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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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Form 20-F

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| ̈ | 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, 2002                                            

OR

| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF 
  THE SECURITIES EXCHANGE ACT OF 1934
|- | -------------------------------------------------------------------------------------------
|  | for the transition period from _________ to _________                                      

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Commission File Number 333-11640

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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, Rehovot 76100, Israel(Address of principal executive
offices)

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

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

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

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

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

14,938,909 Ordinary Shares, NIS 0.01 nominal (par) value per share, as
of June 16, 2003

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

YesxNo ̈

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

Item 17xItem 18 ̈

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Table of Contents

|                                                            | Page                                                                                  
|----------------------------------------------------------- | --------------------------------------------------------------------------------------
|                                                           
|Introduction                                                | 1                                                                                     
|                                                            |                                                                                       
|Our Functional Currency                                     | 1                                                                                     
|                                                            |                                                                                       
|Cautionary Statement Regarding Forward-Looking
  Statements | 1                                                                                     
|                                                            |                                                                                       
|PART I                                                      | 2                                                                                     
|                                                            |                                                                                       
|                                                            | Item 1. 
  Identity of Directors, Senior Management and Advisors                      
|                                                            | Item 2. 
  Offer Statistics and Expected Timetable                                    
|                                                            | Item 3.  Key
  Information                                                            
|                                                            | Item 4. 
  Information on the Company                                                 
|                                                            | Item 5. 
  Operating and Financial Review and Prospects                               
|                                                            | Item 6. 
  Directors, Senior Management and Employees                                 
|                                                            | Item 7. 
  Major Shareholder and Related Party Transactions                           
|                                                            | Item 8. 
  Financial Information                                                      
|                                                            | Item 9.  The
  Offer and Listing                                                      
|                                                            | Item 10. Additional Information                                                       
|                                                            | Item 11. Quantitative and Qualitative Disclosures
  About Market Risk                 
|                                                            | Item 12. Description of Securities Other than Equity
  Securities                     
|                                                            |                                                                                       
|PART II                                                     | 47                                                                                    
|                                                            |                                                                                       
|                                                            | Item 13. Defaults, Dividend Arrearages and
  Delinquencies                            
|                                                            | Item 14. Material Modification to the Rights of
  Security Holders and Use of Proceeds
|                                                            |                                                                                       
|Item 15                                                     | 48                                                                                    
|                                                            |                                                                                       
|Item 16                                                     | 48                                                                                    
|                                                            |                                                                                       
|PART III                                                    | 48                                                                                    
|                                                            |                                                                                       
|                                                            | Item 17. Financial Statements                                                         
|                                                            | Item 18. Financial Statements                                                         
|                                                            | Item 19. Exhibits                                                                     
|                                                            |                                                                                       
|Signatures                                                  | 50                                                                                    

i

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# Introduction

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

The
consolidated financial statements and selected consolidated financial data as of December
31, 1998, 1999, 2000, 2001 and 2002 and for each of the years in the five-year period
ended December 31, 2002 (the Consolidated Financial Statements), included in
this Annual Report have been prepared in accordance with United States generally accepted
accounting principles (U.S. GAAP).

# Our Functional Currency

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

# Cautionary Statement Regarding Forward-Looking Statements

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

1

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# PART I

# Item 1. Identity of Directors, Senior Management and Advisors

Not applicable.

# Item 2. Offer Statistics and Expected Timetable

Not applicable.

# Item 3. Key Information

# Selected Financial Data

The
tables below set forth selected consolidated financial data for the Company for the
periods indicated and are qualified by reference to, and should be read in conjunction
with, the Companys Consolidated Financial Statements and the Notes thereto, which
are included elsewhere in this Annual Report, and Item 5. Operating and Financial
Review and Prospects.

# 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                   |                        
|                                           |                        
|Total operating expenses                   |                        
|                                           |                        
|Operating income (loss)                    |                        
|Financing income, net                      |                        
|Other expenses                             |                        
|                                           |                        
|Net income (loss)                          |                        
|                                           |                        
|Earnings (loss) per share:                 |                        
|Basic earnings (loss) per share            |                        
|Diluted earnings (loss) per share          |                        
|Shares used in calculation of basic        |                        
|earnings                                   |                        
|(loss) per share                           |                        
|Shares used in calculation of diluted      |                        
|earnings per share                         |                        

|                                 | December 31,
|-------------------------------- | ------------
|
|
|Consolidated Balance Sheet Data: |             
|Working capital                  |             
|Total assets                     |             
|Shareholders' equity             |             
|Dividends declared               |             

2

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# Risk Factors

# Risks Related to Our
Business and Our Industry

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

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

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

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

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

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

The
semiconductor manufacturing industry is characterized by rapid technological change, new
product introductions and enhancements and evolving industry standards. Our ability to
remain competitive and generate sales revenue will depend in part upon our ability to
develop new and enhanced systems at competitive prices in a timely and cost-effective
manner and to accurately predict technology transitions. Because new product development
commitments must be made well in advance of sales, new product decisions must anticipate
the future demand for products. If we fail to correctly anticipate future demand for
products, our sales and competitive position could suffer. In addition, the development of
new measurement technologies, new product introductions or enhancements by our competitors
could cause a decline in sales or loss of market acceptance of our existing products. For
example, some of our competitors are attempting to develop sensors that would measure
wafers simultaneously in the chamber as they are being processed. If the efforts of our
competitors to produce and market products utilizing this alternative technology are
successful, our business could suffer. Increased competitive pressure could also lead to
intensified price competition, resulting in lower margins.

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

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

3

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

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

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

Since
our inception in 1993, we have incurred net losses in every year other than in 1998 and
2000, and our losses may continue. As of December 31, 2002, we had an accumulated deficit
of $36.2 million. We plan to continue the level of our aggregate product development,
sales and marketing and administrative expenses over the next 12 months. Accordingly, to
achieve profitability, we will need to increase our revenues. We cannot assure you that
our revenues will grow or that we will achieve profitability in the future.

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

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

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

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

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

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

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

4

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

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

|                            | Year ended December 31,
|--------------------------- | -----------------------
|
|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 period to period.
Furthermore, if any of our customers become insolvent or have difficulties meeting their
financial obligations to us as a result of the current protracted slowdown in the
semiconductor industry or as a result of any other reason, we may suffer losses.

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

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

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

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

5

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

We
believe that the semiconductor capital equipment market is undergoing consolidation. A
number of suppliers have been acquired by larger equipment manufacturers. For example, in
2001 Therma-Wave Inc. acquired Sensys Instruments Corp. and in 2002 Rudolph Technologies
Inc. acquired ISOA 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 afford
them an advantage in meeting customers needs, particularly with those customers that
seek to consolidate their capital equipment requirements with the same vendor. The greater
resources, including financial, marketing and support resources, of competitors involved
in these acquisitions could permit them to accelerate the development and
commercialization of new competitive products and the marketing of existing competitive
products to their larger installed bases. Accordingly, such business combinations and
acquisitions by competitors or customers could jeopardize our competitive position.

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

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

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

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

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

| | As of December 31, 2002, we had obtained 19 U.S. patents and had 29 U.S. patent applications pending.
In addition, we had obtained 14 foreign patents and had 70 foreign patent applications pending.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We cannot assure you that:                                                                                                                                                                           

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

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

6

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

There has been significant
litigation involving intellectual property rights in the semiconductor and related
industries and similar litigation involving Nova could force us to divert our limited
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. We are aware that a patent held by
a third party that does not compete with us may cover aspects of operating our measurement
system. We have not received any notice from this third party of infringement of this
patent. 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.

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

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

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

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

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

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

7

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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 employee options, the market price of our
ordinary shares may fall. As of December 31, 2002 we had 14,929,867 ordinary shares
outstanding, of which 11,178,899 shares were held by seven shareholders.

Because a small group of major
shareholders have a significant influence over our business, this group could prevent a
change of control or other business combination involving Nova at a premium over the then
prevailing price for our ordinary shares.

As
of December 31, 2002, three of our principal shareholders held an aggregate of
approximately 47% of our outstanding ordinary shares. Three of our directors are currently
representatives of these shareholders. By virtue of their stock ownership and board
representation, these shareholders will continue to have significant influence over
matters submitted to our board and our shareholders, including election of our directors,
and will be able to exercise significant control over our business, policies and affairs,
including any matters relating to a proposed change of control of Nova or other business
combination.

# Risks Related to
Operations in Israel

Potential political, economic and
military instability in Israel may adversely effect 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 the Palestinian
Authority have been ongoing. A state of hostility, varying in degree and intensity, has
led to security and economic problems for Israel. The resumption of hostilities in the
region which have occurred after the failure of Camp David peace talks, as well as the
events of September 11, 2001, and the intensification of such hostilities in recent
months, have a negative effect on the stability of the region which might have negative
effect on our business conditions and harm our growth and revenues. For further detail see
Item 5, paragraph Political and economic conditions in Israel.

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

Some
of our executive officers and employees in Israel are obligated to perform up to 45 days
of military reserve duty annually. This time-period may be extended by the Minister of
Defense or in the event of a declared national emergency. Our operations could be
disrupted by the absence for a significant period of one or more of our executive officers
or key employees due to military service. To date, our operations have not been materially
disrupted as a result of these military service obligations, and no executive officer or
key employee was recruited for any significant time period. Any disruption in our
operations due to such obligations would adversely affect our ability to produce and
market our existing products and to develop and market future products.

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

8

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

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

We
receive conditional grants from the Office of the Chief Scientist of the Israeli Ministry
of Industry and Trade for research and development programs that meet specified criteria.
We are also eligible to receive tax benefits under Israeli law for capital investments
that are designated as approved enterprises. To maintain our eligibility for
these programs and tax benefits, we must continue to meet conditions, including paying
royalties related to grants received and making specified investments in fixed assets. In
addition, some of these programs restrict our ability to manufacture particular products
and transfer particular technology outside of Israel. If we fail to comply with these
conditions in the future, the benefits received could be cancelled. We could also be
required to pay increased taxes or refund any benefits previously received, adjusted for
inflation and interest. In 2001 and in 2002, we recorded an aggregate of $1.8 million and
$1.7 million, respectively, in conditional grants under Israeli government programs. As of
December 31, 2001, our contingent liability to the Office of the Chief Scientist for
grants received was approximately $1.4 million. As of December 31, 2002, our contingent
liability to the Office of the Chief Scientist for grants received was approximately $0.7
million. 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 or for new programs. These
requests might not be approved. The Israeli government has reduced the benefits available
under these programs in recent years and has indicated that it may reduce or eliminate
these benefits in the future. The termination or reduction of these grants and tax
benefits could harm our business, financial condition and results of operations. In
addition, if we increase our activities outside the State of Israel due to, for example,
future acquisitions, our increased activities generally will not be eligible for inclusion
in Israeli tax benefit programs. Accordingly, our effective corporate tax rate could
increase significantly in the future.

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

We
are organized under the laws of the State of Israel, and we maintain significant
operations in Israel. Substantially all 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,
you might not be able to enforce any judgment obtained in the United States against us or
any of such persons. Additionally, you might not be able to bring civil actions under U.S.
securities laws if you file a lawsuit in Israel. We have been advised by our Israeli
counsel that Israeli courts generally enforce a final executory judgment of a U.S. court
for liquidated amounts in civil matters after a hearing in Israel. If a foreign judgment
is enforced by an Israeli court, it will be payable in Israeli currency.

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

Our
ordinary shares are listed for trading on the NASDAQ national market and on the Tel Aviv
Stock Exchange. This may result in price variations. Our ordinary shares are traded on
these markets in different currencies, U.S. dollars on the NASDAQ and New Israeli Sheckels
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.

9

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

We
believe that in 2002 we were not a passive foreign investment company and currently we
expect that we will not be a passive foreign investment company in 2003. However, passive
foreign income company status is determined as of the end of the full tax year and is
dependent on a number of factors, including the value of a corporations assets in
the amount and type of its gross income. Therefore, there can be no assurances that we
will not become a passive foreign investment company for the current fiscal year ending on
December 31, 2003 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. In October 1995, we
began manufacturing and marketing systems for chemical mechanical polishing. We have since
expanded our product offering to include systems designed for chemical vapor deposition,
lithography and etch, and are continuing to develop new products and additional
applications for our current products.

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

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

We
have four wholly owned subsidiaries in the United States, 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
Weizman Science Park, Building 22, 2nd Floor, Rehovot, 76100. Our telephone number at our
main office is +1-972-8-938-7505. Our facilities occupy approximately 5,000 square meters.
Our U.S. subsidiary leases approximately 600 square meters in Arizona for use as a
marketing and support facility. Our Japanese subsidiary leases approximately 200 square
meters for use as a marketing and service facility. Our Taiwanese subsidiary leases
approximately 350 square meters for use as a service and demonstration facility.

Our
agent for service of process in the United States is David Gitlin, of Wolf, Block, Schorr
and Solis-Cohen LLP, 1650 Arch Street, 22nd Floor, Philadelphia PA 19103.

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# Business review

# Overview

We
design, develop and produce integrated process control systems used in the manufacture of
semiconductors. Our products enable manufacturers to measure wafers immediately after the
process steps while the wafers are inside the process equipment.

The
semiconductor manufacturing process requires exacting steps and strict control of
equipment performance and process sequences. Tight control can be achieved through
monitoring wafers and measuring relevant parameters after each process step. Prior to the
introduction of our systems, process control was achieved through stand-alone measurement
equipment. This technique requires the semiconductor manufacturer to interrupt the process
sequence, remove sample wafers from the process equipment and place them on the measuring
or inspection tool. In contrast, our approach is based on patented measuring methods that
enable us to produce optical measuring systems that are small enough to be integrated
directly inside many types of process equipment in semiconductor manufacturing.

We
supply our systems to major semiconductor manufacturers worldwide, either directly or
through process equipment manufacturers. Semiconductor manufacturers using our systems
comprise a large number of the top 20 semiconductor manufacturers in the world, including
IBM, Infineon, Intel, Micron, Motorola, Philips, ST Microelectronics, Texas Instruments
and UMC. Our process equipment manufacturer customers include Applied Materials, Ebara,
Speedfam-IPEC and Strasbaugh. Our first systems were installed in 1995, and we have sold
more than 950 systems worldwide. Our approach offers considerable advantages over the
conventional approach to process control, enabling manufacturers using our equipment to
reduce costs and to improve production efficiency, yield and quality.

# The Nova Integrated
Process Control Solution

We
believe that our systems provide semiconductor manufacturers with more effective process
control by measuring wafers thin films thickness and optical properties without
removing the wafer from the process equipment. Our products are based on 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. Our integrated systems measure the wafer within the actual process
environment, reducing labor and wafer handling as well as the risk of contamination or
damage to the wafer. In addition, we believe that our systems deliver significant
increases in overall equipment efficiency as well as in wafer-to-wafer uniformity, with
minimal operator intervention.

We
believe that 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. Our approach centered around our NovaReady
integration package, allows process equipment manufacturers to prepare their equipment to
accept our measurement and inspection systems, which can then be integrated with a simple
plug-and-play installation.

We
believe that our integrated process control systems 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;
- perform the measurement without removing the wafer from the process equipment, increasing
the efficiency of the process and decreasing the risk of contamination;

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- reduce capital costs of the fabrication facility by increasing overall equipment
efficiency and reducing labor costs and necessary clean room area; and
- reduce the amount of time required to qualify process equipment that is usually idle
during qualification steps, thus minimizing costly equipment down-time.

# Integrated Process
Control throughout the Manufacturing Fab

Nova
introduced the Integrated Metrology concept to the industry and is now offering integrated
process control systems for the chemical mechanical polishing (CMP), chemical vapor
deposition (CVD), and photolithography manufacturing processes.

The
Companys integrated thickness monitoring (ITM) systems for CMP process control
deliver a high degree of wafer-to-wafer closed loop control.

The
NovaReady open architecture policy enables installation of integrated process control
systems on all process equipment and delivers advanced Integrated Process Control for the
entire fab along with the rapid advancement of the semiconductor manufacturing processes.

# Novas Open
Architecture Policy

Nova
has established OEM partnerships with the major CMP tool manufacturers. They make their
systems NovaReady by finding on-tool space and providing wafer handling access
and minimal wiring for the ITM system, which is a little larger than a wafer, with a small
optical head that scans the wafers. Applied Materials, Ebara, Peter Wolters,
SpeedFam-IPEC, Strasbaugh, and others have made their systems NovaReady,
making the installation of Novas ITM systems a simple plug-and-play
process. Nova is strongly committed to its multi-vendor policy and is establishing
relationships with different process equipment manufacturers for its new developments.

# Products

Thin Film Process Control

Nova offers several models of its
integrated thickness monitoring systems, depending on polisher type and end user
requirements:

- The NovaScan 840 combines high-speed measurement and effective handling, enabling
measurement of wafers both before and after polishing. This system and prior generations
were our main revenue source in 2001 and prior years.
- The NovaScan 2020 and 2040 are the second generation of integrated thickness
monitoring systems with enhanced spectral range, responding to the needs of the industry
for emerging chemical mechanical polishing high-end applications of thin films and complex
layer stacks. The 2020 model was introduced to the market in the end of 2000, and since
then has replaced the NovaScan 840 and accounted for the major portion of our sales for
200mm production lines. The NovaScan 2040 was introduced in 2002 and is the fastest
integrated film thickness 200mm measurement system in the market today.
- The NovaScan 3000 system measures 300mm wafers and offers an efficient monitoring
solution to wafer fabrication plants moving to 300mm manufacturing. The system was
introduced to the market and started sales in 2001.
- The NovaScan 3030 and 3060are the second generation of the 300mm measuring system,
with improved optics and motion system enabling high speed measurement, and with broad
spectral rage (Ultra Violet to Infra Red) allowing accurate measurements on complex
structures and thin film layers. The 3030 model was introduced to the market in 2001 and
since then has replaced the NovaScan 3000 and accounts for the major portion of our sales
for 300mm production lines. The NovaScan 3060 was introduced in 2002 and is the fastest
integrated film thickness 300mm measurement system in the market today.
- The NovaScan 2020Cuhas the same basic platform as the NovaScan 2040, with
additional hardware and software improvements, enabling the system to answer the unique
requirements of copper CMP monitoring. The system went through several beta tests during
2001 and 2002 and was released for sale in the beginning of 2003.

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- The NovaScan 3030Cu has same basic platform as the NovaScan 3030, with additional
hardware and software improvements, enabling the system to answer the unique requirements
of 300mm copper CMP monitoring. The system went through field testing during 2002 and was
released for sale in the beginning of 2003.
- A closed loop control option for the NovaScan systems delivers reliable, highly
automated wafer-to-wafer uniformity over chemical mechanical polishing manufacturing
processes. The thickness data of every processed wafer is obtained and process parameters
are fed back to adjust the next wafer polish.
- NovaNetis a highly sophisticated computer network, connecting all NovaScan systems
on a factory floor. The network is managed by a dedicated server, running with a
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 allow programmable cross
sections.
- The NovaScan 3030 CDsystem isa Scatterometry-based system for profiling
lines and trenches on 200mm and 300mm wafers. The system is in advanced stage of
field-testing and is planned to be released toward the end of 2003.
- The NovaScan 840CVDsystem is an integrated vacuum 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 are being developed for
different process equipment both for 200mm and 300mm equipment. The system was introduced
to the market in the end of 2000, several units had been sold, and is not expected to have
high market potential.

Photolithography Process
Control

- The NovaTrack 2020system is a dual-purpose Integrated Metrology and Stand Alone
system for overlay registration measurement and macro defect inspection in the
photolithography steps. The system is designed for integration on a photoresist track and
as a stand-alone system for 200mm wafers. Both stand-alone and integrated models of the
NovaTrack 2020 finished beta testing in the first quarter of 2003 and have been released
for sale.
- The NovaTrack 3030system is a dual-purpose Integrated Metrology and Stand Alone
system for overlay registration measurement and macro defect inspection in the
photolithography steps. The system is designed for integration on a photoresist track and
an as stand-alone for 300mm wafers. The stand-alone model is planned to be released for
sale in the first quarter of 2004. The integrated model is ready for alpha testing on a
300mm track.

# Customers, Sales and
Marketing

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

We
have a diverse customer base in terms of both geographic location and types of integrated
circuits manufactured. Our customers are located in different countries, including Japan,
Korea, Singapore, Taiwan, Malaysia, the United States and Europe.

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

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

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

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

The
below table describes the distribution of our revenues by geographic areas:

|       | Year ended December 31,
|------ | -----------------------
|
|
|      
|USA    |                        
|Europe |                        
|Japan  |                        
|Other  |                        
|       |                        
|Total  |                        
|       |                        

# Research and Development

We
have assembled a core team of experienced scientists and engineers who are highly skilled
in their particular field or discipline. Our research and development core competencies,
technologies and disciplines are comprised of spectrophotometry, ellipsometry,
scatterometry, image acquisition, pattern recognition, inspection and automatic defect
classification.

The
new integrated 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. At December 31, 2002,
our management and research and development staff was comprised of 86 persons, including
independent contractors, of whom 28 held Ph.D. degrees and 29 held M.S. degrees.

Our
research and development operations received the ISO 9001 quality mark by an international
certification institute in June 2000.

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# Intellectual Property

Our
success depends in part upon our ability to protect our intellectual property. We have
been granted 33 U.S. and non-U.S. patents and hold an exclusive license to one U.S.
patent. The U.S. patents we own have expiration dates ranging from 2013 to 2020. We also
have 99 pending regular and provisional patent applications pending in the United States
and other countries. Our patents and applications principally cover various aspects of
optical methods, optomechanical and mechanical algorithms, and integrated process control
implementation concepts.

To
protect our proprietary rights, we also rely on a combination of copyrights, trademarks,
trade secret laws, contractual provisions and licenses. 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.

In
1998, Intel Corporation (Intel), a major customer and former shareholder,
notified us that a lawsuit had been filed against a number of semiconductor manufacturers,
including Intel, by the Lemelson Medical Education and Research Foundation. The suit
alleges that these semiconductor manufacturers have infringed upon U.S. Patents owned by
Lemelson. Our standard product sales agreement with our customers provides that we will
indemnify our customers against losses and will assume responsibility for defending any
lawsuit against them asserting patent infringement claims based upon the use of our
products. In their 1998 letter, Intel requested that we defend, indemnify and hold it
harmless against the Lamelson claim to the extent such claim results from the use of the
products we sold to Intel. We have yet to conclude that such claim results from the use of
our products and, to date, have not undertaken such defense nor have agreed to indemnify
and hold Intel harmless with respect to such claim.

For
additional information regarding intellectual property, see Item 3  Risk
Factors.

# Contracts

In
February 2002, we signed a joint development agreement with Applied Materials relating to
integrated metrology for Copper CMP processing. Pursuant to this agreement, we hope to
develop copper CMP monitoring capabilities using the NovaScan 2020/3030 Cu, which could be
sold to Applied Materials and its customers.

In
February 2002, we signed a licensing agreement with Lucent Technologies Inc.
(Lucent) according to which we were licensed the rights to certain of
Lucents patents, software and technical information. In connection with the
agreement entered into with Lucent we also signed an agreement with Agere Systems Guardian
Corporation (Agere) according to which we were granted a license in a patent
owned by Agere. Pursuant to this agreement, as well as the agreement entered into with
Lucent, we hope to develop new metrology products and technologies for the semiconductors
industry.

# Manufacturing

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

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

# Capital expenditures

See Item 5 - Liquidity and Capital Resources.

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# Property, Plants and
Equipment

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

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

Our
U.S. subsidiary leases approximately 600 square meters in Arizona for use as a marketing
and service support facility. Our Japanese subsidiary leases approximately 200 square
meters for use as a marketing and service support facility. Our Taiwanese subsidiary
leases approximately 350 square meters for use as a service and demonstration facility.

# Competition

The
market for semiconductor capital equipment is highly competitive. Our current integrated
products principally compete with products manufactured by Nanometrics. To the best of our
knowledge, Dai Nippon Screen has ceased its activities in integrated metrology.
Nanometrics had a non-exclusive arrangement with Applied Materials, which we believe
prevented Nanometrics from selling to other customers. This agreement expired. We
currently sell more systems to Applied Materials than Nanometrics, but we anticipate that
Noanometrics will start to work with other CMP equipment manufacturers. We have entered
into strategic alliance with Applied Materials for process control of Copper CMP
processing.

In
the photolithography area, for overlay measurement and macro inspection, we expect to see
competition from KLA-Tencor Corp., Therma-Wave Inc. and Rudolph Technologies Inc., though
we are not aware of any released integrated products by these companies. In the
photolithography and etch area, for optical critical dimension measurement we expect to
compete with KLA-Tencor Corp., Therma-Wave Inc., Accent Technologies Inc. and Nanometrics
Inc.

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

# Subsidiaries

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

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

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# Item 5. Operating and
Financial Review and Prospects

# Critical Accounting
Policies

Management
believes the following critical accounting policies, among others, affect its more
significant judgments and estimates used in the preparation of its 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

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

Adequate
provision is made, upon shipment, for estimated product returns and warranties. When
transactions involve newly introduced products or when customers specify acceptance
criteria that cannot be demonstrated prior to the shipment, we defer the relevant
revenues. We currently anticipate introducing several new systems in fiscal 2003. Delays
in introducing a product or delays in our ability to obtain customer acceptance, will
delay the recognition of revenue and gross profit by us.

Allowances for doubtful
accounts

We
maintain allowances for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.

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
obligation is affected by product failure rates, material usage and service delivery costs
incurred in correcting a product failure at home or at customer sites. Should actual
product failure rates, material usage or service delivery costs differ from our estimates,
and revisions to the estimated warranty liability may be required.

Inventories write-down

We
value our inventory at the lower of the actual cost or the current estimated market value
of the inventory. We regularly review inventory quantities on hand and record a provision
for excess and obsolete inventory based primarily on our estimated forecast of product
demand and production requirements for the next twelve months. As demonstrated during 2000
and 2001, demand for our products can fluctuate significantly. A significant increase in
the demand for our products could result in a short-term increase in inventory purchases
while a significant decrease in demand could result in an increase in the amount of excess
inventory quantities on hand. In addition, our industry is characterized by rapid
technological change, frequent new product development, 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.

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# Operating results

Overview

A
significant portion of our revenues historically has been derived from customers in the
United States, and we expect that this trend will continue, although we expect that U.S.
sales as a percentage of total sales may decrease as our total sales and sales to other
geographic areas, particularly Asia, increase. In 1999, 71% of our revenues were derived
from U.S. customers, 12% were from European customers, including 5% from Italian
customers, 2% were from Japanese customers and 15% were from Singaporean customers. In
2000, 71% of our revenues were derived from U.S. customers, 12% were from European
customers, 2% were from Japanese customers and 15% were from Asian customers, including 5%
from South Korean customers. In 2001, 72% of our revenues were derived from U.S.
customers, 8% were from Japanese customers, 13% were from European customers and 7% were
from Asian (other than Japanese) customers. In 2002, 61% of our revenues were derived from
U.S. customers, 20% were from Japanese customers, 16% were from European customers and 3%
were from Asian (other than Japanese) customers.

Historically,
a substantial portion of our revenues has come from a small number of customers. For
example, in 2002 and 2001 and 2000, our five largest customers accounted for 86% and 81%
and 66% of our revenues, respectively. In 2002 and 2001 and 2000, our single largest
customer accounted for 29% and 33% and 21% of our revenues, respectively. We anticipate
that our revenues will continue to depend on a limited number of major customers, although
the companies considered to be major customers and the percentage of our revenue
represented by each major customer may vary from period to period.

The
sale cycle for our systems typically ranges from three to 24 months and relies upon the
integration status with a specific process equipment, manufacturer and model, 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 our production line. We
have a relatively low backlog. Accordingly, if sales of our products do not occur when we
expect, and we are unable to adjust our estimates on a timely basis, our expenses and
inventory levels may fluctuate relative to revenues and total assets.

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. 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.

During
2002, the Company went through reorganization, including consolidation of the
companys different integrated metrology products into two major product divisions
(Thin Films and Lithography).

Overall,
according to DataQuest April 2003 published research, the semiconductor wafer front-end
equipment (WFE) industry has declined by 32% in 2002, following a 29% decline in 2001. By
comparison, Nova revenues declined 4% in 2002 and 56% in 2001.

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

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|                                            | Percentage of Total RevenuesYear ended December 31,
|------------------------------------------- | ---------------------------------------------------
|
|Consolidated Statements of Operations Data: |                                                    
|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 expenses                    |                                                    
|Total operating expenses                    |                                                    
|Operating income (loss)                     |                                                    
|Financing income, net                       |                                                    
|Net income (loss)                           |                                                    
|                                            |                                                    

# Comparison of Years
Ended December 31, 2002 and 2001

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

19

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We
expect that sales from our main integrated process control product line targeting the
chemical mechanical polishing market will continue to account for a substantial portion of
our future revenues for at least the next year, and that the new product lines sales
(process control systems for lithography and etch) will gradually become more significant.

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

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

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

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

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

Other
OperatingExpenses. In 2002 the company purchased technology for use in research and development for $1.5 million.
Such amount has been charged to the statement of operations in the year
ended December 31, 2002 in accordance with the principals set force in SFAS 2.
Other operating expenses in 2001 of $1.0 million are comprised of a non-recurring expenses
related to the breach of part of our operating lease commitments associated with the move
to the new building.

# Comparison of Years
Ended December 31, 2001 and 2000

Revenues.Our revenues in 2001 decreased $27.3 million, or 56.3%, compared to 2000.
          This decrease is attributed to the decrease in the volume of systems sold from
          our main integrated process control product line targeting the chemical
          mechanical polishing market, resulting from the deep slowdown of the
          semiconductor industry in 2001. Revenues from services accounted for 30.4% of
          total sales, as compared to 13.5% in 2000. This increase is attributed to the
          reduction of 64.9% in 2001 revenues from products compared to 2000.

20

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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 the
provision for estimated future warranty costs for systems we have sold. Our gross profit
decreased 81.2% from $25.0 million in 2000 to $4.7 million in 2001. Our gross profit
represented 51.6% and 22.2% of our revenues in 2000 and 2001, respectively. Our gross
profits decrease from 2000 to 2001 is attributed to the fixed costs of our service and
support organization (12.2% of total revenues in 2000 as compared to 34.5% of total
revenues in 2001), and to a $2.2 million inventory write-off (10.4% of total revenues of
2001) related to the deep slowdown of the semiconductor industry.

Costs
related to 2001 services increased 23.2% as compared to 2000. On a quarterly basis, costs
related to Q4-2001 services decreased 24.0% as compared to Q4-2000, following the
implementation of a cost-reduction plan. Due to the decrease in revenues related to
services, we recorded a gross loss of $0.9 million in 2001, as compared to a gross profit
of $0.6 million in 2000.

Research
and Development, Net.Research and development expenses consist primarily of salaries
and related expenses and also include consulting fees, subcontracting, related materials
and overhead expenses, after offsetting conditional grants received or receivable from the
Office of the Chief Scientist. Our research and development expenses, net, decreased 4.5%
from $13.9 million in 2000 to $13.3 million in 2001, after offsetting conditional grants
received or receivable from the Office of the Chief Scientist of $2.0 million and $1.8
million in 2000 and 2001, respectively. Research and development expenses, net,
represented 62.6% and 28.6%, respectively, of our revenues in 2001 and 2000. Approximately
$6 million of our research and development expenses, net, in 2001, resulted from our
research and development efforts relating to the introduction of new product lines in
order to maintain our position as a market leader in integrated process control equipment.

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 recorded royalties payable to the Office of the Chief Scientist and commissions to
our representatives and sales personnel. Our sales and marketing expenses decreased 14.3%
from $8.0 million in 2000 to $6.9 million in 2001. Sales and marketing expenses
represented 16.5% and 32.4%, respectively, of our revenues in 2000 and 2001.

General
and Administrative. General and administrative expenses are comprised of salaries and
related expenses and other non-personnel related expenses. Our general and administrative
expenses decreased 4.8% from $3.2 million in 2000 to $3.0 million in 2001. General and
administrative expenses represented 6.6% and 14.3%, respectively, of our revenues in 2000
and 2001.

Other Operating Expenses.
Other operating expenses in 2001 are comprised of a non-recurring
expenses related to the breach of part of our operating lease commitments associated with
the move to the new building.

# Liquidity and Capital
Resources

As
of December 31, 2002, we had working capital of $34.6 million compared to working capital
of $45.5 million as of December 31, 2001. This decrease is attributed primarily to our
operating losses incurred during 2002. Cash and cash equivalents, short-term deposits and
securities held to maturity as of December 31, 2002 were $38.5 million compared to cash
and cash equivalents, marketable securities available for sale and securities held to
maturity of $48.7 million as of December 31, 2001.

Trade
accounts receivables increased from $1.7 million in December 31, 2001 to $2.7 million in
December 31, 2002. This increase was due to the increase in our sales during the fourth
quarter of 2002 (2002 fourth quarter revenues were $5.6 million compared to $4.0 million
in the first quarter of 2002).

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Operating
activities in 2002 used cash of $7.9 million compared to cash of $5.7 million used in 2001
and compared to cash of $3.7 million used in 2000. Operating activities in 2002 used more
cash relative to 2001 mainly due to our net losses in 2002.

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

|                               | 2002 | 2001 | 2000
|------------------------------ | ---- | ---- | ----
|
|
|Electronic equipment           |      |      |     
|Office furniture and equipment |      |      |     
|Leasehold improvements         |      |      |     
|                               |      |      |     
|Total                          |      |      |     
|                               |      |      |     

The
decrease in capital expenditures for leasehold improvements in 2002 was due to our
completion of our 2001 investment in new facilities in Israel. Although we currently have
no significant capital commitments, we expect to spend approximately $0.8 million on
capital expenditures in the next 12 months, mainly for electronic equipment.

We
are currently engaged in long-term commitments for the lease of our new building in Israel
(until 2007) and for lease of vehicles (the latest of which ends in 2005). As for the
amounts related to these lease commitments, see notes 7B and 7C to the consolidated
financial statements.

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

Our
long-term capital requirements will be affected by many factors, including the success of
our current products, our ability to enhance our current products and 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.

With regard to usage of hedging
financial instruments  see Item 11 Quantitative and Qualitative Disclosures
About 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 2001 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 with respect to such expenses that might increase as a
result of inflation in Israel. During 2002, the value of the NIS decreased against the
dollar by 7.3%, while the consumer price index in Israel increased by 6.5%. During 2001,
the value of the NIS decreased against the dollar by 9.3%, while the consumer price index
in Israel increased by 1.4%. During 2000, the value of the NIS decreased against the
dollar by 2.7%, while the consumer price index in Israel did not change. 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, 2002, 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.

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# Conditional Grants from
the Office of the Chief Scientist

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

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

As
of December 31, 2002 we received conditional grants from the Office of the Chief Scientist
totaling $5.8 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, 2002, our
contingent liability to the Office of the Chief Scientist for conditional grants received
was approximately $0.7 million.

The
funds available for Office of the Chief Scientist conditional grants were reduced for
2000, and the Israeli authorities have indicated that the government may further reduce or
abolish Office of the Chief Scientist grants in the future. Even if these conditional
grants are maintained, we might not receive Office of the Chief Scientist grants in the
future and cannot presently predict what would be the amounts of grants we might receive.

In
addition to royalty-bearing grants from the Office of Chief Scientist, in 2002, 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 advance measurement techniques. In both programs, the Office of Chief Scientist
contributes 66% of the approved research and development budget for the research
consortium and the members of the research consortium contribute the remaining 34%. No
royalties from this funding are payable to the Israeli government. Expenses in excess of
the approved budget are borne by the consortium members. In general, any consortium member
that develops technology as part of the consortium retains the intellectual property
rights to the technology developed by this member, and all the members of the consortium
have the right to utilize and implement such technology without having to pay royalties to
the developing consortium member. As of December 31, 2002, we had received approximately
$1 million in grants from the Office of Chief Scientist in connection with the
above-mentioned programs.

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# Political and economic
conditions in Israel

The
Company is incorporated under the laws of Israel, and has its 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 in intensity and degree, has led to security and economic problems for
Israel. However, a peace agreement between Israel and Egypt was signed in 1979, a peace
agreement between Israel and Jordan was signed in 1994 and, since 1993, several agreements
between Israel and the Palestinian Authority representatives have been signed. As of the
date hereof, Israel has not entered into any agreement with Syria or Lebanon. Currently
there is stagnation in the peace process in the Middle East and ongoing hostilities
between the Palestinian Authority and Israel. The resumption of hostilities in the region,
which have occurred after the failure of Camp David peace talks, as well as the events of
September 11, 2001, and the intensification of such hostilities in recent months, has a
negative effect on the stability of the region. There can be no assurance as to whether or
how the peace process will develop or what affect it or these ongoing
hostilities may have upon the Company.

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

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

Military
Service. Generally, all male adult citizens and permanent residents of Israel under
the age of 48 are, unless exempt, obligated to perform up to approximately 45 days of
military reserve duty annually. Additionally, all such residents are subject to being
called to active duty at any time under emergency circumstances. Some of the
Companys officers and employees are currently obligated to perform annual reserve
duty. While the Company has operated effectively under these requirements since it began
operations, no assessment can be made as to the full impact of such requirements on the
Companys workforce or business if conditions should change, and no prediction can be
made as to the effect on Company of any expansion or reduction of such obligations.

Economic
conditions. Israels economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980s that reached an annual
peak of 445%, low foreign exchange reserves, fluctuations in world commodity prices,
military conflicts and civil unrest. In the past three years, the Israeli economy has been
in a recession. From 1997 through 2002, Israels GDP increased 3.3%, 2.4%, 2.3%,
6.0%, 2.5% and 6.5%, respectively. The Israeli government has, for these and other
reasons, intervened in the economy by utilizing, among other means, fiscal and monetary
policies, import duties, foreign currency restrictions and control of wages, prices and
exchange rates. The Israeli government periodically changes its policies in all these
areas.

# Trend Information

24

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During
2001 and 2002 the Company has been adversely affected by the general slowdown in the
semiconductor equipment market, and its financial results reflect this slowdown. During
2001 and 2002 the Company implemented a cost-reduction plan, which included a 30%
reduction in work force, salary cutback and expense controls. The Company is unable to
predict the length and severity of this slowdown.

# Item 6. Directors,
Senior Management and Employees

At
the end of 2002, the Company went through an internal reorganization. These changes are
reflected in the following list of officers and directors:

|Name                 | Age | Position                                                         
|-------------------- | --- | -----------------------------------------------------------------
|Barry Cox (1) *      | 63  | Chairman of the Board of Directors                               
|Giora Dishon         | 59  | President, Chief Executive Officer, Director and Co-Founder      
|Moshe Finarov        | 51  | Vice President, Chief Technology Officer, Director and Co-Founder
|Chai Toren *         | 47  | Vice President, Chief Financial Officer                          
|Gad Yaron *          | 52  | Vice President, Chief Operational Officer                        
|Ronen Frish *        | 46  | Vice President, Sales and Marketing                              
|Meir Shannie (2) *   | 58  | Director                                                         
|Adam Feit (3) *      | 56  | Director                                                         
|Avi Kerbs *          | 56  | Director                                                         
|Joseph Ciechanover * | 71  | Director                                                         
|Alon Dumanis (4) *   | 60  | Director                                                         
|Lauri Hanover        | 43  | External Director                                                
|Karrey Holland       | 47  | External Director                                                

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

(1) Was appointed as Chairman in May 2003.
          (2) Resigned from office in June 2003.
          (3) Resigned from office in August 2002. 
          (4) Was appointed as Director in October 2002.

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

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

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

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

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

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

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

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

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

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

Ms.
          Lauri Hanoverwas appointed as the Companys external director in
          accordance with the provisions of Israeli law. Ms. Hanover has been serving
          since 1997 as Executive Vice President and Chief Financial Officer of Sapiens
          Intl. Corp NV, a software company. Prior to that, Ms. Hanover was employed by
          Scitex Corp. for a period of 12 years. Ms. Hanovers last position at
          Scitex Corp. was that of Corporate Controller, a position she held from 1995 to
          1997. Ms. Hanover holds an M.B.A. degree from New York University, BSCE from
          Wharton School, University of Pennsylvania (Maj. Finance) and a B.A. from the
          University of Pennsylvania. Ms. Hanover also holds a masters degree in business administration from New York University.

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Dr.
          Karey Holland was appointed as the Companys external director in
          accordance with the provisions of Israeli law. Dr. Holland serves concurrently
          as Vice President, Technology at Thomas West Inc., an equipment manufacturer for
          the semiconductor industry, and as senior managing partner of Techcet, a company
          providing strategic technical services in the semiconductor industry. Prior to
          her current position, Dr. Holland was employed for over five years by IPEC, a
          semiconductor manufacturing company, and later SpeedFam-IPEC where she held the
          positions of vice president of process technology and later as vice president
          and chief technological officer. She worked for IBM from 1981 through 1993 where
          she held several positions including Sematech advanced lithography technology
          development program manager, process technology development manager and
          manufacturing implementation manager. After leaving IBM and before taking her
          position at IPEC, Karey spent nine months at Motorola in Manufacturing Planning
          for the Microprocessor and Memory Technology Group. Dr. Holland holds a Ph.D. in
          analytical chemistry from Pennsylvania State University.

# Voting agreement

Some
of our main shareholders (Inventech Investments Ltd., Teuza  a Fairchild Technology
Ventures Ltd., Clal Electronics Ltd., Giora Dishon and Moshe Finarov) entered into a
voting agreement dated March 2000, with respect to the voting of their ordinary shares.
The voting agreement provided that for every 8.0% of the outstanding ordinary shares held
by a party to the voting agreement, such party had the right to nominate a person for
election to the board of directors of the Company. All the parties to the voting agreement
were required to vote all of their ordinary shares in favor of such nominee. The voting
agreement terminated on April 11, 2002.

# Compensation

The
aggregate direct remuneration paid or payable to all 13 persons who served in the capacity
of director or officer during 2002 was approximately $650 thousand, including
approximately $200 thousand, which was set aside for pension and retirement benefits and
including amounts expended by us for automobiles made available to our officers.

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

On
November 7, 2001, the Companys shareholders approved payment of remuneration to the
Companys directors in the same amounts as mentioned above for the external
directors. The total amount paid or payable to the directors, including external
directors, for 2002 is $73,000. In 2001, this amount was $74,000.

On
December 24, 2001, the Companys Board of Directors and the Companys Audit
Committee approved a grant to Mr. Meir Dayan, a former director of the company, of
options, immediately exercisable, to purchase 15,000 of the Companys ordinary shares
at an exercise price equal to the fair market value at the date of grant ($3.69). This
decision was approved by the Companys shareholders on May 8, 2002.

On
February 27, 2002, the Companys Board of Directors and the Companys Audit
Committee approved the acceleration of the vesting period for 20,000 options granted to
Mr. Mendy Erad, the former chairperson of the Company. This decision was approved by the
Companys shareholders on May 8, 2002.

27

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

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

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

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

On
May 15, 2003, the Companys Board of Directors and Audit Committee resolved (i) that
the monthly gross salary of Dr. Dishon shall be increased to 44,000 NIS for the period
February 1, 2003 through July 31, 2003 and increased to 50,000 NIS starting on August 1,
2003 and (ii) that the monthly gross salary of Dr. Finarov shall be increased to 40,000
NIS for the period February 1, 2003 through July 31, 2003 and increased to 44,000 NIS
starting on August 1, 2003. These changes in the terms of compensation for Drs. Dishon and
Finarov are subject to shareholder approval.

# Board of Directors
Committees

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

TheAudit Committee is comprised of three members, as required under Israeli law. The
members are Lauri Hanover, Karey Holland and Joseph Chiechanover. The functions of the
audit committee according to Israeli Law are to locate deficiencies in the business
management of the Company in consultation with the Companys auditors and to suggest
the measures to be taken regarding such deficiencies. The audit committee is also
responsible for approving related party transactions.

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

TheInvestment Committeeis comprised of Lauri Hanover who serves as a single member of
the investment committee as of the resignation of Mr. Meir Shannie. We intend to appoint
another member of the investment committee in the forthcoming meeting of our board of
directors. The function of the investment committee is to review and determine the cash
investment policy of the cash reserves of the company.

28

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# Employees

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

Because the Company has been adversely affected by, and its financial results reflect, the general
slowdown in the semiconductor equipment market since the beginning of 2001, and because
the Company is unable to predict the length the severity of this slowdown, the Company has
implemented a cost-reduction plan, which included a reduction in work force, as seen in
the above table.

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

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

# Share ownership

Giora Dishon, President, Chief Executive Officer and Co-Founder, and Moshe Finarov, Vice
President, Director of Technology, Director and Co-Founder, own 754,491 and 754,492
ordinary shares of the Company, respectively. All other directors, external directors and
senior management each hold less than 1% of the Companys shares. The following table
sets forth information regarding options held by our directors and officers as of April 1,
2003:

|Name                        | Ordinary Share
Underlying Options | Expiration Dates | Exercise Prices
($/share)
|--------------------------- | --------------------------------- | ---------------- | -------------------------
|Giora Dishon (1)            |                                   |                  |                          
|Moshe Finarov (1)           |                                   |                  |                          
|8 directors and officers as |                                   |                  |                          
|a group (1)                 |                                   |                  |                          

| | (1) | The vesting period of each option is between one and four years from the date of
               grant. Other than Drs. Dishon and Finarov, the directors and officers of the
               Company each own less than 1% of the Companys issued and outstanding
               ordinary shares.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

29

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Through
December 31, 2002, options to acquire 3,470,822 ordinary shares have been issued under the
share options plans, of which options to acquire 1,338,668 shares have been exercised,
209,752 have been forfeited and 1,149,186 were exercisable as of December 31, 2002.

As
of December 31, 2002, we had six employee share option plans that provide for the grant of
options to our employees, including senior management, to purchase an aggregate of
3,470,822 ordinary shares. The existing share option plans are described below (excluding
the first share option plan that was comprised of options to acquire 827,700 ordinary
shares, which have been fully exercised).

- Options to purchase 650,000 shares at an exercise price per share of NIS 0.01
(approximately $.0023); as of December 31, 2002, all options under this plan were granted,
498,476 options were exercised, 124,267 options were exercisable and 25,401 options were
forfeited;
- Options to purchase 387,000 shares at an exercise price per share of $3.17; as of December
31, 2002, all options under this plan were granted, 12,142 options were exercised, 287,396
options were exercisable and 36,858 options were forfeited;
- Options to purchase 668,350 shares at exercise prices ranging from $6.27 or $7.37 per
share; originally, this plan included 1,000,000 shares, and was reduced to 668,350 shares
by decision of the board of directors of the Company. As of December 31, 2002, all options
under this plan were granted, 350 options were exercised, 369,453 options were exercisable
and 98,574 options were forfeited;
- Options to purchase 746,500 shares at an exercise prices of $1.13, $2.17 or $2.46, the
fair market value of Novas stock on the date of grant; as of December 31, 2002, all
options under this plan were granted, non of the options were exercised, 206,798 options
were exercisable and 48,919 options were forfeited;
- Options to purchase 116,272 ordinary shares at an exercise price of $5.16 per share;
granted in March 1999 to Mendy Erad, the chairman of the board at that time; as of
December 31, 2002, these options were fully exercisable;
- Options to purchase an aggregate of 75,000 ordinary shares at an exercise price of $3.69
per share granted to the members of our Board of Directors, other than our external
directors; as of December 31, 2002, 45,000 of these options were exercisable;

In
addition to the option plans described above, in 2003, the Company implemented an Employee
Stock Purchase Plan pursuant to which eligible employees of the Company may purchase up to
150,000 ordinary shares, subject to certain adjustments, at a discounted price. The
Employee Stock Purchase Plan is presently scheduled to run through 2004.

30

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The following table summarizes information about share
options outstanding as of December 31, 2002:

|Outstanding
  as ofDecember
  31, 2002 |  | Exercisable as of
  December 31, 2002
|-------------------------------------- |  | -------------------------------------
|                                       |  |                                      
|Range of
  exerciseprices              |  | Number
  outstanding                 
|                                       |  |                                      
|(US
  dollars)                         |  |                                      
|                                       |  |                                      
|                                       |  |                                      
|0.0025                                 |  | 126,123                              
|2.46-3.69                              |  | 1,110,581                            
|5.16                                   |  | 116,272                              
|6.27-7.37                              |  | 569,426                              
|                                       |  |                                      
|                                       |  | 1,922,402                            
|                                       |  |                                      

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Item 7.  Major
Shareholder and Related Party Transactions

Major shareholders

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
June 16, 2003.

|Name                                            |  | Number of Ordinary
  Shares Beneficially
  Owned* |  | Percentage of Ordinary
  Shares
  Beneficially Owned | 
|----------------------------------------------- |  | ------------------------------------------------- |  | ---------------------------------------------------- | 
|                                                |  |                                                   |  |                                                      | 
|Clal Electronics Industries Ltd.                |  | 3,079,245                                         |  | 20.61%                                               | 
|Inventech Investments Co. Ltd.(1)               |  | 1,581,244                                         |  | 10.59%                                               | 
|Teuza - A Fairchild Technology Venture Ltd (2). |  | 1,900,327                                         |  | 12.72%                                               | 
|Austin W. Marxe & David Greenhouse (3)          |  | 1,834,300                                         |  | 12.28%                                               | 
|Tamir Fishman Ventures II, L.L.C. (4)           |  | 843,300                                           |  | 5.64%                                                | 
|Shai Saul (4)                                   |  | 843,300                                           |  | 5.64%                                                | 
|Michael Elias (4)                               |  | 850,550                                           |  | 5.69%                                                | 
|Tamir Fishman & Co. Ltd. (4)                    |  | 848,400                                           |  | 5.68%                                                | 
|Eldad Tamir (4)                                 |  | 848,400                                           |  | 5.68%                                                | 
|Danny Fishman (4)                               |  | 848,400                                           |  | 5.68%                                                | 
|Capital Group International, Inc.               |  | 774,800                                           |  | 5.19%                                                | 
|Giora Dishon (5)                                |  | 785,737                                           |  | 5.25%                                                | 
|Moshe Finarov (5)                               |  | 785,736                                           |  | 5.25%                                                | 

*               Unless
specifically stated otherwise, the information provided hereinabove is based
upon information contained in filings made by the named person with the U.S.
Securities and Exchange Commission (SEC) pursuant to Regulation 13D-G.
(1)             As
reported by Inventech to the Tel Aviv Stock Exchange (TASE) on March 25, 2003
and April 13, 2003.
(2)             The
Company has been informed that Teuza-A Fairchild Technology Venture Ltd. has
sold 149,000 shares of the Company shares held by it. However, as of June 16,
2003 the transaction was not fully completed and is therefore not reflected in
the table above.
(3)             As
reported on the Schedule 13G (Amendment 1) filed by Messrs. Marxe and
Greenhouse on February 13, 2003, the amount indicated includes 415,000 shares
held by Special Situations Cayman Fund, L.P., 376,000 shares held by Special
Situations Technology Fund, L.P. and 1,042,000 shares held by Special
Situations Fund III, L.P.
(4)             The
following information is contained in a Schedule 13G filed by, among others,
Tamir Fishman Ventures II, LLC (TFV), on June 3, 2003:  (a) Five limited partnerships and a
corporation directly beneficially own, in the aggregate, 843,300  shares; (b) TFV beneficially owns 843,300
shares as the sole general partner  of
the five limited partnerships and by virtue of its management rights with
respect to corporation ; (b) Shai Saul, is a managing member of TFV; (c)
Michael Elias is a managing member of TFV and reports having sole voting and
dispositive power over an additional 7,250 shares; (c) Tamir Fishman & Co.
Ltd is a managing member of TFV and reports directly owning 5,100 additional
shares; (d) Eldad Tamir and Danny Fishman are each Co-President and Co-CEO of
Tamir Fishman & Co. Ltd.
(5)             Includes
shares held in trust under Israeli tax law for the benefit of the named
shareholders and includes option to purchase 31,245 ordinary shares which is
exercisable within 60 days.

All major shareholders
have the same voting rights.

Intel Corporation Inc.,
who held 1,299,948 shares, sold substantially all of its holdings during 2001.

The Company believes
that, as of December 31, 2002, approximately 30% of its ordinary shares were
held by United States holders.

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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

Our
former articles of association provided that Clal Electronic Industries Ltd.
had the right to designate the chairman and one additional member of our board
of directors, each of Teuza - a Fairchild Technology Venture Ltd., Inventech
Investments Ltd. and our founders, Giora Dishon and Moshe Finarov, jointly had
the right to designate one director and Intel had the right to designate one
director or observer.  Mendy Erad, our
former chairman of the board, was the designee of Clal, Avi Kerbs was the
designee of Teuza, Meir Dayan was the designee of Inventech and Moshe Finarov
was the designee of the founders. Intel did not designate a director. Our
current articles of association, adopted in February 2000, provide that
directors are elected by a vote of the holders of a majority of shares
represented at a shareholders meeting, provided that the holders of a majority
of our shares are present, and no shareholder has a right to designate directors
or observers.  As discussed in Item 6
under the heading Voting Agreement, some of our shareholders had been party
to a voting agreement relating to the election of directors.  This agreement terminated on April 11, 2002.

We
are parties to an agreement with our shareholders and our founders, Messrs.
Dishon and Finarov. This agreement provides that each of Intel, Inventech
Investments Ltd., Clal Electronics Industries Ltd. and Teuza Ltd, has one
demand registration right and these shareholders and Drs. Dishon and Finarov
have unlimited piggyback registration rights for our securities owned by them.
The agreement provides that we will bear all expenses incurred for any
registration of our securities, other than underwriting fees and expenses, and
that we will indemnify the selling shareholders for liabilities arising from
any registration, including liabilities under the Securities Act of 1933. This
registration rights agreement terminated in September 2002.

On
March 16, 1999, we entered into an agreement with Mendy Erad, our former
chairman of the board, that provided that he would serve as active chairman
until December 31, 2001 and receive $6,000 per month.  In addition, we have granted Mr. Erad an option to purchase 116,272
ordinary shares at a price of $5.16 per share. This option is fully vested and
exercisable.

On
July 24, 2000, our shareholders approved a bonus to Mendy Erad in the amount of
$100,000.

On
July 24, 2000, our shareholders approved the issuance of an option to purchase
up to 40,000 ordinary shares to Moshe Finarov, a director and officer of the
Company. The option was granted and is subject to the terms and conditions of
the Companys option plan 4B, which provides that the option exercise price is
$7.37. The options vest over a period of between one and four years and their
term may not exceed seven years from the date of grant.

On
November 7, 2001, the Companys shareholders approved payment of remuneration
to the Companys directors in the same amounts as mentioned above for the
external directors.  The total amount
paid or payable to the directors for 2002 is $73,000. In 2001, this amount was
$74,000.

On
November 7, 2001, the Companys shareholders approved the grant of up to an
aggregate of 70,000 options to purchase ordinary shares to the members of the
Companys Board of Directors, excluding the external directors and directors
that also serve as Company officers. 
Pursuant to that approval, up to 10,000 options could be granted to each
director and up to 20,000 options could be granted to the chairman of the
board.  The 70,000 authorized options
were granted on December 24, 2001, with an exercise price of $3.69 per share
(the market value of Nova stock at the date of grant), and vesting periods of
one to four years.

On
November 7, 2001, our shareholders approved the issuance of an option to
purchase up to 20,000 ordinary shares to Giora Dishon, who at the time of such
resolution served as CEO of the company and was later also appointed as a
director of the Company. The option was granted and is subject to the terms and
conditions of the Companys option plan 5. The options vest over a period of
between one and four years and their term may not exceed seven years from the
date of grant.  The exercise price of
these options is $2.46 per share.

33

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On
November 7, 2001, our shareholders approved the issuance of an option to
purchase up to 20,000 ordinary shares to Moshe Finarov, a director and officer
in the Company, subject to the terms and conditions of the Companys employee
option plan 5. The options vest over a period of between one and four years,
their term may not exceed seven years from the date of grant, and their
exercise price is $2.46 per share.

On
December 24, 2001, the Companys Board of Directors and the Companys Audit
Committee approved a grant to Mr. Meir Dayan, a former director of the company,
of options, immediately exercisable, to purchase 15,000 of the Companys
ordinary shares at an exercise price equal to the fair market value at the date
of grant ($3.69). This decision requires further approval of the Companys
shareholders.

On
February 27, 2002, the Companys Board of Directors and the Companys Audit
Committee approved the acceleration of the vesting period for 20,000 options
granted to Mr. Mendy Erad, the former chairman of the board of the Company.
This decision requires further approval of the Companys shareholders.

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

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

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

On
May 8, 2002, the Companys shareholders approved a grant to Meir Dayan, a
former director of the Company, of options, immediately exercisable, to
purchase 15,000 ordinary shares at an exercise price equal to the fair market
value at the date of grant ($3.69).

On
May 8, 2002 the Companys shareholders approved the acceleration of the vesting
period for 20,000 options granted to Mendy Erad, the former Chairman of the
Board of Directors of the Company.

In
2002, the Company obtained directors and officers liability insurance for its
officers and directors with coverage in an aggregate amount of $5,000,000. In
addition, the Company undertook to indemnify the Companys officers and
directors up to an aggregate amount of $15,000,000 pursuant to the terms set
forth in an Indemnification and Exculpation Letter. The Indemnification and
Exculpation Letter also exculpated the officers and directors from certain
liabilities relating to their positions and directors and officers.  The directors and officers insurance and
Indemnification and Exculpation Letter, to the extent applicable to directors,
were approved by the Companys shareholders on October 31, 2002.

For
a description of the employment arrangements with Mr. Cox and Drs. Dishon and
Finarov, see Item 6. Directors, Senior Management and Employees -
Compensation.

34

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Item
8.  Financial Information

Consolidated
Financial Statements

See
Item 17. Financial Statements and pages F-1 through F-23.

Significant
Changes

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

Legal
Proceedings

From
time to time, we are a party to legal proceedings and claims in the ordinary
course of business. We are not currently a party to any material legal
proceedings. We have, however, been notified of a lawsuit involving Intel, our
former shareholder and former affiliate, and many other semiconductor
manufacturers. See Item 4, Intellectual Property for additional
information.

Dividend
Policies

We
anticipate that we will retain any future 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. Please see Israeli
Taxation for a description of the conditions limiting our ability to declare
and pay dividends under Israeli law.

Export
Sales

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

Item 9.  The Offer and
Listing

Offer
and listing details

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

NASDAQ
National Market

|                         |                | Price per share (US$) |      
|------------------------ | -------------- | --------------------- | -----
|                         |                |                       |      
|                         |                | High                  |      
|                         |                |                       |      
|Yearly highs and lows    |                |                       |      
|2000                     |                | 21.94                 |      
|2001                     |                | 10.97                 |      
|2002                     |                | 4.54                  |      
|                         |                |                       |      
|Quarterly highs and lows |                |                       |      
|2001                     |                |                       |      
|                         | First quarter  |                       | 10.25
|                         | Second quarter |                       | 10.97
|                         | Third quarter  |                       | 5.90 
|                         | Fourth quarter |                       | 4.25 
|2002                     |                |                       |      
|                         | First quarter  |                       | 4.54 
|                         | Second quarter |                       | 3.70 
|                         | Third quarter  |                       | 2.25 
|                         | Fourth quarter |                       | 2.00 
|2003                     |                |                       |      
|                         | First quarter  |                       | 2.62 
|                         |                |                       |      
|Monthly highs and lows   |                |                       |      
|2002                     |                |                       |      
|                         | December       |                       | 2.27 
|2003                     |                |                       |      
|                         | January        |                       | 2.1  
|                         | February       |                       | 2.62 
|                         | March          |                       | 2.58 
|                         | April          |                       | 2.5  
|                         | May            |                       | 4.05 

35

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Tel Aviv Stock Exchange

|                         |                | Price per share (NIS) |      
|------------------------ | -------------- | --------------------- | -----
|                         |                |                       |      
|                         |                | High                  |      
|                         |                |                       |      
|Yearly highs and lows    |                |                       |      
|2002                     |                | 1,158                 |      
|                         |                |                       |      
|Quarterly highs and lows |                |                       |      
|2002                     |                |                       |      
|                         | Second quarter |                       | 1,158
|                         | Third quarter  |                       | 1,158
|                         | Fourth quarter |                       | 1,080
|2003                     |                |                       |      
|                         | First quarter  |                       | 1,080
|                         |                |                       |      
|Monthly highs and lows   |                |                       |      
|2002                     |                |                       |      
|                         | December       |                       | 1,080
|2003                     |                |                       |      
|                         | January        |                       | 1,080
|                         | February       |                       | 1,080
|                         | March          |                       | 1,080
|                         | April          |                       | 1,080
|                         | May            |                       | 1,080

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), 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.

36

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Approval of Related Party Transaction; Corporate
Borrowings.The Israeli
Companies Law requires that an office holder of a company, including directors
and executive officers, promptly disclose to the board of directors of that
company any personal interest that the office holder or the affiliates of the
office holder may have and all related material information known about any
existing or proposed transaction with the company.  Once the office holder complies with this disclosure requirement,
the approval of the board of directors is required for the transaction unless
the articles of association provide otherwise. 
If the transaction is an extraordinary transaction, it also requires
the approval of the audit committee 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.

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

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

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

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

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 holders 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.

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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 33% of the voting
power.  A meeting adjourned for lack of
a quorum is adjourned to the same day in the following week at the same time
and place or any time and place as the chairman may designate with the consent
of a majority of the shareholder votes cast on the matter.  At the reconvened meeting, the required
quorum consists of any number of members present in person or by proxy,
regardless of the number of shares represented.  A notice regarding a general meeting must be sent at least 21
days before the meeting to every shareholder of record, unless a shorter period
has been set by the board of directors, which shall be not less than seven days
prior to the date of the general meeting. 
Every holder of record of the ordinary shares as of the record date
fixed in such notice is entitled to vote at the shareholders meeting.

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

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

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

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

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

Material
Contracts

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

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Exchange
Controls

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

Taxation

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

Tax Reform

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

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

Employee
stock incentive plans.The tax reform codified past practice and determined three
alternative tracks for taxing employee stock option plans. Where a trustee
arrangement is in place, the employer can either claim an expense for tax
purposes while the employee will be fully taxed up to the maximum marginal tax
rate of 50% or the Company can waive the tax expense and the employee will pay
a reduced tax rate of 25%. Where there is no trustee arrangement, the employee
is fully taxable and no expense is allowed to the Company. There are detailed
provisions for implementing these tracks. The Company is considering the
alternatives.

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 to tax on passive income of foreign affiliates as
if it had received a dividend from such companies.

Capital
gains taxCapital 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.

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

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General
Corporate Tax Structure

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

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

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

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

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

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

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

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 2008. Our current investments in development
facilities are made under new approvals.

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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. Tax Considerations Regarding Shares Acquired by U.S.
TaxpayersDistributions on the Ordinary Shares and Note 10 to our consolidated
financial statements.

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

Tax
Benefits for Research and Development

Israeli
tax law allows a tax deduction in the year incurred for expenditures, including
capital expenditures, in scientific research and development projects, if the
projects are approved by the relevant Israeli government ministry and the
research and development is for the promotion of the enterprise. Expenditures
from projects not so approved are deductible over a three-year period. However,
government grants received by us are deducted from company expenses for tax
purposes under 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;
| |   |                                                                                                                                                                                                                                                                                     
| |  | an election to file a consolidated tax return with
  related Israeli industrial companies that satisfy conditions set forth in the
  law; and                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                     
| |  | accelerated depreciation rates on equipment and
  buildings.                                                                                                                                                                                                                        

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.

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

Capital
Gains Tax

Israeli
law imposes a capital gains tax on the sale of capital assets. The law
distinguishes between the inflationary surplus and the real gain. The
inflationary surplus is a portion of the total capital gain which is equivalent
to the increase of the relevant assets purchase price that is attributable to
the increase in the Israeli consumer price index between the date of purchase
and the date of sale. The real gain is the excess of the total capital gain
over the inflationary surplus. Inflationary surplus accumulated after December
31, 1993 is exempt from any capital gains tax in Israel. The real gain is added
to ordinary income, which is taxed at ordinary rates of 30% to 50% for
individuals and 36% for corporations.

Under
current law, gains on sales of our ordinary shares are exempt from Israeli
capital gains tax by individuals and corporations which conduct no trade or
business and whose shares are held only by individuals for so long as our
ordinary shares are quoted on Nasdaq or another stock exchange recognized by
the Israeli Controller of Foreign Currency and we qualify as an industrial
company. The Israeli tax authorities might determine that we do not qualify as
an industrial company. We might not maintain our listing on Nasdaq or our
status as an industrial company in the future.

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

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

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

Taxation
of Non-Resident Holders of Our Shares

Non-residents
of Israel pay income tax on income accrued or derived from sources in Israel.
These sources of income include passive income such as dividends, royalties and
interest, as well as non-passive income from services rendered in Israel. On
distributions of dividends other than bonus shares, or stock dividends, income
tax at the rate of 25% is withheld at source. If the income out of which the
dividend is being paid is attributable to an approved enterprise, the rate is
15%. A different rate may be provided in a treaty between Israel and the
shareholders country of residence. Under the U.S.-Israel Tax Treaty, the
maximum tax on dividends paid to a U.S. resident is 25%. Also, under such
Treaty, if the income out of which the dividend is being paid is attributable
to an approved enterprise and the non-resident is a U.S. corporation that holds
10% of the companys voting power, the rate is 12.5%.

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

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

Foreign
Exchange Regulations

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

U.S.
TAXATION

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

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

| |  | a natural person who is a citizen or resident of the
  United States;                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                         
| |  | a corporation or another entity taxable as a
  corporation created or organized under the laws of the United States or any
  political subdivision of the United States;
| |   |                                                                                                                                                                         
| |  | an estate, the income of which is includable in
  gross income for United States federal income tax purposes regardless of its
  source; or                             

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| |  | a trust, if (a) a U.S. court is able to exercise
  primary supervision over its administration and (b) one or more U.S. persons
  have the authority to control all of its substantial decisions.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

Distributions on the Ordinary Shares

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

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

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

44

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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 United States for purposes of the treaty and
who sells the ordinary shares within Israel may be treated as foreign source
income for U.S. foreign tax credit purposes.

Passive
Foreign Investment Companies

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

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

Status of Nova as a Passive Foreign Investment
Company.  Under the income test, less
than 75% of our gross income was passive income in 2002. The determination of
the companys status under the asset test is more difficult, because that test
requires a quarterly determination of the fair market value of the companys
passive and non-passive assets.  For
2002, because we continue to have substantial amounts of cash and short-term
deposits and the market value of our ordinary shares has decreased, a
determination of the value of our non-passive assets by reference to the market
value of our ordinary shares would result in a conclusion that the average
value of our passive assets exceeds 50% of the average value of our gross
assets.  Therefore, there is a risk that
we were a passive foreign investment company in 2002 or we will be a passive
foreign investment company in subsequent years. There is, however, no
requirement that the fair market value of a companys assets be determined
solely by reference to the market value of the companys stock. Accordingly,
after making a determination of the gross fair market value of its non-passive
assets, the company believes that the average percentage of the value of its
passive assets is less than 50% of the average gross fair market value of its
total assets. If we will be treated as a passive foreign investment
company for any taxable year, U.S. holders should consider whether or not to
elect to treat us as a qualified electing fund or to elect to mark to market
the ordinary shares. In particular, if a U.S. holder makes a qualified electing
fund election for all taxable years that the U.S. holder holds the ordinary
shares during which we are treated as a passive foreign investment company, the
U.S. holder will be required for each taxable year to include in income a pro
rata share of our undistributed ordinary earnings and net capital gain, if any,
as ordinary income and long-term capital gain, respectively. We will comply
with all the requirements of the Code so that U.S. holders of our ordinary
shares will be able to elect to treat Nova as a qualified electing fund if
they so choose.

45

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---

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

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

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

United
States Information Reporting and Backup Withholding

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

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

Documents
on Display

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

46

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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 2002
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 2002, the value of the NIS decreased against the dollar by 7.3%, while
the consumer price index in Israel increased by 6.5%. During 2001, the value of
the NIS decreased against the dollar by 9.3%, while the consumer price index in
Israel increased by 1.4%. During 2000, the value of the NIS decreased against
the dollar by 2.7%, while the consumer price index in Israel did not change.
See Note 2A of our consolidated financial statements. We believe that the rate
of inflation in Israel has had a minor effect on our business to date. However,
our dollar costs in Israel will increase if inflation in Israel exceeds the
devaluation of the NIS against the dollar or if the timing of this devaluation
lags behind inflation in Israel. As of December 31, 2002, 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.

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

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

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

Item 12. Description of Securities Other than Equity
Securities

Not
applicable.

47

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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.

The
managing underwriters for the offering were Chase-H&Q, SG Cowen and Needham
& Company, Inc.

We
sold 3,000,000 ordinary shares for consideration of $54 million. The net
proceeds amounted to $49.2 million. As of March 31, 2003, approximately $11.5
million of the net proceeds had been used for working capital requirements and
$2.5 million for capital expenditures.

Item 15

Evaluation of disclosure
controls and procedures

Within 90 days prior to the date of this
report (the Evaluation Date), the Companys President and Chief Executive
Officer and Chief Financial Officer evaluated the effectiveness of the our
disclosure controls and procedures (as defined in the Securities Exchange Act
of 1934 Rules 13a-14(c) and 15d-14(c)). 
Based on that evaluation, these officers have concluded that, as of the
Evaluation Date, the Companys disclosure controls and procedures were
effective.

Changes in internal controls

There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the Evaluation Date.

Item 16

Reserved.

PART
III

Item 17. Financial Statements

See
pages F-1 through F-23

Item 18. Financial Statements

Not
applicable.

Item 19. Exhibits

|Number |  | Description                                                                                                                                               
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  |                                                                                                                                                           
|       |  |                                                                                                                                                           
|1.1    |  | Articles of Association (incorporated by reference
  to exhibit 3.1 to the Companys Registration Statement on Form F-1
  (registration number 333-11640))
|       |  |                                                                                                                                                           
|1.2    |  | First Amendment to the Companys Articles of
  Association (incorporated by reference to the Companys Current Report on
  Form 6-K filed on June 4, 2002)

48

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|Number |  | Description                                                                                                                                                                                                     
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  |                                                                                                                                                                                                                 
|       |  |                                                                                                                                                                                                                 
|4.1    |  | 1997 Stock Option Plan (Plan 2) (incorporated by
  reference to exhibit 10.1 to the Companys Registration Statement on Form F-1
  (registration number 333-11640))                                             
|       |  |                                                                                                                                                                                                                 
|4.2    |  | Option Plan 3 (incorporated by reference to exhibit
  10.2 to the Companys Registration Statement on Form F-1 (registration number
  333-11640))                                                               
|       |  |                                                                                                                                                                                                                 
|4.3    |  | Option Plan 4A and 4B (incorporated by reference to
  exhibit 10.3 to the Companys Registration Statement on Form F-1
  (registration number 333-11640))                                                       
|       |  |                                                                                                                                                                                                                 
|4.4    |  | Option Plan 5 (incorporated by reference to Exhibit
  4.4 to the Companys Annual Report for 20-F for 2002 filed May 9, 2002                                                                                    
|       |  |                                                                                                                                                                                                                 
|4.5    |  | Option Plan 6 (incorporated by reference to Exhibit
  4.1 to the Companys Registration Statement on Form S-8 filed December 24,
  2002 (registration number 333-102193))                                       
|       |  |                                                                                                                                                                                                                 
|4.6    |  | Employment Agreement between Nova and Giora Dishon
  (incorporated by reference to exhibit 10.4 to the Companys Registration
  Statement on Form F-1 (registration number 333-11640))                          
|       |  |                                                                                                                                                                                                                 
|4.7    |  | Employment Agreement between Nova and Moshe Finarov
  (incorporated by reference to exhibit 10.6 to the Companys Registration
  Statement on Form F-1 (registration number 333-11640))                         
|       |  |                                                                                                                                                                                                                 
|4.8    |  | Employment Agreement between Nova and Chai Toren
  (incorporated by reference to exhibit 10.7 to the Companys Registration
  Statement on Form F-1 (registration number 333-11640))                            
|       |  |                                                                                                                                                                                                                 
|4.9    |  | Employment Agreement between Nova and Ronen Frish
  (incorporated by reference to exhibit 10.8 to the Companys Registration
  Statement on Form F-1 (registration number 333-11640))                           
|       |  |                                                                                                                                                                                                                 
|4.10   |  | Agreements between Nova and the Office of the Chief
  Scientist in Israel (incorporated by reference to exhibit 10.10 to the Companys
  Registration Statement on Form F-1 (registration number 333-11640))    
|       |  |                                                                                                                                                                                                                 
|4.11   |  | Certificate of Approval from the Investment Center
  in Israel (incorporated by reference to exhibit 10.11 to the Companys
  Registration Statement on Form F-1 (registration number 333-11640))               
|       |  |                                                                                                                                                                                                                 
|4.12   |  | Lease Agreement between Nova and Ef-Shar Ltd.
  (incorporated by reference to Exhibit 4.14 to the Companys Annual Report on
  Form 20-F filed on May 9, 2002)                                                  
|       |  |                                                                                                                                                                                                                 
|4.13   |  | Summary of Lease Agreement between Nova and Ef-Shar
  Ltd. (incorporated by reference to Exhibit 4.15 to the Companys Annual
  Report on Form 20-F filed on May 9, 2002)                                       
|       |  |                                                                                                                                                                                                                 
|4.14   |  | Letter Agreement between Barry Cox and the Company
  dated May 15, 2003 (filed herewith)                                                                                                                        
|       |  |                                                                                                                                                                                                                 
|4.15   |  | Employee Stock Purchase Plan 1 (incorporated herein
  by reference to Exhibit 4.1 to the Companys Registration Statement on Form
  S-8 filed on March 24, 2003 (File No. 33-103981))                           
|       |  |                                                                                                                                                                                                                 
|4.16   |  | Letter of Indemnification and Exculpation for
  certain directors, officers and/or employees (incorporated herein by
  reference Annex A to the Companys Current Report on Form 6-K filed on
  October 8, 2002)
|       |  |                                                                                                                                                                                                                 
|8      |  | List of Subsidiaries (filed herewith)                                                                                                                                                                           
|       |  |                                                                                                                                                                                                                 
|12.1   |  | Consent of Brightman Almagor (filed herewith)                                                                                                                                                                   
|       |  |                                                                                                                                                                                                                 
|12.2   |  | Certification Pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002 (filed herewith)                                                                                                                      
|       |  |                                                                                                                                                                                                                 
|12.3   |  | Certification Pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002 (filed herewith)                                                                                                                      

49

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---

Signatures

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

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

Date:  June 25,
2003

50

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---

CERTIFICATION

I,
Giora Dishon, certify that:

1.               I
have reviewed this annual report on Form 20-F of Nova Measuring Instruments,
Ltd.

2.               Based
on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual report;

3.               Based
on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this annual report;

4.               The
registrants other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:

a.               designed
such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in
which this annual report is being prepared;

b.               evaluated
the effectiveness of the registrants disclosure controls and procedures as of
a date within 90 days prior to the filing date of this annual report (the
Evaluation Date); and

c.               presented
in this annual report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;

5.               The
registrants other certifying officers and I have disclosed, based on our most
recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent
function):

a.               all
significant deficiencies in the design or operation of internal controls which
could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any
material weakness in internal controls; and

b.               any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal controls; and

6.               The
registrants other certifying officers and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date:  June 25, 2003

| | /s/ Giora Dishon        | 
| | ----------------------- | 
| |                         | 
| | Giora Dishon           
| | Chief Executive Officer

51

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---

CERTIFICATION

I,
Chai Toren, certify that:

1.               I
have reviewed this annual report on Form 20-F of Nova Measuring Instruments,
Ltd.

2.               Based
on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual report;

3.               Based
on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this annual report;

4.               The
registrants other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:

a.               designed
such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in
which this annual report is being prepared;

b.               evaluated
the effectiveness of the registrants disclosure controls and procedures as of
a date within 90 days prior to the filing date of this annual report (the
Evaluation Date); and

c.               presented
in this annual report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;

5.               The
registrants other certifying officers and I have disclosed, based on our most
recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent
function):

a.               all
significant deficiencies in the design or operation of internal controls which
could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any
material weakness in internal controls; and

b.               any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal controls; and

6.               The
registrants other certifying officers and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date:  June 25, 2003

| | /s/ Chai Toren          | 
| | ----------------------- | 
| |                         | 
| | Chai Toren             
| | Chief Financial Officer

52

---

---

NOVA MEASURING INSTRUMENTS LTD.

CONSOLIDATED FINANCIAL STATEMENTS

AS
OF DECEMBER 31, 2002

---

---

NOVA MEASURING INSTRUMENTS LTD.

CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002

Contents

|                                  | Page                                                                                                        
|--------------------------------- | ------------------------------------------------------------------------------------------------------------
|                                  |                                                                                                             
|Independent Auditors Report      | 1                                                                                                           
|                                  |                                                                                                             
|Consolidated Financial Statements |                                                                                                             
|                                  |                                                                                                             
|                                  | Balance Sheets - December
  31, 2002 and 2001                                                               
|                                  |                                                                                                             
|                                  | Statements of Operations -
  Years Ended December 31, 2002, 2001 and 2000                                   
|                                  |                                                                                                             
|                                  | Statements of
  Shareholders Equity and Comprehensive Loss - Years Ended December 31, 2002,
  2001 and 2000
|                                  |                                                                                                             
|                                  | Statements of Cash Flows -
  Years Ended December 31, 2002, 2001 and 2000                                   
|                                  |                                                                                                             
|                                  | Notes to the Financial
  Statements                                                                         

F-1

---

---

INDEPENDENT
AUDITORS REPORTTO THE SHAREHOLDERS OFNOVA MEASURING INSTRUMENTS LTD.

We
have audited the accompanying consolidated balance sheets of Nova Measuring
Instruments Ltd. (the Company) and its subsidiaries as of December 31, 2002
and 2001, 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, 2002. 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 auditing standards generally accepted
in the United States of America.Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
Companys management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 2002 and 2001, and their
consolidated results of operations and their consolidated cash flows for each
of the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.

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

Tel
Aviv, Israel
February 27, 2003

F-2

---

---

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

|                                         |                                                                                                                                                                                    |  | As of
  December 31, |        
|---------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | -------
|                                         |                                                                                                                                                                                    |  |                      |        
|                                         |                                                                                                                                                                                    |  | 2002                 |        
|                                         |                                                                                                                                                                                    |  |                      |        
|CURRENT ASSETS                           |                                                                                                                                                                                    |  |                      |        
|                                         | Cash and cash equivalents                                                                                                                                                          |  | $                    | 36,964 
|                                         | Short-term interest-bearing
  bank deposits                                                                                                                                        |  |                      | 622    
|                                         | Available for sale
  securities                                                                                                                                                    |  |                      | -      
|                                         | Held to maturity
  securities                                                                                                                                                      |  |                      | 994    
|                                         | Trade accounts receivable
  (no allowance for doubtful accounts)                                                                                                                   |  |                      | 2,663  
|                                         | Inventories (Note 3)                                                                                                                                                               |  |                      | 3,150  
|                                         | Other current assets                                                                                                                                                               |  |                      | 1,137  
|                                         |                                                                                                                                                                                    |  |                      |        
|                                         |                                                                                                                                                                                    |  | 45,530               |        
|                                         |                                                                                                                                                                                    |  |                      |        
|LONG-TERM ASSETS                         |                                                                                                                                                                                    |  |                      |        
|                                         | Severance pay funds (note
  6)                                                                                                                                                     |  |                      | 1,701  
|                                         | Fixed assets, net (Note 4)                                                                                                                                                         |  |                      | 1,777  
|                                         |                                                                                                                                                                                    |  |                      |        
|                                         |                                                                                                                                                                                    |  | 3,478                |        
|                                         |                                                                                                                                                                                    |  |                      |        
|                                         | Total assets                                                                                                                                                                       |  | $                    | 49,008 
|                                         |                                                                                                                                                                                    |  |                      |        
|                                         |                                                                                                                                                                                    |  |                      |        
|CURRENT LIABILITIES                      |                                                                                                                                                                                    |  |                      |        
|                                         | Trade accounts payable                                                                                                                                                             |  | $                    | 3,340  
|                                         | Other current liabilities
  (Note 5)                                                                                                                                               |  |                      | 7,616  
|                                         |                                                                                                                                                                                    |  |                      |        
|                                         |                                                                                                                                                                                    |  | 10,956               |        
|                                         |                                                                                                                                                                                    |  |                      |        
|LONG-TERM LIABILITIES                    |                                                                                                                                                                                    |  |                      |        
|                                         | Liability for employee
  termination benefits (Note 6)                                                                                                                             |  |                      | 2,162  
|                                         | Other long-term liability
  (Note 9)                                                                                                                                               |  |                      | 213    
|                                         |                                                                                                                                                                                    |  |                      |        
|                                         |                                                                                                                                                                                    |  | 2,375                |        
|                                         |                                                                                                                                                                                    |  |                      |        
|COMMITMENTS AND
  CONTINGENCIES (Note 7) |                                                                                                                                                                                    |  |                      |        
|                                         |                                                                                                                                                                                    |  |                      |        
|SHAREHOLDERS EQUITY (Note
  8)          |                                                                                                                                                                                    |  |                      |        
|                                         | Ordinary shares, NIS 0.01
  par value - authorized 40,000,000 and 38,900,000 
     shares respectively, issued and outstanding 14,929,867
     and 14,627,113 shares, respectively |  |                      | 46     
|                                         | Deferred shares, NIS 0.01
  par value - authorized 0 and 1,100,000 shares,
     respectively, issued and outstanding 0 and 1,057,021 shares, respectively                          |  |                      | -      
|                                         | Additional paid-in capital                                                                                                                                                         |  |                      | 72,614 
|                                         | Deferred stock-based
  compensation                                                                                                                                                |  |                      | (809   
|                                         | Accumulated other
  comprehensive loss                                                                                                                                             |  |                      | -      
|                                         | Accumulated deficit                                                                                                                                                                |  |                      | (36,174
|                                         |                                                                                                                                                                                    |  |                      |        
|                                         | Total shareholders equity                                                                                                                                                         |  |                      | 35,677 
|                                         |                                                                                                                                                                                    |  |                      |        
|                                         |                                                                                                                                                                                    |  |                      |        
|                                         | Total liabilities and
  shareholders equity                                                                                                                                       |  | $                    | 49,008 
|                                         |                                                                                                                                                                                    |  |                      |        
|                                         |                                                                                                                                                                                    |  |                      |        

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 per share data)

|                                                                                                                              |  |   | Year
  ended December 31, |  
|----------------------------------------------------------------------------------------------------------------------------- |  | - | ------------------------- | -
|                                                                                                                              |  |   |                           |  
|                                                                                                                              |  |   | 2002                      |  
|                                                                                                                              |  |   |                           |  
|REVENUES:                                                                                                                     |  |   |                           |  
|Product sales                                                                                                                 |  | $ | 14,506                    |  
|Services                                                                                                                      |  |   | 5,865                     |  
|                                                                                                                              |  |   |                           |  
|                                                                                                                              |  |   |                           |  
|                                                                                                                              |  |   | 20,371                    |  
|                                                                                                                              |  |   |                           |  
|                                                                                                                              |  |   |                           |  
|COST OF REVENUES:                                                                                                             |  |   |                           |  
|Product sales                                                                                                                 |  |   | 6,752                     |  
|Services                                                                                                                      |  |   | 6,601                     |  
|                                                                                                                              |  |   |                           |  
|                                                                                                                              |  |   | 13,353                    |  
|                                                                                                                              |  |   |                           |  
|GROSS PROFIT                                                                                                                  |  |   | 7,018                     |  
|                                                                                                                              |  |   |                           |  
|                                                                                                                              |  |   |                           |  
|OPERATING EXPENSES                                                                                                            |  |   |                           |  
|                                                                                                                              |  |   |                           |  
|Research and development expenses,
  net of participation
     by the OCS of $1,679, $1,839 and $1,989, respectively (Note 7) |  |   | 9,894                     |  
|Technology for use in
  research and development (Note 9)                                                                     |  |   | 1,478                     |  
|Sales and marketing
  expenses                                                                                                |  |   | 6,950                     |  
|General and administrative
  expenses                                                                                         |  |   | 1,797                     |  
|Other operating expenses
  (Note 10)                                                                                          |  |   | -                         |  
|                                                                                                                              |  |   |                           |  
|                                                                                                                              |  |   | 20,119                    |  
|                                                                                                                              |  |   |                           |  
|                                                                                                                              |  |   |                           |  
|OPERATING LOSS                                                                                                                |  |   | (13,101                   | )
|                                                                                                                              |  |   |                           |  
|INTEREST AND OTHER NON-
  OPERATING INCOME
     (net of related expenses of $30, $32 and $78, respectively)                   |  |   | 144                       |  
|                                                                                                                              |  |   |                           |  
|                                                                                                                              |  |   |                           |  
|NET INCOME  (LOSS) FOR THE YEAR                                                                                               |  | $ | (12,957                   | )
|                                                                                                                              |  |   |                           |  
|                                                                                                                              |  |   |                           |  
|EARNINGS (LOSS) PER SHARE
  (NOTE 11)                                                                                         |  |   |                           |  
|                                                                                                                              |  |   |                           |  
|Basic earnings(loss) per
  share                                                                                              |  | $ | (0.88                     | )
|                                                                                                                              |  |   |                           |  
|                                                                                                                              |  |   |                           |  
|Diluted earnings per share                                                                                                    |  |   |                           |  
|                                                                                                                              |  |   |                           |  
|                                                                                                                              |  |   |                           |  
|Shares used in calculation
  of basic earnings (loss) per share                                                               |  |   | 14,786                    |  
|                                                                                                                              |  |   |                           |  
|                                                                                                                              |  |   |                           |  
|Shares used in calculation
  of diluted earnings 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
(In thousands)

|                                                          | Share capital      |          |                   |   |                     |  |                    |      |                              |   |                                   
|--------------------------------------------------------- | ------------------ | -------- | ----------------- | - | ------------------- |  | ------------------ | ---- | ---------------------------- | - | ----------------------------------
|                                                          |                    |          |                   |   |                     |  | Accumulated        |      |                              |   |                                   
|                                                          | Ordinary 
  shares |          | OrdinaryA-Eshares |   | Preferred 
  shares |  | Deferred 
  shares |      | Additional
  Paid-in capital |   | Deferredstock-based
  compensation
|                                                          |                    |          |                   |   |                     |  |                    |      |                              |   |                                   
|Balance as of January 1,
  2000                           | $                  | 21       |                   | $ | -                   |  | $                  | 14   |                              | $ | 3                                 
|Conversion of preferred
  shares into
    ordinary shares |                    | 14       |                   |   |                     |  |                    | (14) |                              |   |                                   
|Initial public offering of
  ordinary
    shares (Note 1) |                    | 8        |                   |   |                     |  |                    |      |                              |   |                                   
|Issuance of employee share
  options                      |                    |          |                   |   |                     |  |                    |      |                              |   |                                   
|Amortization of deferred
  stock-
    based compensation  |                    |          |                   |   |                     |  |                    |      |                              |   |                                   
|Net income for the year                                   |                    |          |                   |   |                     |  |                    |      |                              |   |                                   
|                                                          |                    |          |                   |   |                     |  |                    |      |                              |   |                                   
|Balance as of December 31,
  2000                         | $                  | 43       |                   | $ | -                   |  | $                  | -    |                              | $ | 3                                 
|                                                          |                    |          |                   |   |                     |  |                    |      |                              |   |                                   
|Exercise of employee share
  options                      |                    | (*)    - |                   |   |                     |  |                    |      |                              |   |                                   
|Amortization of deferred
  stock-
    based compensation  |                    |          |                   |   |                     |  |                    |      |                              |   |                                   
|Forfeiture of employee
  share options                    |                    |          |                   |   |                     |  |                    |      |                              |   |                                   
|Decrease in fair market
  value of
    derivatives        |                    |          |                   |   |                     |  |                    |      |                              |   |                                   
|Unrealized losses on
  investments                        |                    |          |                   |   |                     |  |                    |      |                              |   |                                   
|Loss for the year                                         |                    |          |                   |   |                     |  |                    |      |                              |   |                                   
|                                                          |                    |          |                   |   |                     |  |                    |      |                              |   |                                   
|Total comprehensive
  loss                                |                    |          |                   |   |                     |  |                    |      |                              |   |                                   
|                                                          |                    |          |                   |   |                     |  |                    |      |                              |   |                                   
|Balance as of December 31,
  2001                         | $                  | 43       |                   | $ | -                   |  | $                  | -    |                              | $ | 3                                 
|                                                          |                    |          |                   |   |                     |  |                    |      |                              |   |                                   
|Exercise of employee share
  options                      |                    | (*)    - |                   |   |                     |  |                    |      |                              |   |                                   
|Amortization of deferred
  stock-
    based compensation  |                    |          |                   |   |                     |  |                    |      |                              |   |                                   
|Forfeiture of employee
  share options                    |                    |          |                   |   |                     |  |                    |      |                              |   |                                   
|Realization of losses on
  derivatives                    |                    |          |                   |   |                     |  |                    |      |                              |   |                                   
|Realization of losses on
  investments                    |                    |          |                   |   |                     |  |                    |      |                              |   |                                   
|Conversion of deferred
  shares into
    ordinary shares  |                    | 3        |                   |   |                     |  |                    |      |                              |   | (3)                               
|Loss for the year                                         |                    |          |                   |   |                     |  |                    |      |                              |   |                                   
|                                                          |                    |          |                   |   |                     |  |                    |      |                              |   |                                   
|Total comprehensive loss                                  |                    |          |                   |   |                     |  |                    |      |                              |   |                                   
|                                                          |                    |          |                   |   |                     |  |                    |      |                              |   |                                   
|Balance as of December 31,
  2002                         | $                  | 46       |                   | $ | -                   |  | $                  | -    |                              | $ | -                                 
|                                                          |                    |          |                   |   |                     |  |                    |      |                              |   |                                   

(*)  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, |       
|-------------------------------------------------------------------------------------------------------- | ----------------------------------------- | - | ----------------------- | ------
|                                                                                                         |                                           |   |                         |       
|                                                                                                         |                                           |   | 2 0 0 2                 |       
|                                                                                                         |                                           |   |                         |       
|                                                                                                         |                                           |   |                         |       
|CASH
  FLOWS - OPERATING ACTIVITIES                                                                      |                                           |   |                         |       
|                                                                                                         |                                           |   |                         |       
|Net income (loss)                                                                                        |                                           | $ | (12,957                 | )     
|Adjustments to reconcile
  net income (loss) to net cash 
     used in operating activities  Schedule A |                                           |   | 5,046                   |       
|                                                                                                         |                                           |   |                         |       
|                                                                                                         |                                           |   |                         |       
|                                                                                                         | Net cash - operating
  activities         |   |                         | (7,911
|                                                                                                         |                                           |   |                         |       
|CASH
  FLOWS - INVESTING ACTIVITIES                                                                      |                                           |   |                         |       
|                                                                                                         |                                           |   |                         |       
|Technology for use in
  research and development                                                         |                                           |   | (1,265                  | )     
|Decrease (increase) in
  deposits                                                                        |                                           |   | (622                    | )     
|Proceeds from held to
  maturity securities                                                              |                                           |   | 15,167                  |       
|Investment in held to
  maturity securities                                                              |                                           |   | (8,947                  | )     
|Proceeds from available
  for sale securities                                                            |                                           |   | 6,644                   |       
|Investment in available
  for sale securities                                                            |                                           |   | -                       |       
|Additions to fixed assets                                                                                |                                           |   | (601                    | )     
|                                                                                                         |                                           |   |                         |       
|                                                                                                         |                                           |   |                         |       
|                                                                                                         | Net cash - investing
  activities         |   |                         | 10,376
|                                                                                                         |                                           |   |                         |       
|                                                                                                         |                                           |   |                         |       
|CASH
  FLOWS - FINANCING ACTIVITIES                                                                      |                                           |   |                         |       
|                                                                                                         |                                           |   |                         |       
|Net proceeds from
  issuance of share capital                                                            |                                           |   | -                       |       
|Stock issued under
  employee stock option plans                                                         |                                           |   | 31                      |       
|                                                                                                         |                                           |   |                         |       
|                                                                                                         |                                           |   |                         |       
|                                                                                                         | Net cash - financing
  activities         |   |                         | 31    
|                                                                                                         |                                           |   |                         |       
|                                                                                                         |                                           |   |                         |       
|Increase in cash and cash
  equivalents                                                                  |                                           |   | 2,496                   |       
|Cash and cash equivalents
  - beginning of year                                                          |                                           |   | 34,468                  |       
|                                                                                                         |                                           |   |                         |       
|                                                                                                         |                                           |   |                         |       
|                                                                                                         | Cash and cash equivalents
  - end of year |   | $                       | 36,964
|                                                                                                         |                                           |   |                         |       
|                                                                                                         |                                           |   |                         |       
|SUPPLEMENTAL
  SCHEDULE OF CASH FLOW  INFORMATION:                                                       |                                           |   |                         |       
|                                                                                                         |                                           |   |                         |       
|                                                                                                         | Taxes paid                                |   | $                       | 53    
|                                                                                                         |                                           |   |                         |       

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 | - | ADJUSTMENTS
  TO RECONCILE NET INCOME (LOSS) OT NET CASH 
  USED IN OPERATING ACTIVITIES
|------------ | - | ----------------------------------------------------------------------------------------

|                                                     |                                                                             |   | Year ended December 31, |      
|---------------------------------------------------- | --------------------------------------------------------------------------- | - | ----------------------- | -----
|                                                     |                                                                             |   |                         |      
|                                                     |                                                                             |   | 2 0 0 2                 |      
|                                                     |                                                                             |   |                         |      
|                                                     |                                                                             |   |                         |      
|Income and expense items
  not involving cash flows: |                                                                             |   |                         |      
|                                                     |                                                                             |   |                         |      
|                                                     | Depreciation                                                                |   | $                       | 802  
|                                                     |                                                                             |   |                         |      
|                                                     | Interest on short-term
  interest-bearing deposit                           |   |                         | -    
|                                                     |                                                                             |   |                         |      
|                                                     | Loss from realization of
  available for sale securities                    |   |                         | 652  
|                                                     |                                                                             |   |                         |      
|                                                     | Technology for use in
  research and development                            |   |                         | 1,478
|                                                     |                                                                             |   |                         |      
|                                                     | Amortization of deferred
  stock-based compensation                         |   |                         | 1,073
|                                                     |                                                                             |   |                         |      
|                                                     | Increase (decrease) in
  liability for employee   termination benefits, net |   |                         | (40  
|                                                     |                                                                             |   |                         |      
|                                                     |                                                                             |   | 3,965                   |      
|                                                     |                                                                             |   |                         |      
|                                                     |                                                                             |   |                         |      
|Changes in assets and
  liabilities:                 |                                                                             |   |                         |      
|                                                     |                                                                             |   |                         |      
|                                                     | Decrease (increase) in trade
  accounts receivable                          |   |                         | (990 
|                                                     |                                                                             |   |                         |      
|                                                     | Decrease (increase) in
  other current assets                               |   |                         | 252  
|                                                     |                                                                             |   |                         |      
|                                                     | Decrease (increase) in
  inventories                                        |   |                         | 1,163
|                                                     |                                                                             |   |                         |      
|                                                     | Increase (decrease) in
  trade accounts payable                             |   |                         | 653  
|                                                     |                                                                             |   |                         |      
|                                                     | Increase (decrease) in
  other current liabilities                          |   |                         | 3    
|                                                     |                                                                             |   |                         |      
|                                                     |                                                                             |   | 1,081                   |      
|                                                     |                                                                             |   |                         |      
|                                                     |                                                                             | $ | 5,046                   |      
|                                                     |                                                                             |   |                         |      

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)

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

F-8

---

---

NOVA
MEASURING INSTRUMENTS LTD.NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS(in
thousands)

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

F-9

---

---

NOVA
MEASURING INSTRUMENTS LTD.NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS(in
thousands)

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

|                                 | %    
|-------------------------------- | -----
|                                 |      
|Electronic equipment             | 20-33
|Office furniture and
  equipment | 6-15 
|Leasehold improvements           | 17-25

| |    | In accordance with SFAS
  No. 144, Accounting for Impairment or Disposal of Long-Lived Assets of the
  FASB, which supercedes SFAS No. 121, 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.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 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.                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | J. | Revenue
  Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The Company recognizes
  revenues upon the shipment of its products to the customer or provision of
  support service provided that persuasive evidence of an arrangement exists,
  title has transferred, the price is fixed, collection of resulting
  receivables is probable and there are no remaining significant obligations.                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 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 its participation in certain research and development projects are
  offset against the Companys research and development costs.                                                                                                                                                                                       

F-10

---

---

NOVA MEASURING INSTRUMENTS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands)

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

|                           |  | 2002      |  | 2001      |  | 2000     
|-------------------------- |  | --------- |  | --------- |  | ---------
|                           |  |           |  |           |  |          
|Risk-free interest rate    |  | 1.5%      |  | 4.25%     |  | 6.5%     
|Expected life of options   |  | 7
  years |  | 7
  years |  | 7
  years
|Expected weekly volatility |  | 90%       |  | 105%      |  | 89%      
|Expected dividend yield    |  | none      |  | none      |  | none     

| |  | 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 2002, 2001 and 2000 in accordance with
  SFAS 123, as amended by SFAS 148, the Companys pro forma loss per share
  would have been as follows:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.                                        

|                                                             |  | 2 0 0 2 |         | 2 0 0 1 |  | 2 0 0 0 |        
|------------------------------------------------------------ |  | ------- | ------- | ------- |  | ------- | -------
|                                                             |  |         |         |         |  |         |        
|Pro
  forma Net income (loss)                                |  |         |         |         |  |         |        
|Net income (loss) for the
  year, as reported                |  | $       | (12,957 | )       |  | $       | (16,874
|Deduct   stock-based compensation
  determined under APB-25 |  |         | 1,073   |         |  |         | 1,777  
|Add - stock-based
  compensation determined
  under SFAS 123 |  |         | (2,265  | )       |  |         | (3,477 
|                                                             |  |         |         |         |  |         |        
|Pro forma net income
  (loss)                                |  | $       | (14,149 | )       |  | $       | (18,574
|                                                             |  |         |         |         |  |         |        
|Pro
  forma earning (loss) per share                         |  |         |         |         |  |         |        
|                                                             |  |         |         |         |  |         |        
|Basic - as reported                                          |  | $       | (0.88   | )       |  | $       | (1.16  
|                                                             |  |         |         |         |  |         |        
|Basic - pro forma                                            |  | $       | (0.96   | )       |  | $       | (1.27  
|                                                             |  |         |         |         |  |         |        
|Diluted  as reported                                        |  |         |         |         |  |         |        
|                                                             |  |         |         |         |  |         |        
|Diluted  pro forma                                          |  |         |         |         |  |         |        
|                                                             |  |         |         |         |  |         |        

| | N. | Earnings
  (Loss) per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Earnings (loss) per share
  are presented in accordance with SFAS 128 of the FASB, Earnings per Share.
  Pursuant to this standard, basic earnings (loss) per share exclude the
  dilutive effects of convertible securities and are computed by dividing
  income (loss) available to common shareholders by the weighted-average number
  of common shares outstanding for the period. Diluted earnings (loss) per
  share reflect the potential dilutive effect of all convertible securities.
  Due to the anti-dilutive effect, basic loss per share was equal to diluted
  loss per share for years 2002 and 2001. The number of potentially dilutive
  securities excluded from diluted earnings per share due to the anti-dilutive
  effect amounted to 2,093,767 and 1,825,615 in 2002 and 2001, respectively.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Retroactive recognition
  has been given in the calculation of basic earning (loss) per share to shares
  issued for nominal consideration prior to the Companys initial public
  offering.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | O. | Derivative
  Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | SFAS No. 133, Accounting
  for Derivative Instruments and Hedging Activities as amended in June 2000 by
  SFAS No. 138, Accounting for Certain Derivative Instruments and Certain
  Hedging Activities, requires, principally, the presentation of all
  derivatives as either assets or liabilities on the balance sheet and the
  measurement of those instruments at fair value. Gains and losses resulting
  from changes in the fair values of derivative instruments would be accounted
  for depending on the use of the derivative and whether it qualifies for hedge
  accounting.                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | See Note 15 for disclosure
  of the derivative financial instruments in accordance with such
  pronouncements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-12

---

---

NOVA
MEASURING INSTRUMENTS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands)

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

F-13

---

---

NOVA
MEASURING INSTRUMENTS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands)

|NOTE
  3   - | INVENTORIES
|------------ | -----------

| | A. |  |  | 
| | -- |  |  | 

| |  |  |  |                 |  | December
  31, | 
| |  |  |  | --------------- |  | -------------- | 
| |  |  |  |                 |  |                | 
| |  |  |  |                 |  | 2 0 0
  2      | 
| |  |  |  |                 |  |                | 
| |  |  |  |                 |  |                | 
| |  |  |  | Raw materials   |  | $ 1,255        | 
| |  |  |  | Work in process |  | 1,754          | 
| |  |  |  | Finished goods  |  | 141            | 
| |  |  |  |                 |  |                | 
| |  |  |  |                 |  | $ 3,150        | 
| |  |  |  |                 |  |                | 

|             | B.             |  |  | In the years ended December 31, 2002 and 2001 the
  Company wrote down inventory in the amounts of $325 and $2,188, respectively.
  Total write-downs as of December 31, 2002 and 2001 were $3,525 and $3,200,
  respectively.
|------------ | -------------- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|             |                |  |  |                                                                                                                                                                                                                               
|NOTE
  4   - | FIXED
  ASSETS

| |                                |  | December
  31, | 
| | ------------------------------ |  | -------------- | 
| |                                |  |                | 
| |                                |  | 2 0 0
  2      | 
| |                                |  |                | 
| |                                |  |                | 
| | Cost:                          |  |                | 
| | Electronic equipment           |  | $ 3,283        | 
| | Office furniture and equipment |  | 403            | 
| | Leasehold improvements         |  | 1,716          | 
| |                                |  |                | 
| |                                |  | 5,402          | 
| |                                |  |                | 
| |                                |  |                | 
| | Accumulated depreciation:      |  |                | 
| | Electronic equipment           |  | 2,609          | 
| | Office furniture and equipment |  | 194            | 
| | Leasehold improvements         |  | 822            | 
| |                                |  |                | 
| |                                |  | 3,625          | 
| |                                |  |                | 
| | Net book value                 |  | $ 1,777        | 
| |                                |  |                | 

|             | The depreciation expenses amounted to $802, $937 and
  $683 for 2002, 2001 and 2000, respectively.
|------------ | --------------------------------------------------------------------------------------------------
|             |                                                                                                   
|NOTE
  5   - | OTHER
  CURRENT LIABILITIES                                                                       
|             |                                                                                                   
|             |                                                                                                   

| |                                                   |  | December
  31, | 
| | ------------------------------------------------- |  | -------------- | 
| |                                                   |  |                | 
| |                                                   |  | 2 0 0
  2      | 
| |                                                   |  |                | 
| |                                                   |  |                | 
| | Accrued salaries and fringe benefits              |  | $ 1,580        | 
| | Accrued warranty costs (See B below)              |  | 2,276          | 
| | Governmental institutions (Note 7A)               |  | 2,664          | 
| | Fair market value of forward contracts (Note 15B) |  | -              | 
| | Other                                             |  | 1,096          | 
| |                                                   |  |                | 
| |                                                   |  | $ 7,616        | 
| |                                                   |  |                | 

F-14

---

---

NOVA
MEASURING INSTRUMENTS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands)

|NOTE
  5   - | OTHER
  CURRENT LIABILITIES (Cont.)
|------------ | -----------------------------------
|             |                                    
|             |                                    

| |                                  |  | December
  31, |  
| | -------------------------------- |  | -------------- | -
| |                                  |  |                |  
| |                                  |  | 2 0 0
  2      |  
| |                                  |  |                |  
| | Balance as of beginning of year  |  | $ 2,258        |  
| | Services provided under warranty |  | (1,228         | )
| | Changes in provision             |  | 1,246          |  
| |                                  |  |                |  
| | Balance as of end of year        |  | $ 2,276        |  
| |                                  |  |                |  

|NOTE
  6   - | ACCRUED
  SEVERANCE PAY                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             | Israeli law and labor agreements determine the
  obligations of the Company to make severance payments to dismissed employees
  and to employees leaving employment under certain other circumstances. The
  obligation for severance pay benefits, as determined by Israeli law, is based
  upon length of service and the employees most recent salary. The liability
  is partially covered through insurance policies purchased by the Company and
  deposits in a severance fund.
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             | Severance-pay expense amounted to $381, $543 and
  $629 for 2002, 2001 and 2000, respectively.                                                                                                                                                                                                                                                                                                                                                                                         
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|NOTE
  7   - | COMMITMENTS
  AND CONTINGENT LIABILITIES                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             | A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|             | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |  | Year |  | Amount
  (US dollars) | 
| |  | ---- |  | --------------------- | 
| |  |      |  |                       | 
| |  | 2003 |  | 930                   | 
| |  | 2004 |  | 1,126                 | 
| |  | 2005 |  | 975                   | 
| |  | 2006 |  | 820                   | 
| |  | 2007 |  | 805                   | 

| |  | Rental expense for the facilities amounted to $884,
  $881 and $475 for the years 2002, 2001 and 2000, respectively.
| |  | --------------------------------------------------------------------------------------------------------------------

F-15

---

---

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

|NOTE
  7   - | COMMITMENTS
  AND CONTINGENT LIABILITIES (Cont.)
|------------ | ------------------------------------------------
|             |                                                 
|             | C.                                              

| |  | Year |  | Amount
  (US dollars) | 
| |  | ---- |  | --------------------- | 
| |  |      |  |                       | 
| |  | 2003 |  | 504                   | 
| |  | 2004 |  | 504                   | 
| |  | 2005 |  | 480                   | 

|             |                        | Vehicle lease expense amounted to $665, $757 and
  $541 for the years 2002, 2001 and 2000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------------ | ---------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|             |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             | D.                     | A major customer who was a related party until
  August 2001 (the Related Party), has notified the Company that a lawsuit
  has been filed against him by a third party. The suit alleges that the
  Related Party, while using the Companys products, has infringed upon numerous
  U.S. patents owned by the third party. According to the agreement between the
  Company and the Related Party, the Company is to assume responsibility and to
  indemnify the Related Party for any losses with regard to such suit. The
  Company is unable to determine at this time with any certainty the ultimate
  outcome of the aforementioned issue and its effect, if any, on the Companys
  financial condition, operating results and business.
|             |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             | E.                     | On February 2002 the Company signed a
  technology-license agreement, according to which the Company received a
  patent usage right as well as equipment in exchange for $1,502 and future
  payments of royalties of 5% of the net revenues of the products developed
  from the abovementioned technology.                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|NOTE
  8   - | SHAREHOLDERS
  EQUITY
|             |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             | A.                     | Share Capital Transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|             |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             |                        | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|             |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             |                        | 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|             |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             |                        | 4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

F-16

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---

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

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

F-17

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---

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

|NOTE 8   -                                                                                                                                                                                                                                                                  | SHAREHOLDERS EQUITY (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                            | C.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Through December 31, 2002, 3,470,822 share options
  have been issued under the plans, of which 1,338,668 options have been
  exercised, 155,711 options have been forfeited, 54,041 have been terminated
  and 1,149,186 options were exercisable as of December 31, 2002.
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                            | The weighted average fair value (in dollars) of the
  options granted during 2002, 2001 and 2000, according to Black-Scholes
  option-pricing model, amounted to $0.82, $2.21 and $12.18 per option,
  respectively. Fair value was determined on the basis of the price of the
  Companys share and prior to the IPO, on the basis of private placements of
  the Companys equity and on the basis of other available evidence and
  estimates, as applicable, adjusted for differentials in value attributable to
  preferential rights in such previous issuances, based on managements
  estimates.
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                            | A summary of the status of the
  Companys share option plans as of December 31, 2002, 2001 and 2000, as well
  as changes during each of the years then ended, is presented below:                                                                                                                                                                                                                                                                                                                                                                                                                       

| |                                     |  | 2 0 0
  2       |   | 2 0 0
  1                             |      | 2 0 0
  0       |          
| | ----------------------------------- |  | --------------- | - | ------------------------------------- | ---- | --------------- | ---------
| |                                     |  |                 |   |                                       |      |                 |          
| |                                     |  | Share
  options |   | Weighted
  average
  exercise
  price |      | Share
  options |          
| |                                     |  |                 |   |                                       |      |                 |          
| |                                     |  |                 |   |                                       |      |                 |          
| | Outstanding -     beginning of year |  | 2,292,132       |   |                                       | 3.57 |                 | 1,771,598
| | Granted                             |  | 46,500          |   |                                       | 1.31 |                 | 775,000  
| | Exercised                           |  | (294,403        | ) |                                       | 0.11 |                 | (197,862 
| | Terminated                          |  | (54,041         | ) |                                       | 4.78 |                 | -        
| | Forfeited                           |  | (67,786         | ) |                                       | 3.96 |                 | (56,604  
| |                                     |  |                 |   |                                       |      |                 |          
| | Outstanding      year end          |  | 1,922,402       |   |                                       | 3.99 |                 | 2,292,132
| |                                     |  |                 |   |                                       |      |                 |          
| |                                     |  |                 |   |                                       |      |                 |          
| | Options exercisable at              |  |                 |   |                                       |      |                 |          
| | year-end                            |  | 1,149,186       |   |                                       |      |                 | 906,915  
| |                                     |  |                 |   |                                       |      |                 |          

F-18

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---

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

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

| | Outstanding
  as of
  December 31, 2002 |  | Exercisable
  as of
  December 31, 2002 |                     
| | --------------------------------------- |  | --------------------------------------- | --------------------
| |                                         |  |                                         |                     
| | Range of
  exerciseprices               |  |                                         | Number
  outstanding
| |                                         |  |                                         |                     
| | (US dollars)                            |  |                                         |                     
| |                                         |  |                                         |                     
| | 0.0025                                  |  |                                         | 126,123             
| | 2.46-3.69                               |  |                                         | 1,110,581           
| | 5.16                                    |  |                                         | 116,272             
| | 6.27-7.37                               |  |                                         | 569,426             
| |                                         |  |                                         |                     
| |                                         |  |                                         | 1,922,402           
| |                                         |  |                                         |                     

|NOTE
  9   - | TECHNOLOGY
  FOR USE IN RESEARCH AND DEVELOPMENT                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|             | In February 2002, the Company signed an agreement
  for the licensing of certain know-how and technology, to be used in one of
  the Companys specific research and development programs and which has no
  alternative use. In accordance with the principles set forth in SFAS 2 these
  costs have been charged to the statement of operations in the year ended
  December 31, 2002, at the present value of the minimum payments to be made
  under the agreement.
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|NOTE
  10  - | OTHER
  OPERATING EXPENSES                                                                                                                                                                                                                                                                                                                                                                                                                                              
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|             | The amount for the year ended December 31, 2001
  represents costs borne by the Company in connection with the breach of part
  of its operating lease commitments associated with the move to the new
  premises. Balance payable outstanding as of December 31, 2002 amounts to
  $340.                                                                                                                                                                               
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|NOTE
  11  - | EARNINGS
  (LOSS) PER SHARE                                                                                                                                                                                                                                                                                                                                                                                                                                             
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|             | Earnings (loss) per share is computed using the
  weighted-average number of ordinary shares outstanding restated in order to
  reflect the conversion, upon the IPO, of all preferred shares into ordinary
  shares described in Note 8A, and assuming the exercise of share options
  (using the treasury stock method). Diluted earnings per share reflect the
  potential dilutive effect of all convertible securities.                                            

F-19

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---

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

|NOTE
  12  - | INCOME
  TAXES
|------------ | --------------
|             |               
|             | A.            
|             |               
|             |               
|             |               
|             |               
|             |               
|             |               
|             |               
|             |               
|             |               
|             |               
|             |               
|             |               
|             |               
|             |               
|             |               
|             |               

F-20

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---

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

|NOTE
  12  - | INCOME
  TAXES (Cont.)
|------------ | ----------------------
|             |                       
|             | B.                    
|             |                       
|             |                       
|             |                       
|             | C.                    
|             |                       
|             |                       
|             |                       
|             | D.                    
|             |                       
|             |                       
|             |                       
|             |                       
|             |                       
|             |                       
|             |                       
|             | E.                    
|             |                       
|             |                       
|             |                       
|             | F.                    
|             |                       
|             |                       
|             |                       
|             | G.                    

F-21

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---

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

|NOTE
  13  - | GEOGRAPHIC
  AREAS AND MAJOR CUSTOMERS                    
|------------ | ----------------------------------------------------------
|             |                                                           
|             | Sales by geographic area (as percentage of total
  sales):

| |                                            |  | Year
  ended December 31, | 
| | ------------------------------------------ |  | ------------------------- | 
| |                                            |  |                           | 
| |                                            |  | 2 0 0
  2                 | 
| |                                            |  |                           | 
| |                                            |  | %                         | 
| |                                            |  |                           | 
| | USA                                        |  | 61                        | 
| | Europe -primarily
  France and     Germany |  | 16                        | 
| | Japan                                      |  | 20                        | 
| | Other                                      |  | 3                         | 
| |                                            |  |                           | 
| | Total                                      |  | 100                       | 
| |                                            |  |                           | 

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

| |                                |  | Year
  ended December 31, |   
| | ------------------------------ |  | ------------------------- | --
| |                                |  |                           |   
| |                                |  | 2 0 0
  2                 |   
| |                                |  |                           |   
| |                                |  | %                         |   
| |                                |  |                           |   
| | Customer A                     |  |                           | 20
| | Customer B (the Related Party) |  |                           | 11
| | Customer C                     |  |                           | - 
| | Customer D                     |  |                           | 30
| | Customer E                     |  |                           | 22

|             | Substantially all fixed assets are located in
  Israel.                                                                       
|------------ | ------------------------------------------------------------------------------------------------------------------------------
|             |                                                                                                                               
|NOTE
  14  - | TRANSACTIONS
  AND BALANCES WITH RELATED PARTIES                                                                              
|             |                                                                                                                               
|             | The total directors fees (including the chairman of
  the Board) for the year 2002 amounted to $50 (2001 - $146, 2000 -$212).
|             |                                                                                                                               
|             | As to options granted to directors, see Note 8C.                                                                              

F-22

---

---

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

|NOTE
  15  - | FINANCIAL
  INSTRUMENTS
|------------ | -----------------------
|             |                        
|             | A.                     
|             |                        
|             |                        
|             |                        
|             |                        
|             |                        
|             | B.                     
|             |                        
|             |                        

F-23

---

---

# EXHIBIT INDEX

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

E-1

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|     | (filed herewith)                                                      |    
|---- | --------------------------------------------------------------------- | ---
|4.15 | Employee Stock Purchase Plan 1 (incorporated herein by reference to   |    
|     | Exhibit 4.1 to the Company's Registration Statement on Form S-8 filed |    
|     | on March 24, 2003 (File No. 33-103981))                               |    
|4.16 | Letter of Indemnification and Exculpation for certain directors,      |    
|     | officers and/or employees (incorporated herein by reference Annex A   |    
|     | to the Company's Current Report on Form 6-K filed on October 8, 2002) |    
|8    | List of Subsidiaries (filed herewith)                                 | E-5
|12.1 | Consent of Brightman Almagor (filed herewith)                         | E-6
|12.2 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of    | E-7
|     | 2002 (filed herewith)                                                 |    
|12.3 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of    | E-8
|     | 2002 (filed herewith)                                                 |    

E-2

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Exhibit 4.16

May 15, 2003

Mr. Barry Cox,

Dear Mr. Cox.

Re: Terms of Engagement in the
Position of Chairman of the Board of Directors:

This
letter establishes the terms of your engagement with Nova Measuring Instruments Ltd.
(Nova).

1. 
Title/Position: You will serve as the Chairman of the Board of Directors
(Board) of Nova.

2. 
Period: As of May 15, 2003 and until May 15, 2004. It is agreed that your
services may be terminated at any time within said period according to the sole
discretion of Novas Board of Directors

3. 
Compensation: Gross payment of 50,000 $ per annum payable in quarterly payments
no later than the end of each fiscal quarter.

4. 
Initial Stock Option Award:

| | (a)       
               Grant: Effective as of May 15, 2003 Nova shall grant you an option
               (Option) to purchase 50,000 shares of Novas Ordinary Shares of
               0.01 par value each ( the Option and the Common Stock
               respectively). To remove any doubt, the option is granted to you on a one time
               basis and Nova shall be under no obligation to grant you any additional options;
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b)       
               Per Share Exercise Price: Fair market value of a single Ordinary Share.
| | -------------------------------------------------------------------------------------------------

| | (c)       
               Vesting Period: The aggregate amount of Common Stock purchasable under the
               Option shall vest over a three year period commencing as of the date hereof so
               that by the end of each anniversary to your engagement according to this letter
               you shall be entitled to purchase one third of the aggregate amount of Common
               Stock Purchasable under the Option. The Option has a fixed term of 10 years from
               the date of grant.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d)       
               Termination of Services: To the extent hat your services are terminated for any
               reason whatsoever other than due to breach of your fiduciary duties to Nova you
               shall be entitled to exercise that part your Option vested immediately prior to
               the date of termination by notice to Nova no later than 90 days of said
               termination. In the event that your services are terminated due to breach of
               fiduciary duties any part of the Option which is unexercised upon the date to
               termination shall expire.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5. 
No Employer Employee Relations: You shall not be deemed to be an Employee of
Nova and you shall agree to waive any claim to the contrary, and to indemnify
Nova against any damage borne by it in the event that any court of law,
quasi-judicial authority or any other administrative authority determines to the
contrary.

E-3

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6. 
Restrictive Covenants: You agree that during the term in which your services are
provided to Nova and for one year thereafter you will not become associated,
whether as principal, partner, employee, consultant or shareholder (other than
as a holder of not more than 1% of the outstanding voting shares of any publicly
traded company), with any entity that is actively engaged in any geographic area
in any business which is in substantial and direct competition with Nova. You
further agree that during the term of your employment by Nova and for two years
thereafter you will not induce any employee of Nova to be employed or perform
services elsewhere. Finally, you agree that during the term in which you provide
services to Nova and thereafter (subject to the requirements of legal process)
you will hold in confidence all trade secrets, confidential information and
proprietary materials of Nova. For the avoidance of doubt proprietary materials
of Nova shall include any work product prepared by you during or in relation to
your services under this letter however, information and materials shall not be
considered to be trade secrets, confidential or proprietary if they (a) have
previously been disclosed to the public, or are in the public domain, other than
as a result of the your breach of this paragraph 6, or (b) are known or
generally available within any trade or industry of Nova.

7. 
Approvals: Please be advised that under applicable law the terms of your
engagement as elaborated in this letter are subject to the approval of
Nova s Audit Committee, Board of Directors and the Shareholders
general meeting. Nova shall not be liable for failing to obtain such approvals.

8. 
          If the foregoing terms are acceptable to you, please indicate your acceptance
          and agreement by signing the enclosed copy of this letter and returning it to
          Nova attn: Dr. Giora Dishon.

| | Very truly yours,              
| | -------------------------------
| | Nova Measuring Instruments Ltd.

Accepted and Agreed: May 15, 2003

/s/ Barry CoxBarry Cox

E-4

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Exhibit 8

List of Subsidiaries

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

E-5

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Exhibit 12.1

# Brightman Almagor &
Co.

CONSENT OF INDEPENDENT
AUDITORS

As independent auditors, we hereby
consent to the incorporation by reference of our report dated February 27, 2003 included
in Novas Annual Report on Form 20-F for the fiscal year ended December 31, 2002 into
the Form S-8 Registration Statements for Nova Measuring Instruments Ltd., filed with the
Securities and Exchange Commission on the following dates: (i) March 5, 2002 (File No.
333-83734); December 24, 2002 (File No. 333-102193); March 24, 2003 (File No. 333-103981).

/s/ Brightman Almagor & Co.
Certified Public Accountants A member of Deloitte Touche Tohmatsu

Tel Aviv, Israel

June 25, 2003

E-6

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Exhibit 12.2

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

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

1. 
          This Annual Report on Form 20-F of Nova Measuring Instruments, Ltd. (the
          Company) for the period ended December 31, 2002 (the
          Report) fully complies with the requirements of Section 13 or 15(d)
          of the Securities Exchange Act of 1934, as amended; and

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

Date: June 25, 2003

| |  | BY: /S/ Giora Dishon
Giora DishonPresident and Chief Executive Officer
| |  | ------------------------------------------------------------------------------------

E-7

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Exhibit 12.3

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

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

1. 
          This Annual Report on Form 20-F of Nova Measuring Instruments, Ltd. (the
          Company) for the period ended December 31, 2002 (the
          Report) fully complies with the requirements of Section 13 or 15(d)
          of the Securities Exchange Act of 1934, as amended; and

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

Date: June 25, 2003

| |  | BY: /S/ Chai Toren

Chai TorenChief Financial Officer
| |  | -------------------------------------------------------------------

E-8

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