipment                       |                   
| | Office furniture and equipment             |                   
| | Leasehold improvements                     |                   
| |                                            |                   
| |                                            |                   
| |                                            |                   
| | Net book value                             |                   
| |                                            |                   

F - 15

---

---

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

|NOTE 6 |  | INTANGIBLE
ASSETS, NET
|------ | - | ----------------------

| |                           | As of December 31,
2 0 0 6
| | ------------------------- | --------------------------
|
|
|
|
| | Cost:                     |                           
| | Goodwill                  |                           
| | Purchased Technology      |                           
| | Purchased Customer Base   |                           
| |                           |                           
| |                           |                           
| |                           |                           
| | Accumulated amortization: |                           
| | Purchased Technology      |                           
| | Purchased Customer Base   |                           
| |                           |                           
| |                           |                           
| |                           |                           
| | Net book value            |                           
| |                           |                           

|NOTE 7 |  | OTHER
CURRENT LIABILITIES
|------ | - | -------------------------

| | A. | 
| | -- | 

| |                                      | As of December 31,
| | ------------------------------------ | ------------------
|
|
|
|
| | Accrued salaries and fringe benefits |                   
| | Accrued warranty costs (See B below) |                   
| | Governmental institutions            |                   
| | Other                                |                   
| |                                      |                   
| |                                      |                   
| |                                      |                   

| | b. | Accrued
warranty costs:
| | -- | -----------------------

| |                                  | As of December 31,
| | -------------------------------- | ------------------
|
|
|
|
| | Balance as of beginning of year  |                   
| | Services provided under warranty |                   
| | Changes in provision             |                   
| |                                  |                   
| | Balance as of end of year        |                   
| |                                  |                   

|NOTE 8 |  | LIABILITY
FOR EMPLOYEE SEVERANCE PAY, NET
|------ | - | -----------------------------------------

| | 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.
| | ------------------------------------------------------------------------------------------------------------------------

| | Severance-pay
expense amounted to $796, $597 and $691 for 2006, 2005 and 2004, respectively.
| | --------------------------------------------------------------------------------------------

F - 16

---

---

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

|NOTE 9 |  | COMMITMENTS
AND CONTINGENCIES
|------ | - | -----------------------------

| | A. | The
Company has received grants in the aggregate amount of $9,778 from the OCS,
               as its participation of up to 60% of certain development costs. In
consideration                for such grants, the Company has undertaken to pay royalties
amounting to                3%-3.5% of the net sales of products developed, directly or
indirectly, from the                projects financed, not to exceed 100% of the grants
received. Refund of the                grants thereon is contingent on future sales and
the Company has no obligation                to refund grants if sufficient sales are not
generated. Royalty expense amounted                to $ 0 for the years 2006, 2005 and
for the year 2004. The balance of the                contingent liability to the OCS as
of December 31, 2006 was approximately                $6,245.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | The
Group rents its facilities under various operating lease agreements, which
          expire on various dates, the latest of which is in 2011. The minimum rental
          payments are as follows:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year | Amount (US dollars)
| | ---- | -------------------
|
|
|
|
| | 2007 |                    
| | 2008 |                    
| | 2009 |                    

| | Rental
expense for the facilities amounted to $1,060, $1,062 and $1,248 for 2006, 2005 and 2004,
respectively.
| | --------------------------------------------------------------------------------------------------------------

| | C. | The
Company leases vehicles under various operating lease agreements, which           expire
on various dates, the latest of which is in 2009. Vehicle lease expense
          amounted to $625, $717 and $669 for 2006, 2005 and 2004, respectively.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | In
March 2005 the Company filed a complaint in the United States District Court
          for the Northern District of California against one of its competitors
          (hereinafter-the Competitor) for infringing its US Patent. The
          patent relates to the Companys Integrated Metrology (IM) tools and the
          fundamental aspects of these systems. The Competitor has filed two counter
          claims for patent infringement. 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.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 10 |  | SHAREHOLDERS EQUITY
|------- | - | --------------------

| | A. | Share
Capital Transactions
| | -- | --------------------------

| | The
Company sponsored an employee stock purchase plan (ESPP) for the benefit of its
employees. Under the ESPP, substantially all employees were entitled to purchase the
Companys ordinary shares through payroll deductions at a price equal to 85 percent
of the lower of fair market value at the beginning or end of each six-month offering
period. The ESPP ended in March 19, 2005. Total shares issued under the ESPP were
138,505, out of which 42,062 shares were issued under the ESPP in 2005. The Company
issued 42,062, 52,858 and 43,585 shares, in 2005, 2004 and 2003 respectively under the
ESPP.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Rights
of Shares
| | -- | ----------------

| | Holders
of ordinary shares are entitled to participate equally in the payment of cash dividends
and bonus shares (stock dividends) and, in the event of the liquidation of the Company,
in the distribution of assets after satisfaction of liabilities to creditors. Each
ordinary share is entitled to one vote on all matters to be voted on by shareholders.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

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

|NOTE 10 |  | SHAREHOLDERS EQUITY
(cont.)
|------- | - | ----------------------------

| | C. | Share
Option Plans
| | -- | ------------------

| | The
Companys Board of directors approves, from time to time, employee share option
plans, the last of which was approved in May 2006. The options usually vest over four
years and their term may not exceed 7 years. The exercise price of each option is usually
the market price of the underlying share at the date of each grant. Through December 31,
2006, 6,906,722 share options have been issued under the plans, of which 1,773,819
options have been exercised, 1,553,063 options have been cancelled, and 2,447,770 options
were exercisable as of December 31, 2006.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
weighted average fair value (in dollars) of the options granted during 2006 and 2004,
according to Black-Scholes option-pricing model, amounted to $1.165 and $2.11 per option,
respectively. Fair value was determined on the basis of the price of the Companys
share.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Restricted
Stock Awards
| | -- | -----------------------

| | As
part of the Hypernex Inc. asset and liabilities acquisition (see Note 3) the Company
granted 392,000 restricted stock awards to certain of its employees who were formerly
employed by Hypernex Inc. The restricted stock awards (the Award Shares) are
ordinary shares of the Company that vest over a period of up to 3 years from the grant
date .Vesting of the Award Shares is subject to the employees continuing service to
the Company. The compensation expense related to these awards was determined using the
market value of the Companys common stock on the date of the grant; compensation is
recognized over the service period.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
summary of the status of the Companys share option plans as of December 31, 2006,
2005 and 2004, as well aschanges during each of the years then ended, is
presented below:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                | 2 0 0 6 | 2 0 0 5 | 2 0 0 4
|------------------------------- | ------- | ------- | -------
|
|
|
|
|Outstanding - beginning of year |         |         |        
|Granted                         |         |         |        
|Exercised                       |         |         |        
|Cancelled                       |         |         |        
|                                |         |         |        
|Outstanding - year end          |         |         |        
|                                |         |         |        
|                                |         |        
|Options exercisable at year-end |         |         |        
|                                |         |         |        

F - 18

---

---

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

|NOTE 10 |  | SHAREHOLDERS EQUITY
(cont.)
|------- | - | ----------------------------

| | The
following table summarizes information about share options outstanding as of December 31,
2006:
| | ---------------------------------------------------------------------------------------------------

| | Outstanding as of
December 31, 2006 | Exercisable as of
December 31, 2006
| | ----------------------------------- | -----------------------------------
|
|
|
|
| | 1.13-1.95                           |                                    
| | 2.06                                |                                    
| | 2.17-3.69                           |                                    
| | 4.01                                |                                    
| | 5.15                                |                                    
| | 6.27-7.37                           |                                    
| |                                     |                                    
| |                                     |                                    
| |                                     |                                    

|NOTE 11 |  | INCOME
TAXES
|------- | - | ------------

| | A. | Law
for the Encouragement of Capital Investments  1959
| | -- | -------------------------------------------------------

| | Part
of the Companys investment in equipment has received approvals in accordance with
the Law for the Encouragement of Capital Investments, 1959 (Approved Enterprise status)
in three separate investment plans. The Company has chosen to receive its benefits
through the Alternative Benefits track, and, as such, is eligible for various
benefits. These benefits include accelerated depreciation of fixed assets used in the
investment program, as well as a full tax exemption on undistributed income in relation
to income derived from the first plan for a period of 4 years and for the second and
third plans for a period of 2 years. Thereafter a reduced tax rate of 25% will be
applicable for an additional period of up to 3 years for the first plan and 5 years for
the second and third plans, commencing with the date on which taxable income is first
earned but not later than certain dates. The first plan benefit period has already
expired. The benefit periods of the second and third plans have not yet commenced. The
period in which the Company is entitled to the abovementioned tax benefits is limited to
seven years from the first year that taxable revenues are generated, and such benefits
must be utilized within 12 years from the year that operation (as defined) of the
approved enterprise commences, or 14 years from the year the approval is granted,
whichever is earlier.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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)
|------- | - | -------------------

| | In
the case of foreign investment of more than 25%, the tax benefits are extended to 10
years, and in the case of foreign investment ranging from 49% to 100% the tax rate is
reduced on a sliding scale to 10%. The benefits are subject to the fulfillment of the
conditions of the letter of approval.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 1, 2005, an amendment to the Investment Law came into effect (the Amendment)
and has significantly changed the provisions of the Investment Law.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Amendment limits the scope of enterprises which may be approved by the Investment Center
by setting criteria for the approval of a facility as a Privileged Enterprise, such as
provisions generally requiring that at least 25% of the Privileged Enterprises
Income will be derived from export. Additionally, the Amendment enacted major changes in
the manner in which tax benefits are awarded under the Investment Law so that companies
no longer require Investment Center approval in order to qualify for tax benefits.
However, the Investment Law provides that terms and benefits included in any certificate
of approval already granted will remain subject to the provisions of the law as they were
on the date of such approval. Therefore, the Israeli companies with Approved Enterprise
status will generally not be subject to the provisions of the Amendment. As a result of
the amendment, tax-exempt income generated under the provisions of the new law, will
subject the Company to taxes upon distribution or liquidation.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
above tax benefits are conditioned upon fulfillment of the requirements stipulated by the
aforementioned law and the regulations promulgated there under, as well as the criteria
set forth in the certificates of approval. In the event of failure by the Company to
comply with these conditions, the tax benefits could be canceled, in whole or in part,
and the Company would be required to refund the amount of the canceled benefits, plus
interest and certain inflation adjustments.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
income of the Company that is not derived from assets, which are eligible for reduced
taxation benefits, as described above, is taxed at the statutory rate for Israeli
companies (see H below). In the event of distribution by the Company of a cash dividend
out of retained earnings that were tax exempt due to its approved enterprise status, the
Company would have to pay a 25% corporate tax on the income from which the dividend was
distributed. A 15% withholding tax may be deducted from dividends distributed to the
recipients.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has not provided deferred taxes on future distributions of tax-exempt earnings,
as management and the Board of Directors do not anticipate any distribution that may
result in a tax liability for the Company. Accordingly, such earnings have been
considered to be permanently reinvested.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | To
date, the Company has not had earnings attributable to Approved Enterprise programs.
| | ---------------------------------------------------------------------------------------

F - 20

---

---

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

|NOTE 11 |  | INCOME
TAXES (cont)
|------- | - | -------------------

| | B. | Law
for the Encouragement of Industry (Taxation), 1969
| | -- | ------------------------------------------------------

| | The
Company is an industrial Company under the Law for the encouragement of
Industry (Taxation), 1969 and, therefore, is entitled to certain tax benefits, mainly
accelerated rates of depreciation.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Taxation
Under Inflationary Conditions
| | -- | --------------------------------------

| | The
Company reports for tax purposes in accordance with the provisions of the Income Tax Law
(Adjustments Due to Inflation)  1985, under which taxable income is measured in
terms of NIS adjusted for changes in the Israeli Consumer Price Index.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Deferred
Taxes
| | -- | --------------

| | The
Company has accumulated losses for Israeli tax purposes as of December 31, 2006 in the
amount of approximately $53,000. At such date, other temporary differences were
approximately $ 9,000.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Israeli tax loss carryforwards have no expiration date. The Company expects that during
the period these losses are utilized, its undistributed earnings will be tax exempt.
Since the Company has no intention to distribute such earnings, there will be
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | no
tax benefit available from such tax losses and no deferred taxes have been included in
these financial statements for these losses.
| | --------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2006, the subsidiaries had a net operating loss carryforward of
approximately $1,500.
| | --------------------------------------------------------------------------------------------------------

| | E. | Effective
Tax Rates
| | -- | -------------------

| | The
Companys effective tax rates differ from the statutory rates applicable to the
Company for all years presented due primarily to its approved enterprise status (see A
above) and the tax loss carry-forward.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | Tax
Assessments
| | -- | ---------------

| | The
Company received final tax assessments until and including tax year 2001.
| | -----------------------------------------------------------------------------

| | G. | In
light of losses for both financial reporting and tax purposes in 2006 and           2005,
a reconciliation of the effective income tax rate has not been presented.           In
2006, theoretical income taxes on the Companys pre-tax           income
were primarily reduced by the utilization of tax loss carryforward from           prior
years for which a deferred tax asset had not been recorded and reduced tax
          rates related to approved enterprise.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | H. | Tax
Rates
| | -- | ---------

| | In
2005 the Israeli Knesset approved a law for the amendment of the Income Tax Ordinance,
according to which the regular corporate tax rate is to be reduced gradually and annually
from 34% to 31% for 2006 tax year ending in 25% for 2010 tax year.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 21

---

---

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

|NOTE 12 |  | GEOGRAPHIC
AREAS AND MAJOR CUSTOMERS
|------- | - | ------------------------------------

| | A. | Sales
by geographic area (as percentage of total sales):
| | -- | --------------------------------------------------------

| |                                              | Year ended December 31,
| | -------------------------------------------- | -----------------------
|
|
|
|
| | USA                                          |                        
| | Europe - primarily Italy, France and Germany |                        
| | Japan                                        |                        
| | Other                                        |                        
| |                                              |                        
| | Total                                        |                        
| |                                              |                        

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

| |            | Year ended December 31,
| | ---------- | -----------------------
|
|
|
|
| | Customer A |                        
| | Customer B |                        
| | Customer C |                        
| | Other      |                        
| |            |                        
| | Total      |                        
| |            |                        

| | C. | Assets
by location
| | -- | ------------------

| | Substantially
all fixed assets are located in Israel.
| | -----------------------------------------------------

|NOTE 13 |  | TRANSACTIONS
AND BALANCES WITH RELATED PARTIES
|------- | - | ----------------------------------------------

| | The
total directors fees (including the chairman of the Board) for the year 2006
amounted to $193 (2005  $114, 2004 -$103). Number of options granted to directors
amounted 562,000 (no options in 2005, 380,000 options in 2004).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 14 |  | FINANCIAL
INSTRUMENTS
|------- | - | ---------------------

| | A. | Fair
value of financial instruments
| | -- | -----------------------------------

| | A
financial instrument is defined as cash, evidence of an ownership interest in an entity,
or a contract that impose on one entity a contractual obligation either to deliver cash
or receive cash or another financial instrument to or from a second entity. Examples of
financial instruments include cash and cash equivalents, short-term interest-bearing bank
deposits, held to maturity securities, trade accounts receivable, investments, trade
accounts payable, accrued expenses, options and forward contracts.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2006 and 2005 the fair market value of the Companys financial
instruments did not materially differ from their respective book value.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---

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

|NOTE 14 |  | FINANCIAL
INSTRUMENTS (Cont.):
|------- | - | ------------------------------

| | B. | Hedging
activities
| | -- | ------------------

| | In
2004, the Company entered into currency-forward transaction, to currency-put option and
to currency-call option (NIS/dollar, Euro/dollar, Yen/dollar) of 7,700 with settlement
date through 2005, designed to reduce cash-flow exposure to the impact of exchange-rate
fluctuations on firm commitments of 7,700. In accordance with SFAS 133 the Company
recorded in 2004 a decrease of $5 in fair market value in Other Comprehensive Income.
In 2005 this increase was charged to operations on the relevant settlement dates.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2005, the Company entered into currency-forward transaction, to currency-put option and
to currency-call option (NIS/dollar, Euro/dollar, Yen/dollar) of 4,250 with settlement
date through 2005, designed to reduce cash-flow exposure to the impact of exchange-rate
fluctuations on firm commitments of 4,250. In accordance with SFAS 133 the Company
recorded in 2005 a decrease of $26 in fair market value in Other Comprehensive
Income. In 2006 this decrease was charged to operations on the relevant settlement
dates.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2006, the Company entered into currency-forward transaction, (NIS/dollar, Euro/dollar,
Yen/dollar) of 15,220. with settlement date through 2006 designed to reduce cash-flow
exposure to the impact of exchange-rate fluctuations on firm commitments of 15,220. In
accordance with SFAS 133 the Company recorded in 2006 an increase of $12 in fair market
value in Other Comprehensive Income.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 15 |  | SUBSEQUENT
EVENT
|------- | - | ----------------

| | On
February 28, 2007, the Company entered into Share Purchase Agreement with four investors
for the private placement of 1,937,983 ordinary shares of the Company, at a price of
$2.58 per share, for gross proceeds of $5 million. As part of the transaction, the
Company issued warrants to the investors for the purchase of 1,453,485 additional
ordinary shares at an exercise price of $3.05 per share. On March 13, 2007 the shares
were issued and the proceeds from the private placement were received.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

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# SIGNATURES

The
registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and has duly caused and authorized the undersigned to sign this annual report on its
behalf.

| |  | NOVA MEASURING INSTRUMENTS LTD.By: /s/ Gabi Seligsohn
Gabi SeligsohnPresident and Chief Executive Officer
| |  | -----------------------------------------------------------------------------------------------------------------------

Date: May 11, 2007



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# EXHIBIT INDEX

|Number | Description
|------ | -----------

|1.1 |  | Articles
of Association, as amended (filed herewith)
|--- |  | ----------------------------------------------------

|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 (File No. 333-11640))
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Option
Plan 3 (incorporated by reference to Exhibit 10.2 to the Companys Registration
Statement on Form F-1 (File No.  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 (File No.  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 (File No. 333-102193))
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|4.6 |  | Employment
Agreement between Nova and Giora Dishon (incorporated by reference to Appendix A to
Exhibit 99.1 to the Companys Report on Form 6-K filed October 26, 2006)
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.7 |  | Employment
Agreement between Nova and Moshe Finarov (incorporated by reference to Appendix A to
Exhibit 99.1 to the Companys Report on Form 6-K filed October 26, 2006)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.8 |  | 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 (File No.
333-11640))
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. |  | 9
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 (File No. 333-11640))
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.10 |  | 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)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.11 |  | 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)
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.12 |  | 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))
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.13 |  | Letter
of Indemnification and Exculpation for certain directors, officers and/or employees
(incorporated herein by reference to Appendix C to the Companys Report on Form 6-K
filed on July 7, 2006)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.14 |  | Option
Plan 7A (incorporated by reference to Exhibit 4.1. to the Company's Registration
Statement on Form S-8 filed on May 17,              2004 (File No. 333-115554))
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.15 |  | Option
Plan 7B (incorporated by reference to Exhibit 4.1 to the Companys Registration
Statement on Form S-8 filed on March 7, 2005 (File No. 333-123158)
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|4.16 |  | Amended
and Restated Asset Purchase Agreement dated as of August 8, 2006 by and among the
Company, HyperNex, Inc. and the              Stockholders listed on Schedule 4(a) therein
(filed herewith).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.17 |  | Option
Plan 7C (incorporated by reference to Exhibit 4.20 of the Companys Annual Report on
Form 20-F filed on June 29, 2006).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------

|4.18 |  | Option
Plan 8 (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-8 filed on December 29, 2005 (File No. 333-130745).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.19 |  | Share
Purchase Agreement, dated as of February 28, 2007, by and between the Company and the
investors identified on the signature pages thereto, including the form of warrant (filed
herewith)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8.1 |  | List
of Subsidiaries (incorporated by reference to Exhibit 8 of the Companys Annual
Report on Form 20-F filed on June 29, 2006).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------

|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)
|---- |  | ----------------------------------------------------------------------------------------

|15.1 |  | Consent
of Brightman Almagor & Co. (filed herewith)
|---- |  | ---------------------------------------------------



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