20-F

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 20-F

o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

OR

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

OR

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

Commission File Number 000-30668

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

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

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

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

Title of each class	Name of each exchange on which registered
Ordinary Shares, nominal value NIS 0.01 per share	The NASDAQ Global Market

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

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

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

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

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

Yes o No x

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

Yes o No x

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

Yes x No o

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

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

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

Item 17 o Item 18 x

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

Yes o No x

TABLE OF CONTENTS

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

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Introduction

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

        The consolidated financial statements and selected consolidated financial data as of December 31, 2002, 2003, 2004, 2005 and 2006 and for each of the years in the five-year period ended December 31, 2006 (the “Consolidated Financial Statements”), included in this Annual Report have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Our Functional Currency

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

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

Cautionary Statement Regarding Forward-Looking Statements

        Certain information contained herein, which does not relate to historical financial information, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words or phrases “will likely result,” “are expected to,” will continue,” “is anticipated,” “estimate,” “project,” “believe,” “plan”, or similar expressions identify “forward looking statements.” Such statements, including statements relating to our anticipated sales, revenues and expenses in 2007, our expectations with respect to our ability to gain market share, add additional process equipment manufacturers as partners and to develop and introduce new products, possible outcomes of the litigation in which we are involved, possible outcomes of our efforts to consummate and integrate our pending acquisition or of our efforts to identify, complete and integrate future acquisition, anticipated growth of the semiconductor industry and metrology markets and expected changes in the semiconductor industry, are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We cannot guarantee future results, levels of activity, performance or achievements. We also undertake no obligation to release publicly any revisions to these forward–looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Among the factors that could cause our actual results in the future to differ materially from any opinions or statements expressed with respect to future periods are competitive industry conditions and the ability to forecast the needs of the semiconductor industry with respect to the very cyclical nature of the industry and the very fast pace of technology evolutions. Various other factors that could cause our actual results to differ materially are set forth in “Risk Factors” starting on page 2 and elsewhere herein.

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PART I

Item 1. Identity of Directors, Senior Management and Advisors

        Not applicable.

Item 2. Offer Statistics and Expected Timetable

        Not applicable.

Item 3. Key Information

        Selected Financial Data

        The following selected consolidated financial data as of December 31, 2005 and 2006 and for the years ended December 31, 2004, 2005 and 2006 have been derived from our audited Consolidated Financial Statements included elsewhere in this annual report. These financial statements have been prepared in accordance with U.S. GAAP, and audited by our independent registered public accounting firm. The consolidated selected financial data as of December 31, 2004, 2003 and 2002 and for the years ended December 31, 2003 and 2002 have been derived from other consolidated financial statements not included in this Form 20-F that were also prepared in accordance with U.S. GAAP and audited by our independent registered public accounting firm. The selected consolidated financial data set forth below should be read in conjunction with and are qualified by reference to “Item 5. Operating and Financial Review and Prospects” and the Consolidated Financial Statements and notes thereto and other financial information included elsewhere in this annual report on Form 20-F.

Summary of Consolidated Financial Data

	Year ended December 31,
	2002			2003			2004			2005			2006
	(in thousands, except per share data)
Consolidated Statement of Operations Data:
Revenues	$	20,371		$	26,688		$	36,806		$	30,142		$	48,292
Cost of revenues		13,353			16,535			21,111			19,306			27,743
Gross profit		7,018			10,153			15,695			10,836			20,549
Operating expenses:
Research and development expenses, net		9,894			8,561			8,665			9,301			9,166
Sales and marketing expenses		6,950			6,534			6,647			6,950			8,754
General and administrative expenses		1,797			1,898			2,331			3,626			5,136
Other operating expenses (income)		1,478			(2,203	)		-			-			-
Total operating expenses		20,119			14,790			17,643			19,877			23,056
Operating loss		(13,101	)		(4,637	)		(1,948	)		(9,041	)		(2,507	)
Financing income, net		144			425			528			627			573
Net loss	$	(12,957	)	$	(4,212	)	$	(1,420	)	$	(8,414	)	$	(1,934	)
Loss per share:
Basic and diluted loss per share	$	(0.88	)	$	(0.28	)	$	(0.09	)	$	(0.55	)	$	(0.12	)
Shares used in calculation of basic and diluted loss per
share		14,786			14,994			15,259			15,437			15,976

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	December 31,
	2002		2003		2004		2005		2006
	(in thousands)
Consolidated Balance Sheet Data:
Working capital		34,574		30,350		25,709		14,834		15,873
Total assets		49,008		47,918		49,966		42,339		44,419
Capital stock (including additional paid-in capital)		71,851		72,709		73,379		73,682		76,735
Shareholders' equity		35,677		32,336		31,581		23,444		24,575

Risk Factors

Risks Related to Our Business and Our Industry

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

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

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

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

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

        Historically, we have derived all of our revenues, and we expect to continue to derive practically all of our revenues, from sales of our products and related services to the semiconductor industry. Our business depends in large part upon capital expenditures by semiconductor manufacturers, which in turn depend upon the current and anticipated demand for semiconductors. The semiconductor industry has experienced severe and protracted cyclical downturns and upturns. During cyclical downturns, we have in the past experienced, and will likely in the future experience, material reductions in the demand for the type of capital equipment and process technology that we offer and our sales and revenues might decline again. In addition, our ability to reduce expenses in response to any downturn or slowdown in the rate of capital investment by manufacturers in these industries may be limited because of:

— our continuing need to invest in research and development;

— our capital equipment requirements; and

— our extensive ongoing customer service and support requirements worldwide.

        As a result, we may have difficulty achieving profitability.

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

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

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

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

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

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

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

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

We have historically generated losses and may incur future losses.

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

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

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

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

        Our quarterly operating results have fluctuated significantly in the past. This trend may continue. A principal reason is that we derive a substantial portion of our revenue from the sale of a relatively small number of systems to a relatively small number of customers. As a result, our revenues and results of operations for any given quarter may decrease due to factors relating to the timing of orders by, shipments of systems and timing of recognizing these revenues. Furthermore, our quarterly results are affected by the highly cyclical nature of the semiconductor capital equipment market and industries.

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

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

        Like our peers serving the semiconductor market, our customer base is highly concentrated among a limited number of large customers, primarily because the semiconductor industry is dominated by a small number of large companies. We anticipate that our revenues will continue to depend on a limited number of major customers, although the companies considered to be our major customers and the percentage of our revenue represented by each major customer may vary from period to period. The loss of any one of our major customers would adversely affect our sales and revenues. Furthermore, if any of our customers become insolvent or have difficulties meeting their financial obligations to us for any reason, we may suffer losses.

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

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

— the contribution of our equipment to our customers' productivity;

— our product quality and performance;

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— our global technical service and support;

— the return on investment (ROI) of our equipment and its cost of ownership;

— the breadth of our product line;

— our success in developing and marketing new products. and;

— the extendibility of our product

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

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

        We believe that the semiconductor capital equipment market is undergoing consolidation. A number of suppliers have been acquired by larger equipment manufacturers. For example, in 2005 Rudolph Technologies Inc. acquired August Technologies Inc., in 2006 Nanometrics Inc. acquired Soluris Inc. and Accent Technologies Inc., and in 2007 KLA-Tencor Corp. acquired Therma-Wave Inc. We believe that similar acquisitions and business combinations involving our competitors and customers may occur in the future. These acquisitions could adversely impact our competitive position by enabling our competitors and potential competitors to expand their product offerings and customer service, which could provide them an advantage in meeting customers’ needs, particularly with those customers that seek to consolidate their capital equipment requirements with a smaller number of vendors. The greater resources, including financial, marketing and support resources, of competitors involved in these acquisitions could allow them to accelerate the development and commercialization of new competitive products and the marketing of existing competitive products to their larger installed bases. Accordingly, such business combinations and acquisitions by competitors or customers could jeopardize our competitive position.

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

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

— diverting management's attention and other resources from our ongoing business concerns;

— entering markets in which we have no direct prior experience;

— improperly evaluating new services, products and markets;

— being unable to maintain uniform standards, controls, procedures and policies;

— being unable to integrate new technologies or personnel;

— incurring the expenses of any undisclosed or potential liabilities; and

— the departure of key management and employees.

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

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

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

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

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

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

        Sales of our systems depend, in significant part, upon our customers adding new manufacturing capacity or expanding existing manufacturing capacity, both of which involve a significant capital commitment. We may experience delays in finalizing sales following initial system qualification while a customer evaluates and approves an initial purchase of our systems. In general, for new customers or applications, our sales cycle takes between three and 12 months to complete. During this time, we may expend substantial funds and management effort, but fail to make any sales. Lengthy sales cycles subject us to a number of significant risks, including inventory obsolescence and fluctuations in operating results, over which we have limited control.

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

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

        We cannot assure that:

— pending patent applications will be approved;

— any patents will be broad enough to protect our technology, will provide us with competitive advantages or will not be challenged or invalidated by third parties; or

— the patents of others will not have an adverse effect on our ability to do business.

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

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

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

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

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

— result in our loss of proprietary rights;

— subject us to significant liabilities, including treble damages in some instances;

— require us to seek licenses from third parties, which licenses may not be available on reasonable terms or at all; or

— prevent us from selling our products.

        Any litigation of this type, even if we are ultimately successful, could result in substantial cost and diversion of time and effort by our management, which by itself could have a negative impact on our profit margin, competitive position and ability to develop and market new and existing products. For additional information on our intellectual property, including information regarding a civil action we commenced against Nanometrics Inc., or Nanometrics, information regarding civil actions Nanometrics commenced against us, and information with respect to the settlement agreement we have recently reached with Nanometrics, see “Intellectual Property” beginning on page 20 of this annual report.

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

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

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

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

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

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

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

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

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

        If our principal shareholders sell substantial amounts of our ordinary shares, including shares issued upon the exercise of outstanding options, the market price of our ordinary shares may fall. As of December 31, 2006, we had 17,104,523 ordinary shares outstanding, of which 7,827,839 shares were held by four shareholders.

Because as of April 20, 2007 five of our shareholders control approximately 56% of our ordinary shares, they can control the outcome of matters submitted to a vote of our shareholders, including the election of directors.

        As of April 20, 2007, five of our shareholders controlled approximately 56% of our outstanding ordinary shares (not including options or warrants currently exercisable or exercisable within 60 days of April 20, 2007). As a result, and although we are currently not aware of any voting agreement between such shareholders, if these shareholders voted together or in the same manner, they would have the ability to control the outcome of corporate actions requiring an ordinary majority vote of shareholders as set in the Company’s articles of association. Even if these five shareholders do not vote together, each has the ability to influence the outcome of corporate actions requiring the vote of shareholders as set in the Company’s article of association.  For additional information on our major shareholders, see “Major shareholders” on page 42.

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

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

Risks Related to Operations in Israel

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

        Our principal offices and manufacturing facilities and many of our suppliers are located in Israel. Although most of our sales are currently being made outside Israel, political, economic and military conditions in Israel directly affect our operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. Conflicts between Israel and Palestinian militant groups have been ongoing. A state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. The resumption of hostilities in the region, and the on-going tension in the region, have a negative effect on the stability of the region which might have negative effect on our business and harm our growth and revenues. For further detail see “Political and economic conditions in Israel” starting on page 24.

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

        Some of our executive officers and employees in Israel are obligated to perform up to 36 days of military reserve duty annually until the age of 40 for those serving in combat units and until the age of 45 for non combatants. This time-period may be extended by the Military Chief of General Staff and the approval of the Minister of Defense or by a directive of the Minister of Defense in the event of a declared national emergency. Our operations could be disrupted by the absence for a significant period of one or more of our executive officers or key employees due to military service. To date, our operations have not been materially disrupted as a result of these military service obligations, and no executive officer or key employee was recruited for any significant time period including during the 2^nd Lebanon war of July 2006. Any disruption in our operations due to such obligations would adversely affect our ability to produce and market our existing products and to develop and market future products.

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

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

We participate in government programs under which we receive tax and other benefits. These programs impose restrictions on our ability to use the technologies developed under these programs. In addition, the reduction or termination of these programs would increase our costs.

        We receive conditional grants from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor for research and development programs that meet specified criteria. We are also eligible to receive tax benefits under Israeli law for capital investments that are designated as “approved enterprises.” To maintain our eligibility for these programs and tax benefits, we must continue to meet certain conditions, including paying royalties related to grants received and making specified investments in fixed assets. Some of these programs also restrict our ability to manufacture particular products and transfer particular technology, which was developed as part of the “approved enterprises” outside of Israel, by requiring approval of the research and development committee nominated by the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor under applicable law. Such approval may be given only if the recipient abides by all the provisions of the law and related regulations. Approval to manufacture products outside of Israel or consent to the transfer of technology, if requested, might not be granted.

        If we fail to comply with these conditions in the future, the benefits received could be cancelled. We could also be required to pay increased taxes or refund any benefits previously received, adjusted for inflation and interest. In each of 2004, 2005 and 2006, we recorded an aggregate of $1.9 million, in conditional grants under Israeli government programs. As of December 31, 2006, our contingent liability to the Office of the Chief Scientist for grants received was approximately $6.2 million. See also Note 9A to our consolidated financial statements contained elsewhere in this report. From time to time, we submit requests for new grants from the Office of the Chief Scientist and for expansion of our approved enterprise programs. These requests might not be approved. Also, the Israeli government may reduce or eliminate these benefits in the future. The termination or reduction of these grants or tax benefits could harm our business, financial condition and results of operations. In addition, if we increase our activities outside Israel due to, for example, future acquisitions, our increased activities generally will not be eligible for inclusion in Israeli tax benefit programs. Accordingly, our effective corporate tax rate could increase significantly in the future.

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

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

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

        Our ordinary shares are listed for trading on the Nasdaq Global Market and on the Tel Aviv Stock Exchange. This may result in price variations. Our ordinary shares are traded on these markets in different currencies, U.S. dollars on the Nasdaq Global Market and New Israeli Shekels on the Tel Aviv Stock Exchange. These markets have different opening times and close on different days. Different trading times and differences in exchange rates, among other factors, may result in our shares being traded at a price differential on these two markets. In addition, market influences in one market may influence the price at which our shares are traded on the other.

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

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

        We believe that in 2006 we were not a passive foreign investment company. Nonetheless, because of the difficulty determining the value of our assets, there is a risk that we were a passive foreign investment company in 2006. Currently we expect that we will not be a passive foreign investment company in 2007. However, passive foreign investment company status is determined as of the end of the full tax year and is dependent on a number of factors, including the value of a corporation’s assets and the amount and type of its gross income. Therefore, there can be no assurances that we will not become a passive foreign investment company for the current fiscal year ending on December 31, 2007 or any future year. For a discussion on how we might be characterized as a passive foreign investment company and related tax consequences, please see the section of this annual report entitled “U.S. Taxation – Passive Foreign Investment Companies.”

Item 4. Information on the Company

History and Development of the Company

        Nova Measuring Instruments Ltd. was incorporated in May 1993 under the laws of the State of Israel. We commenced operations in October 1993 to design, develop and produce integrated process control systems for use in the manufacture of semiconductors, also known as integrated circuits or chips. In October 1995, we began manufacturing and marketing systems for chemical mechanical polishing processes. We have since expanded our product offering to include systems designed for lithography and etch, and are continuing to develop new products and additional applications for our current products. These new offerings have contributed approximately $4 million to our sales in 2006.

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        In April 2000, we conducted an initial public offering pursuant to which we sold 3,000,000 ordinary shares for consideration of net proceeds of $49 million. In connection with the public offering, our shares were listed for trading on the Nasdaq Global Market (formally known as Nasdaq National Market).

        In June 2002, we listed our shares in the Tel-Aviv Stock Exchange in Israel, pursuant to legislation which enables Israeli companies whose shares are traded on certain stock exchanges outside of Israel to be registered on the Tel Aviv Stock Exchange, while reporting, in substance, in accordance with the provision of the relevant foreign securities law applicable to the company.

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

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

        Our main office, research and development and production facilities are located in Israel at the Weizmann Science Park, Building 22, 2nd Floor, Ness-Ziona. Our telephone number at our main office is +1-972-8-938-7505.

Overview

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

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

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

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        We have always emphasized our integrated metrology solutions as this continues to be an area where we have a leading position. In addition, in the past few years we developed and started manufacturing stand-alone metrology systems as well. We plan to leverage our technology, methods, metrology expertise and market position in the integrated metrology field to expand our offerings of stand-alone metrology systems. Today, both stand alone and integrated metrology solutions have reached a level of maturity allowing semiconductor manufactures to choose how to use either technology and make decisions based on merit specific to the process step in question, always balancing between the amount of data attained and the use made of the data for capabilities such as automated process control. Our long-term strategy is focused on advanced metrology and process control solutions where our integrated process control products and stand alone products are compatible or complementary and used in a customized way to meet specific customer needs.

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

Our Market

        Growth of the Semiconductor Industry and the Metrology Market

        The use of semiconductor devices continues to increase. Semiconductors are no longer used solely in personal computers and computer systems, but also in wireless communications, Internet infrastructure, Internet access devices, automobiles, portable electronic devices and other advanced consumer electronics. As a result of the increasing demand for semiconductors, the semiconductor industry has experienced significant growth over the past eight to 10 years, despite a severe downturn between 2000 and 2003. According to the Semiconductor Industry Association, worldwide sales of semiconductors decreased from $223 billion in 2000 to $178 billion in 2003, but then increased to $220 billion in 2004, $235 billion in 2005 and $259 in 2006. Over the past decade, the increased use of semiconductors has driven demand for additional semiconductor manufacturing capacity. In turn, the addition of semiconductor manufacturing capacity, whether through new construction or refurbishment of existing manufacturing facilities, has been a driver of demand for metrology systems such as those we produce. Furthermore, the diversification semiconductor types has led to a situation that each discrete device offers macro size market opportunities and thus an increase or decline in any one market does not necessarily drag with it the entire semiconductor manufacturing field.

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

        The ever-increasing level of complexity and the decrease in feature sizes has also significantly increased the cost and performance requirements of semiconductor fabrication equipment. The cost of wafer fabrication equipment has also increased due to the higher levels of automation being utilized by manufacturers. Thus, semiconductor manufacturers must increase their investment in capital equipment in order to sustain technological leadership, to expand manufacturing capacity and maintain profitability. According to published reports by an industry market research firm, the cost of building a state-of-the-art semiconductor manufacturing facility has grown from approximately $200 million in 1983 to over $3 billion in 2006 for facilities capable of manufacturing 300 mm wafers. We believe that the process control equipment market, which includes the metrology segment, will grow in the future at a rate greater than the overall process equipment market since process control equipment is in the future expected to consume a larger portion of the overall costs of semiconductor manufacturing equipment.

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        While we expect that the demand for semiconductors will increase and the market for semiconductor process control equipment will expand, we cannot assure you that either will occur, that we will benefit from any increase in demand or expansion of the process control market, or that our products will be accepted in the market place. Our industry is intensively competitive and if we fail to compete effectively our revenues and market share will decline. In addition, the semiconductor industry, and the semiconductor capital equipment market in particular, are highly cyclical. Therefore, while we anticipate demand for semiconductors will increase and the market for semiconductors capital equipment will expand, it is likely that there will be periodic downturns which may be severe and protracted.

        The Semiconductor Manufacturing Process

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

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

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

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

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

        The Need for Greater Overall Equipment Efficiency

        We believe that one of the major challenges to achieving improvements in semiconductor manufacturing cost productivity is continuously improving equipment productivity. Overall equipment efficiency, that is, the percentage of time that processing equipment is utilized to produce wafers, is used as a metric to quantify the productivity of a processing tool. The major factors affecting productivity are equipment downtime, qualification time, mis-processing and operator skills. We believe that in order to improve cost productivity, earn an acceptable return on their investment in capital equipment and to meet the demand for improved semiconductor device performance, semiconductor manufacturers must find ways to improve overall equipment efficiency.

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

        The Need for Effective Process Control Tools. A number of technical and operational trends within the semiconductor manufacturing industry are strengthening the need for more effective process control solutions. These trends include:

— Development of smaller semiconductor features. The development of smaller features, now as small as 90 nm and 65nm in production, enables semiconductor manufacturers to produce larger numbers of circuits per wafer and to achieve higher circuit performance. As feature geometries decrease, manufacturing yields become increasingly sensitive to processing deviations and defects, as more integrated circuits are lost with every discarded wafer. In addition, the increased complexity and number of layers of the integrated circuits increase the chance of error during the manufacture of the wafer.

— Shortening of technology life cycles. The technology life cycle of integrated circuits continues to shorten as semiconductor manufacturers strive to adopt new processes that allow a faster transition to smaller, faster and more complex devices. In the past, the technology life cycle was approximately three years; it is now only two years. The accelerating rate of obsolescence of technology makes early achievement of enhanced productivity and high manufacturing yields an even more critical component of a semiconductor manufacturer’s profitability.

— Transition to copper and other new materials. Copper metal layers and other new materials such as low and high k-dielectrics and silicon on insulator are increasingly replacing aluminum for advanced integrated circuits in order to increase performance and reduce the cost of integrated circuits. Copper and low-K materials make it possible to build higher speed devices using fewer layers. The use of copper and other new materials, requires new processing and metrology equipment and thus represents challenging developments for the semiconductor manufacturing industry.

— Change to 300-millimeter wafers. The transition in wafer size from 200-millimeter diameter to 300-millimeter diameter that began in 1999more than doubles the number of integrated circuits per wafer. Maintaining process uniformity across these larger wafers is more difficult. Processing larger wafers also increases the cost of mistakes caused by both the larger number of integrated circuits per wafer and the greater complexity (and, therefore, cost) of processing larger wafers. Thus, with 300 mm wafers, the need for effective metrology to quickly detect and correct errors in the manufacturing process has increased. In addition, new metrology equipment is needed to accommodate the larger wafer size. It is estimated that in 2006, 80% of equipment sales have moved towards 300mm processing.

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— Increase in foundry manufacturing. Asa result of the rising investment needed for semiconductor production and the proliferation of different types of semiconductors, semiconductor manufacturing is increasingly being outsourced to large semiconductor contract manufacturers, or foundries. A foundry typically runs several different processes and makes hundreds to thousands of different semiconductor product types in one facility, making the maintenance of a constant high production yield and overall equipment efficiency more difficult to achieve. This trend of shifting to foundries for manufacturing needs has progressed even further in 2006 with technology leaders such as Texas Instruments announcing that they will also be outsourcing process development to Taiwan Semiconductor Instruments, Limited.

— Increase in Automation. In an effort to achieve greater operating efficiencies, semiconductor manufacturers are increasingly relying upon automation. Automation represents the fastest growing segment of the semiconductor manufacturing industry.

        In order to address the increasing costs associated with these trends, we believe semiconductor manufacturers must enhance manufacturing productivity. One way to enhance productivity is through improvements in process control, with a greater emphasis on metrology as part of process control. As part of this emphasis on metrology, manufacturers are taking more measurements to characterize each step of the semiconductor manufacturing process, new and enhanced measurement techniques are being used to provide meaningful data and the data provided is being used in new ways to enhance the manufacturing process. We believe that the demand for advanced process control systems that address the evolving needs of semiconductor manufacturers will continue to drive the growth in the market for process control systems, and integrated process control systems in particular.

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

The Nova Approach

        Integrated Metrology

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

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

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

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

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

— perform the measurements without removing the wafer from the process equipment, increasing the efficiency of the process and decreasing the risk of contamination;

— reduce capital costs of the fabrication facility by increasing overall equipment efficiency and reducing labor costs and necessary clean room area;

— reduce the amount of time required to qualify process equipment that is usually idle during qualification steps, thus, minimizing costly equipment down-time;

— reduce the number of test wafers; and

— detect processing errors as early as possible.

        We believe that as semiconductor manufacturers demand greater efficiency from their manufacturing equipment, process equipment manufacturers will increasingly seek to offer their customers integrated metrology in their tools to lower costs and increase overall efficiency. We believe the drive toward more efficient manufacturing operations in the face of increasing complexity will continue the trend of adopting integrated metrology solutions such as those we offer to multiple processes.

        Stand-alone Metrology

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

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

Our Technology

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

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        Our suite of technological capabilities includes:

— Ellipsometry. Ellipsometry is a non-contact, non-destructive optical measuring technique used to measure very accurately the thickness and other properties of transparent thin films. When a surface is exposed to a polarized light laser, Ellipsometers measure the change in the reflected light’s polarization. By using multiple light angles and/or multiple wavelengths, Ellipsometry can provide accurate and reliable measurement of a wide range of film thicknesses, film materials and film stacks.

— Broadband Spectrophotometry. Our broadband Spectrophotometry capabilities range from deep ultraviolet to near infrared. This technology enables fast, accurate and small spot size film thickness measurement in large range of applications on a very cost effective basis, both as an integrated system and as a stand-alone system.

— Scatterometry. Our Scatterometry systems are based on our broadband Spectrophotometry. These systems use fully polarized deep ultraviolet to near-infrared spectral light source. This technology enables fast and cost effective system development. Scatterometry provides two and three dimensional characterization of very fine geometries on patterned product wafers. These profiling and critical dimension capabilities are key enablers of advanced process control, allowing almost real time metrology of the most advanced design rule, down to 65 nm and below.

— Imaging and image processing. This technology has three different applications: 1) navigating on product wafers to perform measurements on very small selected sites; 2) detecting defects on product wafers after critical process steps, such as lithography and etch; and 3) measurement of the accuracy of registration between two layers (overlay measurement), mostly used in lithography.

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

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

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

Products

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

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Thin Film Process Control

— The NovaScan 840 combines high-speed measurement and effective handling, enabling measurement of wafers both before and after polishing. While we no longer market this system, this system and prior generations were our main revenue source in 2001 and prior years.

— The NovaScan 2020 and 2040 are the second generation of integrated thickness monitoring systems with enhanced spectral range, responding to the needs of the industry for emerging chemical mechanical polishing high-end applications of thin films and complex layer stacks. The 2020 model was introduced to the market at the end of 2000, and since then has replaced the NovaScan 840 and accounted for the majority of our sales for 200 mm production lines.

— The NovaScan 3030 and 3060 are the second generation of the 300mm measuring system, with improved optics and motion system enabling high speed measurement, and with broad spectral rage (ultraviolet to infrared) allowing accurate measurements on complex structures and thin film layers. The 3030 model was introduced to the market in 2001 and since then has replaced the NovaScan 3000 and accounts for the major portion of our sales for 300 mm production lines. The NovaScan 3060 was introduced in 2002.

— The NovaScan 2020Cu has the same basic platform as the NovaScan 2040, with additional hardware and software improvements, enabling the system to answer the unique requirements of copper chemical mechanical polishing monitoring. The system went through several beta tests during 2001 and 2002 and was released for sale in the beginning of 2003.

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

— The NovaScan 840CVD system is a 200 mm integrated metrology vacuum chemical vapor deposition measurement system, measuring different layers in the chemical vapor deposition process. Data can be fed forward to the chemical mechanical polishing process tool. Integration solutions were developed for different process equipment. The system was introduced to the market in the end of 2000 and several units have been sold. However, we do not expect to sell a significant number of these systems in the future.

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

— The NovaScan 3090 CD system is a scatterometry-based system for measuring the critical dimensions (CD) and profiling lines and trenches on 200 mm and 300 mm wafers. The system went through field-testing during 2003 and was released for sale in 2004. The systems are sold as integrated metrology systems and as stand-alone systems with third-party automation modules.

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

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

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

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

— A closed loop control option for the NovaScan systems delivers reliable, highly automated wafer-to-wafer uniformity over chemical mechanical polishing manufacturing processes. The thickness data of every processed wafer is obtained and process parameters are fed back to adjust the next wafer polish.

— NovaNet is a highly sophisticated computer network, connecting all NovaScan systems on a factory floor. The network is managed by a dedicated server, running with proprietary software developed by Nova, and insuring safe recipe distribution and recipe integrity across the factory. The NovaNet also includes a report generator (NSA) that allows the creation of reports from all the systems connected and allows programmable cross sections.

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

n HPC

n TurboHPC

n Grid computing connectivity enabled

n Web-based management SW

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

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

Research and Development

        We have assembled a core team of experienced scientists and engineers who are highly skilled in their particular field or discipline. Our research and development core competencies, technologies and disciplines are in thin film metrology and x-ray metrology, and include measurement instruments, optical modeling, image acquisition, pattern recognition, equipment integration and fab automation. Our research and development staff consists of about 80 highly skilled members, including independent contractors. Since June 2003, our research and development operations have been certified as ISO9001/2000 quality standard.

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        The process control market is characterized by continuous technological development and product innovations. We believe that the rapid and ongoing development of new products and enhancements to our existing product line is critical to our success. Accordingly, we devote a significant portion of our technical, management and financial resources to developing new applications and emerging technologies. In 2004, 2005 and 2006, our research and development expenses, net of participation by the Office of the Chief Scientist, were $8.7 million, $9.3 million and $9.2 million, respectively, representing, 24%, 31% and 19% of our respective total revenues for those years. We anticipate that our research and development expenses, net, will be approximately $9 million in 2007.

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

Intellectual Property

        Our success depends in part upon our ability to protect our intellectual property. We, therefore, have an extensive program devoted to seeking patent protection for our inventions and discoveries that we believe will provide us with competitive advantages. We have been granted 51 U.S. patents and 32 non-U.S. patents and hold an exclusive license to one U. S. patent. The U.S. patents we hold have expiration dates ranging from 2014 to 2023. We also have 25 U.S. patent applications pending and more than 50 applications pending in other countries.  Our patents and applications principally cover various aspects of optical measurement systems and methods, integrated process control implementation concepts, and optical, opto-mechanical and mechanical design. We have also registered four trademarks in the United States and five trademarks in countries other than the U.S. In August 8, 2006, HyperNex assigned all of its right, title, and interest in 8 U.S. patents, 2 non-U.S. patents, 6 patent applications filed in other countries and 4 trademarks registered in the U.S. As of April 30, 2007, the assignment of the 3 non-U.S. patents was not completed.

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

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

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

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

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

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

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

        While, other than the litigation with Nanometrics described above, we are not currently involved in any material legal proceedings in which a third party has asserted that we have violated their intellectual property rights, we have become aware of a United States patent held by a competitor, which may be interpreted to cover some aspects of the products we sell in the United States. Nonetheless, we have not received any indications of intention to enforce this patent or any notice from the competitor with respect to this patent. In addition, the patent is being reexamined by the PTO, is unenforceable at this time, and may or may not survive the reexamination. If the PTO decides to allow the patent to stand in some reexamined form, it is possible that the competitor could seek to enforce the patent rights against certain of our products sold in the United States, seeking damages, an injunction, or requiring us to pay royalties for a license. While we believe that we would be successful in any litigation seeking to enforce those patent rights, the ultimate outcome of any litigation or other legal proceedings cannot be predicted.

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

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

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

        Bids may be as follows:

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

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

— Complete acquisition of the patents (or one of the two groups).

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

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

Our Customers, Sales and Marketing

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

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

        We also seek to establish and maintain close and mutually beneficial relationships with our customers by consistently providing them with a high level of service, support and new capabilities. We have established a global network of direct sales and marketing, customer service and applications support offices. We maintain sales, service or applications offices in Europe, Israel, Japan, Korea, Singapore, Taiwan, and the U.S., with a total staff of 113 people. These offices provide highly qualified application support specialists, training to process equipment manufacturer customers and end users, marketing, demonstrations and evaluations, spare parts hubs and sales and support engineers.

        We serve all sectors of the integrated circuit manufacturing industry including logic, ASIC, foundries and memory manufactures. Our end user and process equipment manufacturer customers are located in different countries, including Japan, Korea, Singapore, Taiwan, the U.S. and various European countries.

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

	Year ended December 31,
	2004		2005		2006
	(in thousands)
U.S.	$	15,943	$	9,945	$	16,525
Europe		4,905		1,990		4,800
Japan		6,132		6,666		3,214
Asia-Pacific		9,826		11,541		23,753
Total	$	36,806	$	30,142	$	48,292

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

	Year ended December 31,
	2003			2004			2005			2006
Total revenues from five
largest customers		87	%		82	%		83	%		79	%
Range of revenues from five
largest customers		3%-36	%		3%-45	%		2%-48	%		1%-46	%

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

        The highly competitive nature of the market for semiconductor capital equipment affects our ability to successfully implement our marketing and sale efforts. Competitive factors in the market for integrated process control systems include technological leadership, system performance, ease of use, reliability, cost of ownership, technical support and customer relationships. For integrated process control, an adequate business model, internal organization and unique process equipment manufacturer agreements and partnerships are also significant factors. We believe we compete favorably on the basis of these factors in the markets we serve.

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

Manufacturing

        In order to leverage the relatively high volume of integrated systems we manufacture and to decrease production costs, we continue to focus our internal manufacturing activities on processes that add significant value or require unique technology or specialized knowledge and outsource others. Our manufacturing operations received the ISO 9002 quality mark by an international certification institute in October 1999. Since then, we have upgraded our quality systems to conform to ISO 9001/2000 requirements.

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

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

        We have our manufacturing facility, which is located in Ness-Ziona, Israel divided into 2 buildings. Any event affecting this facility, including natural disaster, labor stoppages or armed conflict, may disrupt or indefinitely discontinue our manufacturing capabilities and could significantly impair our ability to fulfill orders and generate revenues.

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Our Subsidiaries

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

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

Capital Expenditures

        Our capital expenditures are primarily for network infrastructure, computer hardware and software, leasehold improvements of our facilities and system demonstration tools. None of these assets are held as collateral or guarantee other obligations. For additional information on our capital expenditures, see “Liquidity and Capital Resources” starting on page 33.

Properties and Equipment

        Our main facilities, located in Ness-Ziona, Israel, occupy approximately 5,500 square meters, including: approximately 1,300 square meters of production facilities, approximately 3,000 square meters of research and development offices (including approximately 300 square meters of laboratories) and approximately 1,200 square meters of headquarters, sales and marketing, service and support and administration facilities. Our current lease commitment relating to our facilities in Israel expires at the beginning of 2008.

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

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

Political and Economic Conditions in Israel

        The Company is incorporated under the laws of Israel, and has its principal offices and manufacturing facilities in Israel. The Company is, therefore, directly influenced by the political, economic and military conditions affecting Israel. Any major hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners or a significant downturn in the economic or financial condition of Israel could have a material adverse effect on the Company’s business, financial condition and results of operations.

        Political Conditions. Since the establishment of the state of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying from time-to-time in intensity and degree, has led to security and economic problems for Israel. However, a peace agreement between Israel and Egypt was signed in 1979, a peace agreement between Israel and Jordan was signed in 1994 and, since 1993, several agreements between Israel and the Palestinian Authority representatives have been signed. As of the date hereof, Israel has not entered into any agreement with Syria or Lebanon. In 2006, for approximately one month, battles took place between the Israeli military and Lebanese guerilla units. Currently there is stagnation in the peace process in the Middle East and ongoing hostilities between Palestinian militant groups and Israel. The resumption of hostilities in the region, which have occurred after the failure of the Camp David peace talks, as well as the events of September 11, 2001, and the ongoing tension in the region, has a negative effect on the stability of the region. There can be no assurance as to whether or how the “peace process” will develop or what affect it or these ongoing hostilities may have upon the Company.

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

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

        Military Service. Many of the Company’s male employees in Israel are currently obligated to perform annual reserve duty in the Israel Defense Forces. In addition, virtually all such employees are subject to being called to active duty at any time under emergency circumstances. While the Company has operated effectively under these requirements since it began operations, no assessment can be made as to the full impact of such requirements on the Company’s workforce or business if conditions should change, and no prediction can be made as to the effect on the Company of any expansion or reduction of such obligations.

Government Regulation

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

Item 4A. Unresolved Staff Comments

        Not applicable.

Item 5. Operating and Financial Review and Prospects

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

Executive Overview

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

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

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

        We derive our revenues principally from sales of our metrology systems and services relating to our systems. In 2006, product sales produced 79% of our total revenues and services produced 21%. Presently, we have no significant long-term debt and continue to finance our operations mainly from the proceeds of our initial public offering in 2000. As of the end of 2006, we had working capital of $16 million, including cash and cash equivalents, short-term deposits and held to maturity securities of $10 million, and no significant long-term debt.

        From quarter to quarter and from year to year, our revenues can vary significantly for a number of reasons. Importantly, we do not have long-term or multi-unit purchase contracts with our customers. Therefore, while most of our customers have purchased multiple systems from us and we anticipate that our customers will continue to do so, our customers can determine at any time to stop doing business with us. In addition, primarily because the semiconductor industry is dominated by a small number of large companies, our customer base is concentrated among a limited number of customers. A loss of any single customer could cause our revenues to decrease by a material amount. Furthermore, because our systems range in price from $100,000 to over $1,000,000, the loss of relatively few sales could also cause our revenue to decrease by a material amount. Our service revenues, which tend to be more predictable and less subject to wide fluctuations, tend to help decrease volatility in our earnings.

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

        When evaluating the performance of the Company, our management tends to focus on several financial metrics and several qualitative areas such as: warranty cost per system and warranty costs as a percentage of sale price; costs of production and costs of production as a percentage of sales; inventory as a percentage of yearly sales; days sales outstanding; and the mixture of our sales and geographical distribution of installations of our systems at end users sites compared to industry capital equipment trends. In 2006, warranty costs amounted to approximately 10% of sale price. Factors that affect warranty costs include the number of systems installed in a specific site or territory and the maturity of the products. Costs of production include materials, labor, and write-off per product during product life time, and ranged from 30% to 43% of the sale price in 2006, depending on the product. Factors that affect cost of production include sales volume, product configuration, product maturity, and actual sale price. Our average inventory levels in 2006 were approximately 16% of yearly sales. In 2006, average days sales outstanding for total revenues were 65 and ranged between 53 and 71 days over the four quarters of 2006. Geographical distribution analysis of installation at end users sites of our products reveals an increase in the installation of our products in Asia Pacific (excluding Japan) 38% in 2005 to 49% in 2006. In Japan the installation of our products decreased from 22% of sales in 2005 to 7% in 2006.

Significant Events in 2006 and Outlook for 2007

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

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

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        In 2007, Nova will focus on continuing development of its current chemical mechanical polishing (“CMP”), copper CMP and optical critical dimension systems as well as investing in the products and technologies included in its long-term strategy, and products related to the new acquisition, in the x-ray segment. Over the next three years, Nova anticipates introducing future generations of its current products and new product to address the advancing technology trends toward feature sizes of 45 nm and below and new processes and materials. We believe that in 2007 our opportunities will most likely come from the increased need for monitoring and control resulting from decreasing feature sizes, and the accelerating move to new materials. The main challenges and risks we see are to be “on time” with the right process control solutions to meet the needs of our existing customers and new customers. In order to address these risk and challenges, we are working closely with leading customers’ development process groups and with the leading process equipment manufacturers. The purpose of working closely with customers and process equipment manufacturers is to receive from them as early as possible information and feedback on the metrology and process needs of the upcoming new manufacturing processes and materials. We believe receiving this information as early as possible will assist us in developing metrology solutions to meet the new needs of the semiconductor industry. In tandem with this type of long term development, our ongoing marketing activity supports our current products with short term improvements to answer the customers’ ongoing needs and to make required changes.

        Currently, our main revenue generator is our oxide CMP product line and sales of our oxide CMP product line are affected by the total number of process tools sold in this segment. In years prior to 2003, the oxide CMP represented more than 50% of the entire CMP equipment market. Since 2004, this percentage decreased and we expect it to continue to decrease as copper CMP equipment is expected to dominate the CMP equipment market. We can not foresee what will ultimately be the process control needs for copper CMP, and whether the products and solutions we will bring to market for the copper CMP market will be accepted in the market.

Critical Accounting Policies

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

Use of estimates – General

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

Revenue recognition

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

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

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

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

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Allowances for doubtful accounts

        We review on an on-going basis the need for allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. When determining what allowance, if any, to make for doubtful accounts, we review many factors, including our history of relatively few write-offs, customer relationships and customers’ creditworthiness. Based on this review, we estimate the amount of accounts receivable, if any, we may be unable to collect and allowances for doubtful accounts may be required. If the financial condition of our customers were to deteriorate, their ability to make payments could be impaired and our estimates could prove to be inaccurate. If significant, allowances for doubtful accounts could have a material adverse effect on our financial results.

Warranty provisions

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

Inventories write-off

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

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

Operating Results

Overview

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

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

	2004			2005			2006
USA		43	%		33	%		34	%
Europe		13	%		7	%		10	%
Japan		17	%		22	%		7	%
Asia-Pacific		27	%		38	%		49	%
Total		100	%		100	%		100	%

        Historically, a substantial portion of our revenues has come from a small number of customers. In 2004, 2005 and 2006, our five largest customers accounted for 82%, 83% and 79% of our revenues, respectively. In, 2004, 2005 and 2006, our single largest customer accounted for 45%, 48% and 46% of our revenues, respectively. We anticipate that our revenues will continue to depend on a limited number of major customers, although the companies considered being major customers and the percentage of our revenue represented by each major customer may vary from period to period. Therefore, the loss of any one of our major customers could materially and adversely affect us.

        The sales cycle for our systems typically ranges from 3 to 12 months and depends upon the status of our system’s integration with a particular manufacture and model of process equipment, the evaluation criteria of our customers, and the technology or application of the process. Additionally, the rate and timing of customer orders may vary significantly from month to month as a function of the introduction of a new type of system to a production line. We have a relatively low backlog. Accordingly, if sales of our products do not occur when we expect or we are unable to adjust our estimates on a timely basis, our expenses and inventory levels may fluctuate relative to revenues and total assets. In 2006, our inventory levels at the end of each quarter ranged from $6.6 million to $9.1 million. We planned our 2006 inventories for sales of 200 mm systems and 300 mm systems according to our expectation that approximately 80% of equipment sales would be for 300 mm equipment and that the NovaScan 3090 would account for most of our sales of 300 mm systems. Actual sales in 2006 were similar to this plan. In 2007, we anticipate continued proliferation of the new NovaScan 3090 product series for the 300 mm market, and expect that overall 300mm sales will account for over 80% of our revenues. If our actual sales are significantly different from our expectations, we may have to write-off some of our inventory.

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

        Our revenues increased by 60% in 2006 following an 18% decrease in 2005 and a 38% increase in 2004.

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

	Percentage of Total Revenues
	Year ended December 31,
	2004			2005			2006
Revenues from products sale		79.5	%		72.9	%		79.2	%
Revenues from services		20.5	%		27.1	%		20.8	%
Total revenues		100.0	%		100.0	%		100.0	%
Cost of products sale		39.1	%		37.9	%		38.8	%
Cost of services		18.3	%		26.2	%		18.7	%
Total cost of revenues		57.4	%		64.1	%		57.5	%
Gross profit		42.6	%		35.9	%		42.5	%
Operating expenses:
Research and development expenses, net		23.5	%		30.8	%		19.0	%
Sales and marketing expenses		18.1	%		23.1	%		18.1	%
General and administrative expenses		6.3	%		12.0	%		10.6	%
Other operating income		--			--			--
Total operating expenses		47.9	%		65.9	%		47.7	%
Operating loss		(5.3	)%		(30.0	)%		(5.2	)%
Financing income, net		1.4	%		2.1	%		1.2	%
Net Loss		(3.9	)%		(27.9	)%		(4.0	)%

Comparison of Years Ended December 31, 2006 and 2005

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

        We expect that sales from our main integrated process control product line targeting the CMP market, including dielectric, copper and etch, will continue to account for a substantial portion of our revenues for at least the next year, and that the new stand alone product lines sales will gradually become more significant following wider market penetration. As our revenues are largely dependent upon the sale of systems for CMP processing, any decrease in demand for our CMP products would have a material adverse affect on us. In 2007, we expect service revenue to increase relative to 2006 as the warranty periods for additional systems will expire and we expect customers to buy service contracts for these systems.

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Cost of Revenues and Gross Profit. Cost of revenues consists of the labor, material and overhead costs of manufacturing our systems, and the costs associated with our worldwide service and support infrastructure. It also consists of inventory write-offs and provision for estimated future warranty costs for systems we have sold. Our cost of revenues attributable to product sales in 2006 was $18.7 million, an increase of $7.3 million, or 64%, compared to 2005. This increase is attributable to the increased volume of systems sold in 2006. As a percentage of total revenues, our cost of revenues attributable to product sales in 2006 increased to 38.8% from 37.9% in 2005. This increase is attributable to the higher sales volume of products with lower gross margins. In the years ended December 31, 2006 and 2005 we wrote-off inventories in the amounts of $0.4 million and $0.1 million, respectively. Our cost of revenues attributable to services in 2006 was $9.0 million, an increase of $1.1 million, or 14%, compared to 2005. This increase is attributable mainly to labor and material costs relating to new service contracts.

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

        Research and Development Expenses, Net. Research and development expenses, net, consist primarily of salaries and related expenses and also include consulting fees, subcontracting costs, related materials and overhead expenses, after offsetting conditional grants received or receivable from the Office of the Chief Scientist. Our research and development expenses, net, decreased by 1% from $9.3 million in 2005 to $9.2 million in 2006, after offsetting conditional grants received or receivable from the Office of the Chief Scientist of $1.9 million in 2006 and 2005, each. In 2006 research and development expenses, net, represented 19% of our revenues compared to 31% of our revenues in 2005, due to the significant increase in our revenues in 2006.

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

        Sales and Marketing. Sales and marketing expenses are comprised of salaries and related costs for sales and marketing personnel, related travel expenses, and overhead. They also include commissions to our representatives and sales personnel and royalties. Our sales and marketing expenses increased by 26% from $7.0 million in 2005 to $8.8 million in 2006. Sales and marketing expenses represented 23% and 18%, respectively, of our revenues in 2005 and 2006. The decrease as a percentage of revenue is related to the higher volume of revenues in 2006. This decrease was offset with $1.8 million higher sales and marketing costs in 2006, related to evaluations, commissions and managerial transition costs in the Asia Pacific and Japan regions.

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

Comparison of Years Ended December 31, 2005 and 2004

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

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        We expect that sales from our main integrated process control product line targeting the CMP market, including dielectric and copper, will continue to account for a substantial portion of our revenues for at least the next year, and that the new product lines sales (integrated and stand-alone process control systems for etch) will gradually become more significant following wider market adoption of integrated metrology for etch. As our revenues are largely dependent upon the sale of systems for CMP processing, any decrease in demand for our CMP products would have a material adverse affect on us. In 2006, we expect service revenue to increase relative to 2005 as the warranty periods for additional systems will expire and we expect customers to buy service contracts for these systems.

        Cost of Revenues and Gross Profit. Cost of revenues consists of the labor, material and overhead costs of manufacturing our systems, and the costs associated with our worldwide service and support infrastructure. It also consists of inventory write-offs and provision for estimated future warranty costs for systems we have sold. Our cost of revenues attributable to product sales in 2005 was $11.4 million, a decrease of $3.0 million, or 20.8%, compared to 2004. This decrease is attributable mainly to the decreased volume of systems sold. As a percentage of total revenues, our cost of revenues attributable to product sales in 2005 decreased to 37.9% from 39.1% in 2004. This decrease is attributable to the mixture of products sold. Inventory write-down did not have significant affect on our cost of goods sold in 2005 or in 2004. Our cost of revenues attributable to services in 2005 was $7.9 million, an increase of $1.2 million, or 17.5%, compared to 2004. This increase is attributable to an increase in labor and material costs relating to service contracts and installations at new customer sites.

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

        Research and Development Expenses, Net. Research and development expenses, net, consist primarily of salaries and related expenses and also include consulting fees, subcontracting costs, related materials and overhead expenses, after offsetting conditional grants received or receivable from the Office of the Chief Scientist. Our research and development expenses, net, increased 7.3% from $8.7 million in 2004 to $9.3 million in 2005, after offsetting conditional grants received or receivable from the Office of the Chief Scientist of $1.9 million in 2005 and 2004, each. In 2005 research and development expenses, net, represented 30.9% of our revenues compared to 23.5% of our revenues in 2004, due to the significant decrease in our revenues in 2005.

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

        Sales and Marketing. Sales and marketing expenses are comprised of salaries and related costs for sales and marketing personnel, related travel expenses, and overhead. They also include commissions to our representatives and sales personnel and royalties. Our sales and marketing expenses increased by 6% from $6.6 million in 2004 to $7.0 million in 2005. Sales and marketing expenses represented 23.1% and 18.1%, respectively, of our revenues in 2005 and 2004. This increase as a percentage of revenue is related to lower volume of revenues in 2005.

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

Liquidity and Capital Resources

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

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

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

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

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

	2006				2005				2004
	Domestic		Abroad		Domestic		Abroad		Domestic		Abroad
	(in dollar thousands)
Electronic equipment		955		81		1,176		41		844		78
Office furniture and equipment		44		14		13		2		230		3
Leasehold improvements		228		12		48		2		79		8
Total		1,227		107		1,237		45		1,153		89

        The investment in capital expenditures was financed mainly from the cash reserves of the Company. The increase in capital expenditures for electronic equipment in 2006 and 2005 was due to our investments in information systems improvements (software and hardware), electronic equipment used in our research and development labs and systems for our demonstration centers and application development. Although we currently have no significant capital commitments, we expect to spend up to $2 million on capital expenditures in the next 12 months, mainly for information systems improvements (software and hardware), electronic equipment used in our research and development labs and demonstration centers.

        Our principal liquidity requirements are expected to be for working capital, research and development, capital expenditures and lease payments for our worldwide facilities. We believe that our current cash reserves, which include a $5 million private placement that was completed during March 2007, will be adequate to fund our activities for at least the next 12 months.

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

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

        With regard to usage of hedging financial instruments and the impact of inflation and currency fluctuations, see “Quantitative and Qualitative Disclosures About Market Risk” starting on page 60.

Off-Balance Sheet Arrangements

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

Contractual Obligation

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

	Total		Less than 1 year		1-3 years
Operating Lease Obligations		1,525		1,081		444
Purchase Obligations		5,317		5,317		-
Other Long Term Liabilities		70		-		70
Total		6,912		6,398		514

Research and Development

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

Conditional Grants from the Office of the Chief Scientist

        Under the Law for the Encouragement of Industrial Research and Development, 1984, a qualifying research and development program is eligible for conditional grants of up to 50% of the program’s expenses. The program must be approved by a committee of the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor. The recipient of the conditional grants is required to return the grants by the payment of royalties on the revenues derived from using the grants. Current regulations promulgated under the law provide for the payment of royalties to the Office of the Chief Scientist ranging from 3% to 5% on the revenues derived from using the conditional grants until 100% of the grants are repaid. Conditional grants received under programs approved after January 1, 1999 will accrue interest at an annual rate of the 12-month LIBOR applicable to dollar deposits. Royalties are paid in NIS linked to the dollar at the exchange rate in effect at the time of payment. Following the full payment of such royalties and interest, there is generally no further liability for payment.

        The terms of the conditional grants under the law require that we manufacture the products developed with these grants in Israel. These restrictions apply even after grants are fully repaid. Under the regulations promulgated under the law, the products may be manufactured outside Israel by us or by another entity and know-how may be transferred outside of Israel, only if prior approval is received from the Office of the Chief Scientist. This approval may be given only if we abide by all the provisions of the law and related regulations. Ordinarily, as a condition to obtaining approval to manufacture outside Israel, we would be required to pay increased royalties and as a condition to obtaining approval to transfer know-how outside Israel, ordinarily we would be required to pay a lump sum, all as defined under the relevant law. If we perform the manufacturing, the increased royalties would ordinarily be one percentage point above the otherwise applicable royalty rate. If the manufacturing is performed by an entity other than us, the rate would depend on the amount of manufacturing performed outside of Israel and the size of the conditional grants in relation to the investments made by us in the project. The total amount to be repaid to the Office of the Chief Scientist would also be adjusted to between 120% and 300% of the conditional grants, depending on the manufacturing volume that is performed outside Israel. If we wish to transfer know-how, the terms for approval shall be determined according to the character of the transaction and the consideration paid to us for such transfer. Approval of the transfer of technology to another Israeli company may be granted only if the recipient abides by all the provisions of the law and related regulations, including the restrictions on the transfer of know-how outside of Israel and the obligation to pay royalties in an amount that may be increased. Approval to manufacture products outside of Israel or consent to the transfer of technology, if requested, might not be granted.

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        As of December 31, 2006 we received conditional grants from the Office of the Chief Scientist totaling $9.8 million. Because the implementation of regulations raising royalty rates to between 3% and 6% has been deferred, we are obligated to pay royalties of 3% of revenues derived from sales of products funded with these grants. As of December 31, 2006, our contingent liability to the Office of the Chief Scientist for conditional grants received was approximately $6.2 million. See also Note 9A to our consolidated financial statements contained elsewhere in this report.

        The funds available for conditional grants from the Office of the Chief Scientist were reduced for 2004 and 2005, and the Israeli authorities have indicated that the government may further reduce or abolish grants of this kind in the future. Even if these conditional grants are maintained, we might not receive them in the future and cannot presently predict the amount of any grants we might receive.

        In addition to royalty-bearing grants from the Office of the Chief Scientist, in 2006, we participated in two programs sponsored by the Office of Chief Scientist. In one program, we are a member of a research consortium comprised of several Israeli high technology companies, which are engaged in the development of multimedia on-line technology. In the other program, we are cooperating with a research institute in Israel for the development of advanced measurement techniques. In both programs, the Office of the Chief Scientist contributes 66% of the approved research and development budget for the research consortium and the members of the research consortium contribute the remaining 34%. No royalties from this funding are payable to the Israeli government, however, the provisions of the law and related regulations regarding the restrictions on the transfer of know-how outside of Israel apply to these programs. Expenses in excess of the approved budget are borne by the consortium members. In general, any consortium member that develops technology as part of the consortium retains the intellectual property rights to the technology developed by this member, and all the members of the consortium have the right to utilize and implement such technology without having to pay royalties to the developing consortium member. As of December 31, 2006, we had received approximately $3 million in grants from the Office of Chief Scientist in connection with these programs.

Item 6. Directors, Senior Management and Employees

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

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

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

       Dr. Micha Brunstein was named chairman of our board of directors in June 2006, after serving as member of our board of directors from November 2003. During the years 1990 and 1999, Dr. Brunstein served as Managing Director of Applied Materials Israel Ltd. Prior to that, Dr. Brunstein served as President of Opal Inc., and as a Director of New Business Development in Optrotech Ltd. At present, Dr. Brunstein serves as a board member of Ham-let Ltd., a company listed on the Tel Aviv Stock Exchange and Valor Computerized Systems Ltd., a company listed on the Frankfurt Stock Exchange. He is a chairman and serves on boards of directors of several privately owned companies. Dr. Brunstein holds a B.Sc. in Mathematics and Physics from the Hebrew University, Jerusalem, and a M.Sc. and a Ph.D. in Physics from Tel Aviv University.

        Dr. Giora Dishon is a co-founder of Nova and served as President and Chief Executive Officer since Nova’s formation in 1993 until August 2006. From 1989 to 1993 he served as Thin Film and Flat Panel Display Product Line Manager at Orbot Systems and Orbotech Ltd., a manufacturer of automated optical inspection equipment. From 1986 to 1988 he was a Visiting Scientist at the Microelectronics Center of North Carolina, and from 1982 to 1986 he served as Managing Director at AVX Israel Ltd., a manufacturer of electronic devices. Dr. Dishon holds a B.Sc. in Chemistry, a M.Sc. and a Ph.D. in Materials Science from the Hebrew University, Jerusalem, Israel.

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

        Mr. Avi Kerbs has served as a director of Nova since 1993. He serves as the President and Chief Executive Officer of Teuza Management & Development Ltd., the management company of Teuza-A Fairchild Technology Venture Ltd., a venture capital company and has served in this capacity since 1991. Teuza-A Fairchild Technology Venture Ltd. is a major shareholder of Nova. He serves as a director of most of the companies comprising the investment portfolio of the Teuza Fund. Mr. Kerbs holds a B.Sc. in Industrial Engineering and Management and a M.Sc. in Management from the Technion – Israel Institute of Technology. Mr. Kerbs serves as a member of the Technion’s Board of Governors and the Haifa University Board of Governors and is the Chairman of the Scientific Academic Club of Haifa University. Mr. Kerbs is also a member of the Board of the United Cerebral Palsy Research and Educational Foundation in the U.S. Mr. Kerbs was originally appointed to our board of directors by Teuza.

        Mr. Joseph Ciechanover has served as a director of Nova from October 1996 until December 1998 and again from February 2000 until the present. He is the founder and president of the Challenge Fund-Etgar L.P., a venture capital firm holding approximately 1.5% of Nova’s outstanding shares as of April 20, 2007, and served as chairman of the board of directors of El-Al Israel Airlines from 1995 until 2001. He served as a chairman of Israel Discount Bank from 1986 to 1993 and the President and a member of the board of directors of PEC Israel Economic Corporation, a diversified investment company which merged later into Discount Investment Corp. Since 1995, Mr. Ciechanover has been a member of the board of directors of United Retail Group, Inc. and serves on the audit and compensation committees. United Retail Group, Inc.‘s stock is publicly traded in the United States. He has been a member of the board of directors of Harel Investment Co. since 1995. Mr. Ciechanover holds a law degree from the Hebrew University, Jerusalem, an LL.M. from the University of California at Berkeley and a Ph.D. in philosophy from Boston University, Boston, Massachusetts.

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

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

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

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

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

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

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

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

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

Voting agreement

        We are not aware of any voting agreement currently valid.

Compensation

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

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

Board of Directors’ Committees

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

        The Audit Committee is comprised of Dan Falk, Joseph Ciechanover and Naama Zeldis. The functions of the audit committee according to Israeli Law are to locate and monitor deficiencies in the management of the Company, including in consultation with the independent auditors and the internal auditor, and to advise the board of directors on how to correct such deficiencies. The audit committee is also responsible to assist the board of directors in fulfilling its responsibility for oversight of the quality and integrity of accounting, auditing and financial reporting practices of the Company. Furthermore, the audit committee is also responsible for approving related party transactions. In addition, as described under Item 16, the audit committee is responsible for the approval of all audit and non-audit services provided to the Company by Deloitte & Touche and to oversee the qualifications, independence, appointment, compensation and performance of the Company’s independent auditors. The audit committee operates under a charter adopted by the board of directors.

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

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

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

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

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

Employees

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

	as of December 31,
	2004		2005		2006
Total Personnel		239		239		280
Located in Israel		159		156		168
Located abroad (mainly U.S.)		80		83		112
In operations		40		33		60
In research and development		82		84		83
In Global Business		95		98		116
In general and administration		22		24		21

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

        We were a member of the Industrialists Association in Israel, an employer’s union until December 31, 2006. As a result of this membership, a number of collective bargaining agreements apply to us. These agreements principally concern cost of living wage increases, paid vacation and holidays, length of the workday, wage tariffs, termination and severance payments. As of December 31, 2006, we have been providing our employees with benefits and working conditions that are at least as favorable as those found in the collective bargaining agreements.

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

Share Ownership

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

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Name	Ordinary Shares Underlying Options		Expiration Dates		Exercise Prices ($/share)
Giora Dishon		281,236		2007-2012		2.06-7.37
Moshe Finarov		247,500		2007-2012		2.06-7.37
14 directors and officers as a group		931,625		2007-2012		1.79-7.37

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

        We currently have six active share option plans.

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

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

        Option Plan 5 — As of December 31, 2006, options to purchase 972,161 ordinary shares at an exercise prices of $1.13, $2.17 or $2.46, the fair market value of Nova’s stock on the date of grant were granted; 128,722 options were exercised, 413,170 options were exercisable and 430,269 options had been cancelled;

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

        Options to purchase an aggregate of 75,000 ordinary shares at an exercise price of $3.69 per share granted to the members of our board of directors, other than our external directors; as of December 31, 2006, 20,000 options were exercised, 35,000 options were exercisable and 20,000 options had been cancelled;

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

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

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

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

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        In addition to the option plans described above, in 2003, we implemented an Employee Stock Purchase Plan pursuant to which eligible employees of the Company may purchase up to 150,000 ordinary shares, subject to certain adjustments, at a discounted price. The Company issued a total of 138,505 ordinary shares under this plan.

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

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

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

Outstanding as of December 31, 2006							Exercisable as of December 31, 2006
Range of exercise prices	Number outstanding		Weighted average remaining contractual life		Weighted average exercise price		Number exercisable		Weighted average exercise price
(US dollars)			(in years)		(US dollars)				(US dollars)
1.13-1.95		733,792		6.3		1.81		28,492		1.13
2.06		628,245		3.1		2.06		628,245		2.06
2.17-3.69		1,376,303		4.4		2.80		979,533		2.98
4.01		438,035		4.4		4.01		438,035		4.01
5.15		40,000		4.2		5.15		40,000		5.15
6.27-7.37		363,465		1.5		7.02		363,465		7.02
		3,579,840						2,477,770

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

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Item 7. Major Shareholder and Related Party Transactions

Major Shareholders

        The following table shows the number of ordinary shares beneficially owned by persons known by us to own beneficially more than five percent of the Company’s ordinary shares, as of April 20, 2007:

Name	Number of Ordinary Shares Beneficially Owned*		Percentage of Ordinary Shares Beneficially Owned
Clal Electronics Industries Ltd.(1)		4,858,627		24.3	%
Austin W. Marxe & David Greenhouse(2)		2,367,837		12.4	%
Rima Managenent, LLC(3)		1,640,673		8.3	%
Richard Mashaal(3)		1,640,673		8.3	%
Teuza - A Fairchild Technology Venture Ltd.(4)		1,453,407		7.6	%
Teuza Management & Development (1991) Ltd.(4)		1,453,407		7.6	%
Tamir Fishman Ventures II, L.L.C.(5)		1,175,600		6.2	%
Shai Saul(5)		1,175,600		6.2	%
Michael Elias(5)		1,182,850		6.2	%
Tamir Fishman & Co. Ltd.(5)		1,180,700		6.2	%
Eldad Tamir(5)		1,180,700		6.2	%
Danny Fishman(5)		1,180,700		6.2	%
Giora Dishon(6)		989,278		5.1	%

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

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

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

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

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

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

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

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

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

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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

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

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

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

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

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

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

Item 8. Financial Information

Consolidated Financial Statements

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

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Significant Changes

        None.

Legal Proceedings

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

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

Dividend Policies

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

        We obtained the status of “approved enterprise” under the Law for the Encouragement of Capital Investments, 1959, under which we may take advantage of certain tax exemptions. We may further obtain such status in the future. If we distribute a cash dividend from income which is tax exempt, we would have to pay corporate tax at a rate of up to 25% on the amount equal to the amount distributed and on the amount of corporate tax which would have been due in the absence of the tax exemption, in addition to withholding tax on such dividends paid. For further description of the conditions limiting our ability to declare and pay dividends see “Israeli Taxation” starting on page 51.

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

Export Sales

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

Item 9. The Offer and Listing

Offer and listing details

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

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Nasdaq Global Market

	Price per share (US$)
	High		Low
Yearly highs and lows
2002		4.54		0.86
2003		7.19		1.42
2004		8.21		3.00
2005		3.84		2.00
2006		2.72		1.72
Quarterly highs and lows
2005
Second quarter		3.00		2.22
Third quarter		2.98		2.20
Fourth quarter		2.47		2.00
2006
First quarter		2.64		1.90
Second quarter		2.40		1.72
Third quarter		2.06		1.82
Fourth quarter		2.72		1.86
2007
First quarter		3.02		2.42
Second Quarter (until May 7, 2007)		2.88		2.56
Monthly highs and lows
November 2006		2.50		2.14
December 2006		2.72		2.45
January 2007		2.70		2.42
February 2007		3.02		2.46
March 2007		2.99		2.55
April 2007		2.88		2.56

Tel Aviv Stock Exchange*

	Price per share (NIS)
	High		Low
Yearly highs and lows
2002		11.58		10.80
2005		14.08		9.56
2006		12.79		8.08
Quarterly highs and lows
2005
Second quarter		11.00		10.80
Third quarter		14.08		10.28
Fourth quarter		11.81		9.56
2006
First quarter		12.79		9.74
Second quarter		11.31		8.17
Third quarter		10.02		8.08
Fourth quarter		11.37		8.20
2007
First quarter		12.74		10.40
Second Quarter (until May 7, 2007)		12.74		11.21
Monthly highs and lows
November 2006		11.03		9.25
December 2006		11.37		10.50
January 2007		11.47		10.86
February 2007		12.70		10.40
March 2007		12.74		10.75
April 2007		12.74		11.21

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

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Item 10. Additional Information

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

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

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

        Approval of Related Party Transaction; Corporate Borrowings. The Israeli Companies Law, to which the company is subject, requires that an office holder of a company, including directors and executive officers, promptly disclose to the board of directors of that company any personal interest that the office holder may have and all related material information known about any existing or proposed transaction with the company. The approval of the board of directors is required for a transaction between the company and its office holder or between the company and another person in which the office holder has a personal interest that is not an “extraordinary transaction,” unless the articles of association provide otherwise. If the transaction is an “extraordinary transaction,” it also requires the approval of the audit committee prior to its being approved by the board of directors. In the event that the transaction is between the company and a director regarding the director’s terms of engagement with the company, including with regard to other positions in the company filled by the director and including with respect to indemnification, insurance and exemptions, the transaction requires the approval of the audit committee, the board of directors and the shareholders.

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

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

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

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

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

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

        According to our articles of association, the quorum required for an ordinary meeting of shareholders is at least two shareholders present in person or by proxy who together hold or represent in the aggregate more than one third (33.33%) of the voting power. A meeting adjourned for lack of a quorum is adjourned to the same day in the following week at the same time and place or to a later date if said date is indicated in the prior written notice or if the Company has sent to the shareholders a prior notice of no less than 72 hours before the date set for the postponed meeting. At the reconvened meeting, the required quorum consists of any number of members present in person or by proxy, regardless of the number of shares represented. The Companies Law and regulations determine that prior notice of no less than 21 days should be given to the company’s shareholders, prior to convening a meeting. In the event that the issue to be resolved is an issue listed in Article 87 to the Companies Law and is to be voted upon pursuant to a proxy solicitation, a notice of no less than 35 days should be given to the company’s shareholders.

        Subject to anti-terror legislations, there are no limitations on the rights of non-resident or foreign owners to hold or vote ordinary shares imposed under Israeli law or under the Company’s memorandum or articles of association.

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        Board of Directors. Our articles of association provide that directors may be elected either at our annual general meeting or an extraordinary meeting of shareholders by a vote of the holders of at least 50% of the total number of votes represented at such meeting. In addition, our board of directors is authorized to appoint directors, at its discretion, provided that the total number of directors shall not exceed the maximum number of directors permitted by our articles of association. Each of our directors holds office until the next annual general meeting of shareholders. However, in accordance with the Companies Law, our external directors serve for three years, which may be renewed for additional three year terms, if both the audit committee and the board of directors confirm that in light of the expertise and contribution of the external director, the extension of such external director’s term would be in the interest of our company. The Companies Law requires that the offices of the Chief Executive Officer and the Chairman of the board of directors be held by different persons. However, the Companies Law further provide that those positions may be held by the same person for a period not exceeding three years if approved by a majority of the company’s shareholder, including at least two thirds of the voting present shareholders (shares held by abstaining shareholders are not considered) which are not controlling shareholders or the aggregate number of shares voting against the proposal shall not exceed 1% of company voting shareholders.

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

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

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

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

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

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

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

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

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

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

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

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

(c) A senior position in the company’s major fields of business.

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

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

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

        Our board of directors has the authority to issue preferred stock in one or more classes or series and to fix the voting powers, preferences and relative participating, optional or other special rights of such preferred stock, without any further vote or action by the shareholders, subject to specific events as detailed in our Articles of Association and relevant rules.

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

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

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

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        The Companies Law provides that corporate mergers require the approval of both companies’ boards of directors and shareholders. In the event, however that shares of the target company are held by the acquiring company or by a person holding 25% or more of any type of controlling means of the acquiring company, the merger will not be approved if a majority of the shareholders of the target company attending and voting at the meeting at which the merger is considered (without taking into account, for that purpose, the shares held by the acquiring company or by a person holding 25% or more of any type of controlling means of the acquiring company) object to and do not vote in favor of the merger. If a person holds 25% or more of any type of controlling means of more than one merging company, the same provisions shall apply with regard to the shareholders’ vote with respect to each such company. Upon the request of a creditor of either party to the proposed merger, the Israeli courts may delay or prevent the merger if the courts conclude that there exists a reasonable concern that as a result of the merger the surviving company will be unable to satisfy the target company’s obligations. Furthermore, a merger may not close unless at least 30 days have passed from the time that the general meeting of each of the merging companies was held and at least 50 days have passed from the date on which the merger proposal was sent to the Israeli Registrar of Companies.

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

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

Material Contracts

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

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

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Exchange Controls

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

Israeli Taxation

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

Tax Reform 

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

        Transfer pricing of international transactions with related parties. The Income Tax Ordinance was amended to include provisions concerning transfer pricing between related parties, where one of the parties is situated abroad. Although the Company considers that the transfer pricing policy adopted with foreign affiliates is economically fair, we cannot be sure that our policy will accord with any future interpretation.

        Employee stock incentive plans. The tax reform codified past practice and determined three alternative tracks for taxing employee stock option plans. Where a trustee arrangement is in place, the employer can either claim an expense for tax purposes while the employee will be fully taxed up to the maximum marginal tax rate of 49% or the Company can waive the tax expense and the employee will pay a reduced tax rate of 25%. Where there is no trustee arrangement, the employee is fully taxable and no expense is allowed to the Company. There are detailed provisions for implementing these tracks. For Option Plans 6 and 7, which were allocated after the implementation of the tax reform, the Company has used the trustee arrangement, with waiver of the tax expense for the company and employee payment of reduced tax rate of 25%. As a result of the reform, the income tax authorities allowed the Company a change of tracks with regard to unvested options issued under option plans prior to the tax reform taking effect, subject to the optionees agreeing to certain restrictions.

        Controlled foreign company (CFC). The amendment to the law introduced Controlled Foreign Company (CFC) provisions, which, in certain circumstances, will lead to the Israeli company being charged tax on passive income of foreign affiliates as if it had received a dividend from such companies. This change is not expected to have material affect on the company’s financial results and tax payments.

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

        Carrying forward of capital losses. The seven year limit for carrying forward of capital losses has been removed with respect to capital losses arising from 1996 and thereafter. This change is not expected to have material affect on the company’s financial results and tax payments.

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General Corporate Tax Structure

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

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

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

        Taxable income of a company derived from an approved enterprise is taxed at the maximum rate of 25%, rather than the usual rate of 35% (or less as described above), for the benefit period. This period is ordinarily seven years commencing with the year in which the approved enterprise first generates taxable income, and is limited to 12 years from the year of commencement of operations, as determined by the Investment Center, or 14 years from the year of approval, whichever is earlier.

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

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

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

        A major portion of our production facilities has been granted the status of approved enterprises. Income arising from our approved enterprise facilities is tax-free under the alternative package of benefits described above and entitled to reduced tax rates of up to 25%, based on the level of foreign ownership for specified periods. We have derived, and expect to continue to derive, a substantial portion of our income from our approved enterprise facilities. In general, the benefits for most of our current production facilities in Israel will continue until termination in 2006. Our current investments in facilities are made under new approvals, the benefits of which will continue no longer than 2012.

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

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

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

Tax Benefits for Research and Development

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

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

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

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

— deduction of purchases of know-how and patents over an eight-year period for tax purposes;

— deduction of specified expenses incurred in connection with a public issuance of securities over a three-year period for tax purposes, although Israeli tax authorities have indicated that they do not allow these deductions in connection with offerings outside of Israel;

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

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

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

Special Provisions Relating to Taxation Under Inflationary Conditions

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

— A special tax adjustment for the preservation of equity whereby corporate assets are classified broadly into fixed, or inflation immune assets and non-fixed, or soft assets. Where a company’s equity exceeds the depreciated cost of its fixed assets, the company may take a deduction from taxable income, including tax-exempt income, that reflects the effect of multiplication of the annual rate of inflation on this excess, up to a ceiling of 70% of taxable income, including tax exempt income, in any single tax year, with the unused portion carried forward on a linked basis. If the depreciated cost of fixed assets exceeds a company’s equity, then the excess multiplied by the annual rate of inflation is added to taxable income.

— Depreciation deductions on fixed assets and losses carried forward are generally adjusted for inflation based on the increase of the Israeli consumer price index.

— Gains on traded securities, which are normally exempt from tax, are taxable in specified circumstances. However, the regular tax rules governing business income in Israel apply to dealers in securities.

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

Taxation of our Shareholders

Capital Gain Tax

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

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

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

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

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

Dividends

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

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

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

U.S. Taxation

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

        For purposes of this discussion, a “U.S. holder” is:

— a natural person who is a citizen or resident of the United States;

— a corporation or another entity taxable as a corporation created or organized under the laws of the United States or any political subdivision of the United States;

— an estate, the income of which is includable in gross income for United States federal income tax purposes regardless of its source; or

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

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

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

— persons who own, directly, indirectly or constructively, 10% or more of our outstanding voting shares;

— persons who hold the ordinary shares as part of a hedging, straddle or conversion transaction;

— persons whose functional currency is not the dollar;

— persons who acquire their ordinary shares in a compensatory transaction;

— broker-dealers;

— insurance companies;

— tax-exempt organizations;

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— financial institutions; and

— persons subject to the alternative minimum tax.

Availability of Reduced Tax Rates

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

Distributions on the Ordinary Shares

        We currently do not intend to pay dividends for at least the next several years. However, if we make any distributions of cash or other property to a U.S. holder of our ordinary shares, the amount of the distribution for U.S. federal income tax purposes will equal the amount of cash and the fair market value of any property distributed and will also include the amount of Israeli taxes withheld, if any, as described above under “Dividends” starting on page 55. In general, a distribution paid by us on the ordinary shares to a U.S. holder will be treated as dividend income if the distribution does not exceed our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. The amount of any distribution which exceeds these earnings and profits will be treated first as a non-taxable return of capital, reducing the U.S. holder’s tax basis in its ordinary shares to the extent thereof, and then as capital gain from the deemed disposition of the ordinary shares. Corporate holders generally will not be allowed a deduction for dividends received on the ordinary shares.

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

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

Sale or Exchange of the Ordinary Shares

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

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

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Passive Foreign Investment Companies

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

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

        Status of Nova as a PFIC. Under the income test, less than 75% of our gross income was passive income in 2006. The determination of our status under the asset test is more difficult, because that test requires a quarterly determination of the fair market value of our passive and non-passive assets and there is no definitive method set forth in the Code, U.S. Treasury Regulations or administrative or judicial interpretations thereof for determining the value of a foreign corporation’s assets under the asset test. While there are no definitive rules, the legislative history of the U.S. Taxpayer Relief Act of 1997 indicates that for purposes of the PFIC assets test, “the total value of a publicly-traded foreign corporation’s assets generally will be treated as equal to the sum of the aggregate value of its outstanding stock plus its liabilities.”

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

        Available Elections. If we will be treated as a PFIC for any taxable year, U.S. holders should consider whether or not to elect to treat us as a “qualified electing fund” or to elect to “mark-to-market” their ordinary shares. If a U.S. holder makes a qualified electing fund election (a “QEF election”) for all taxable years that the U.S. holder holds our ordinary shares and during which we are treated as a PFIC, the U.S. holder will be required for each taxable year to include in income a pro rata share of our undistributed ordinary earnings and net capital gain, if any, as ordinary income and long-term capital gain, respectively. In order to make (or maintain) a QEF election, the U.S. holder must annually complete and file IRS From 8621. In addition, we must make certain information regarding our net capital gains and ordinary earnings available to the U.S. holder and permit our books and recorded to be examined to verify such information. Therefore, if you determine that we are a PFIC for any year and make a request to us in writing at the address on the cover our latest Annual Report on Form 20-F, Attention Chief Financial Officer, for the information required to make a QEF election, we will promptly make the information available to you and comply with any other applicable requirements of the Code.

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

        Alternatively, if a U.S. holder elects to “mark-to-market” its ordinary shares, the U.S. holder will generally include in its income any excess of the fair market value of our ordinary shares at the close of each taxable year over the holder’s adjusted basis in such ordinary shares. A U.S. holder generally will be allowed an ordinary deduction for the excess, if any, of the adjusted tax basis of the ordinary shares over the fair market value of the ordinary shares as of the close of the taxable year, or the amount of any net mark-to-market gains recognized for prior taxable years, whichever is less. A U.S. holder’s adjusted tax basis in the ordinary shares will generally be adjusted to reflect the amounts included or deducted under the mark-to-market election. Additionally, any gain on the actual sale or other disposition of the ordinary shares generally will be treated as ordinary income. Ordinary loss treatment also will apply to any loss recognized on the actual sale or other disposition of ordinary shares to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included with respect to such ordinary shares. An election to mark-to-market generally will apply to the taxable year in which the election is made and all subsequent taxable years. A mark-to-market election applies to the tax year for which the election is made and to each subsequent year, unless our ordinary shares cease to be marketable, as specifically defined, or the IRS consents to revocation of the election. No view is expressed regarding whether our ordinary shares are marketable for these purposes or whether the election will be available.

        If a U.S. holder makes either the QEF election or the mark-to-market election, distributions and gain will not be recognized ratably over the U.S. holder’s holding period or be subject to an interest charge as described above. Further, the denial of basis step-up at death described above will not apply. If a U.S. holder elects to treat us as a “qualified electing fund,” gain on the sale of the ordinary shares will be characterized as capital gain. However, U.S. holders making one of these two elections may experience current income recognition, even if we do not distribute any cash. The elections must be made with the U.S. holder’s federal income tax return for the year of election, filed by the due date of the return (as it may be extended) or, under certain circumstances provided in applicable Treasury Regulations, subsequent to that date.

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

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

United States Information Reporting and Backup Withholding

        Dividend payments and proceeds from the sale or disposal of ordinary shares may be subject to information reporting to the Internal Revenue Service and possible U.S. federal backup withholding at the rate of 28%. Backup withholding will not apply, however, to a holder who furnishes a correct taxpayer identification number or certificate of foreign status and makes any other required certification or who is otherwise exempt from backup withholding (for example, if you are a corporation). Any U.S. holder who is required to establish exempt status generally must file Internal Revenue Service Form W-9 (“Request for Taxpayer Identification Number and Certification”). Finalized Treasury Regulation, which are applicable to payments made after December 31, 2000, have generally expanded the circumstances under which information reporting and backup withholding may apply.

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

Documents on Display

        The documents referred to herein, including our memorandum and articles of association, can be obtained from the Company at its registered office at Weizmann Science Park, Building 22, 2nd Floor, Ness-Ziona 76100, Israel. In addition, the Company is subject to certain informational requirements of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder. In accordance therewith, the Company files reports with the United States Securities and Exchange Commission (“SEC”). Reports and other information provided to the SEC by the Company may be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, 100 Fifth Street, N.E., Washington, D.C. 20549. Information on the operation of the public reference facilities may be obtained by calling the SEC at 1-800-SEC-0330. In addition, certain of the Company’s reports filed with the SEC are available on-line at www.sec.gov.

Item 11. Quantitative and Qualitative Disclosures About Market Risk

Market risk

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

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

Impact of Inflation and Currency Fluctuation

        Substantially all of our sales are made in U.S. dollars. Over 50% of our expenses in 2006 were in dollars or in NIS linked to the dollar. Most of the remaining expenses were in NIS. The dollar cost of our operations in Israel is influenced by any increase and the timing of such increase, in the rate of inflation in Israel that is not offset by the devaluation of the NIS in relation to the dollar During 2006, the value of the NIS increased against the dollar by 8.62%, while the consumer price index in Israel decreased approximately 0.1 %. During 2005, the value of the NIS decreased against the dollar by 5.6%, while the consumer price index in Israel increased 2.39%.During 2004, the value of the NIS increased against the dollar by 1.62%, while the consumer price index in Israel increased 2.38%. We believe that the rate of inflation in Israel has had a minor effect on our business to date. However, our dollar costs in Israel will increase if inflation in Israel exceeds the devaluation of the NIS against the dollar or if the timing of this devaluation lags behind inflation in Israel. As of December 31, 2006, the majority of our net monetary assets were denominated in dollars and the remainder was denominated mainly in NIS. Net monetary assets that are not denominated in dollars or dollar-linked NIS are affected by the risk of currency fluctuations. In addition, approximately 5% of our expenses are in Euros. During 2006, the value of the Euro increased against the dollar by approximately 11.5%. The strength of the dollar against the Euro and the NIS has decreased the average dollar value of expenses valued in those currencies.

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

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

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

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        In 2006, the Company entered into currency-forward transactions (NIS/dollar, Euro/dollar, Yen/dollar) to insure (NIS/dollar, Euro/dollar, Yen/dollar) the rate in 2006. The total accumulated sum insured in the year was approximately $15.2 million with settlement dates through 2006, and the results of these transactions did not have, as expected, any material effect on the operational results of the Company.

Item 12. Description of Securities Other than Equity Securities

        Not applicable.

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

        None.

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

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

        We sold 3,000,000 ordinary shares for net proceeds of $49 million. As of March 31, 2007, approximately $26 million of the net proceeds had been used for working capital requirements and $7 million for capital expenditures.

Item 15. Evaluation of disclosure controls and procedures

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

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

Changes in internal controls

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

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

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

Item 16. Reserved

        Reserved.

Item 16A. Audit Committee Financial Expert

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

Item 16B. Code of Ethics

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

        You may review our code of conduct on our website, http://nova.co.il under “About Nova”.

Item 16C. Principal Accountant Fees and Services

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

        Audit Fees

        Deloitte & Touche billed the Company approximately $43,000 for audit services for fiscal 2005, including fees associated with the annual audit and reviews of the Company’s quarterly financial results submitted on Form 6-K, consultations on various accounting issues and performance of local statutory audits. Deloitte & Touche billed the Company approximately $57,000 for audit services in fiscal 2006.

        Audit-Related Fees

        Deloitte & Touche did not bill for any audit-related services in 2005 or 2006, except as included under the caption “Audit Fees”.

        Tax Fees

        Deloitte & Touche billed the Company approximately $2,000 for tax advice, including fees associated with tax compliance services, tax planning services and other tax consulting services for fiscal 2005. Deloitte & Touche billed the Company approximately $4,000 for tax advice in fiscal 2006.

        All Other Fees

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

- 62 -

        Pre-Approval Policies For Non-Audit Services

        Prior to the engagement of Deloitte & Touche each year, the engagement is approved by the Audit Committee of the Board of Directors. The Company’s Audit Committee rules of procedure provide for a process with respect to the prior approval of all services, including non-audit services, to be performed by the independent auditors for the Company. In fiscal 2005 and 2006, the Company’s Audit Committee approved all of the services provided by Deloitte & Touche.

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

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

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

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

PART III

Item 17. Financial Statements

        Not applicable.

Item 18. Financial Statements

        See pages F-1 through F-23.

Item 19. Exhibits

        See Exhibit Index.

- 63 -

NOVA MEASURING INSTRUMENTS LTD.

CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2006

NOVA MEASURING INSTRUMENTS LTD.

CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2006

Contents

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

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

We have audited the consolidated balance sheets of Nova Measuring Instruments Ltd. (the “Company”) and its subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders’ equity and comprehensive loss and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2006 and 2005, and their consolidated results of operations and cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America

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

Tel Aviv, Israel
February 28, 2007

F - 2

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

	As of December 31,
	2006			2005
CURRENT ASSETS
Cash and cash equivalents	$	4,176		$	5,776
Short-term interest-bearing bank deposits		466			1,206
Short-term investments		2,400			3,500
Held to maturity securities		3,265			4,388
Trade accounts receivable (net of $14 for doubtful accounts)		10,252			6,841
Inventories (Note 4)		8,968			6,606
Other current assets		1,917			1,141
		31,444			29,458
LONG-TERM ASSETS
Long-term interest-bearing bank deposits		3,172			2,974
Held to maturity securities		1,704			4,952
Other long-term assets		222			262
Severance pay funds (Note 8)		2,249			2,186
		7,347			10,374
FIXED ASSETS, NET (Note 5)		2,601			2,507
INTANGIBLE ASSETS, NET (Note 6)		3,027			-
Total assets	$	44,419		$	42,339
CURRENT LIABILITIES
Trade accounts payable	$	6,424		$	5,744
Deferred revenue		3,048			3,852
Other current liabilities (Note 7)		6,099			5,028
		15,571			14,624
LONG-TERM LIABILITIES
Liability for employee severance pay (Note 8)		3,224			2,907
Deferred revenue		979			1,264
Other long-term liability		70			100
		4,273			4,271
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY (Note 10)
Ordinary shares, NIS 0.01 par value - authorized 40,000,000
shares, issued and outstanding 17,104,523
and 15,457,471 shares, respectively		50			46
Additional paid-in capital		76,685			73,636
Accumulated other comprehensive income		(6	)		(18	)
Accumulated deficit		(52,154	)		(50,220	)
Total shareholders' equity		24,575			23,444
Total liabilities and shareholders' equity	$	44,419		$	42,339

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

F - 3

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

	Year ended December 31,
	2006			2005			2004
REVENUES:
Product sales	$	38,258		$	21,985		$	29,274
Services		10,034			8,157			7,532
		48,292			30,142			36,806
COST OF REVENUES:
Product sales		18,728			11,413			14,396
Services		9,015			7,893			6,715
		27,743			19,306			21,111
GROSS PROFIT		20,549			10,836			15,695
OPERATING EXPENSES:
Research and development, net of participation
by the Office of Chief Scientist of $1,862, $1,896 and $1,926,
respectively (Note 9)		9,166			9,301			8,665
Sales and marketing		8,754			6,950			6,647
General and administrative		5,136			3,626			2,331
		23,056			19,877			17,643
OPERATING LOSS		(2,507	)		(9,041	)		(1,948	)
INTEREST INCOME, NET		573			627			528
NET LOSS FOR THE YEAR	$	(1,934	)	$	(8,414	)	$	(1,420	)
LOSS PER SHARE:
Basic and diluted loss per share	$	(0.12	)	$	(0.55	)	$	(0.09	)
Shares used in calculation of basic and diluted loss per share		15,976			15,437			15,259

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

F - 4

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

	Ordinary shares		Additional Paid-in Capital		Deferred stock-based compensation			Accumulated other Comprehensive Income (loss)			Accumulated Deficit			Total Comprehensive Income (loss)			Total Shareholders' Equity (loss)
Balance as of January 1, 2004	$	46	$	72,785	$	(122	)	$	13		$	(40,386	)				$	32,336
Employee share-based plans	(*)	-		548														548
Amortization of deferred equity- based compensation						122												122
Change in fair market value of hedging derivatives									(5	)				$	(5	)		(5	)
Net loss for the year												(1,420	)		(1,420	)		(1,420	)
Total comprehensive loss														$	(1,425	)		(1,425	)
Balance as of December 31, 2004	$	46	$	73,333	$	-		$	8		$	(41,806	)				$	31,581
Shares issued under employee share-based plans	(*)	-		275														275
Equity-based compensation				28		(28	)											-
Amortization of deferred equity- based compensation						28												28
Change in fair market value of hedging derivatives									(26	)				$	26			(26	)
Net loss for the year												(8,414	)		(8,414	)		(8,414	)
Total comprehensive loss														$	(8,388	)		(8,440	)
Balance as of December 31, 2005	$	46	$	73,636	$	-		$	(18	)	$	(50,220	)				$	23,444
Employee share-based plans	(*)	-		83														83
Restricted shares issued to employees		1		346														347
Equity-based compensation				315														315
Shares issued in acquisition		3		2,305														2,308
Change in fair market value of hedging derivatives									12					$	12			12
Net loss for the year												(1,934	)		(1,934	)		(1,934	)
Total comprehensive loss														$	(1,922	)		(1,922	)
Balance as of December 31, 2006	$	50	$	76,685	$	-		$	(6	)	$	(52,154	)				$	24,575

(*) 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 6			2 0 0 5			2 0 0 4
CASH FLOWS - OPERATING ACTIVITIES
Net loss for the year	$	(1,934	)	$	(8,414	)	$	(1,420	)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization		1,413			894			548
Net recognized gains on investments		(226	)		(380	)		(309	)
Amortization of deferred equity-based compensation		662			28			122
Increase (decrease) in liability for employee termination benefits, net		254			(66	)		310
Decrease (increase) in trade accounts receivable		(3,411	)		9			(1,046	)
Decrease (increase) in other current assets and other long term assets		(736	)		148			(70	)
Increase in inventories		(786	)		(252	)		(2,202	)
Increase (decrease) in trade accounts payables and other        long-term liabilities		137			904			(624	)
Increase (decrease) in short term and long-term deferred income		604			(2,567	)		3,568
Increase (decrease) in other current liabilities		(1,089	)		2,315			(715	)
Net cash - operating activities		(5,112	)		(7,381	)		(1,838	)
CASH FLOWS - INVESTING ACTIVITIES
Decrease (increase) in short-term interest-bearing bank deposits		567			931			(1,205	)
Decrease (Increase) in short term investments		1,100			(3,500	)		-
Proceeds from held to maturity securities		5,261			5,612			4,530
Investment in short-term held to maturity securities		(664	)		-			(1,948	)
Investment in long-term held to maturity securities		-			-			(12,549	)
Investment in long-term interest-bearing bank deposits		(25	)		(1,050	)		(759	)
Acquisition of assets and liabilities - Schedule A		(1,577	)		-			-
Additions to fixed assets		(1,233	)		(1,282	)		(1,242	)
Net cash - investing activities		3,429			711			(13,173	)
CASH FLOWS - FINANCING ACTIVITIES
Shares issued under employee share-based plans		83			275			548
Net cash - financing activities		83			275			548
Decrease in cash and cash equivalents		(1,600	)		(6,395	)		(14,463	)
Cash and cash equivalents - beginning of year		5,776			12,171			26,634
Cash and cash equivalents - end of year	$	4,176		$	5,776		$	12,171

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

F - 6

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

SCHEDULE A – ACQUISITION OF ASSETS AND LIABILITIES

Acquisition of Assets and liabilities	2 0 0 6
Working Capital		665
Long lived assets		101
Other identifiable intangible assets		2,408
Long term liabilities		(81	)
Goodwill arising on acquisition		792
		3,885
Issuance of shares		(2,308	)
Cash paid, net	$	1,577

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

F - 7

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

NOTE 1 – GENERAL

A. Business Description

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

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

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

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

B. Use of Estimates in the Preparation of Financial Statements

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

F - 8

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

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

The Company’s consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America.

The following is a summary of the significant accounting policies, which were applied in the preparation of these financial statements, on a consistent basis:

A. Financial Statements in U.S. Dollars

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

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

B. Principles of Consolidation

The Company’s consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries (“the Group”), after elimination of material intercompany transactions and balances.

C. Cash and Cash Equivalents

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

D. Allowance for Doubtful Accounts

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

E. Held to Maturity Securities

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

F. Inventories

Inventories are presented at the lower of cost or market. Cost is determined as follows: Raw materials-on the average cost basis.

Finished goods and work in process – on actual production cost basis (materials, labor and indirect manufacturing costs).

F - 9

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

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (Cont.)

G. Fixed assets

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

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

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

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

H. Acquisition-related intangible assets

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

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

I. Accrued Warranty Costs

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

J. Revenue Recognition

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

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

F - 10

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

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (Cont.)

J. Revenue Recognition (cont.)

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

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

K. Research and Development

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

L. Income Taxes

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

M. Equity-Based Compensation

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

F - 11

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

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (Cont.)

M. Equity-Based Compensation (Cont.)

SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”).

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

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

Stock Options

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

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

Restricted Stock Awards

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

Pro Forma Information under SFAS 123 for Periods Prior to 2006

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

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

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

F - 12

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

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (Cont.)

M. Equity-Based Compensation (Cont.)

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

	2 0 0 5			2 0 0 4
Pro forma net loss
Net loss for the year, as reported	$	(8,414	)	$	(1,420	)
Deduct - stock-based compensation determined under APB-25		28			122
Add - stock-based compensation determined under SFAS 123		(2,710	)		(1,258	)
Pro forma net loss	$	(11,096	)	$	(2,556	)
Pro forma loss per share
Basic and diluted- as reported	$	(0.55	)	$	(0.09	)
Basic and diluted- pro forma	$	(0.72	)	$	(0.17	)

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

N. Loss per Share

Loss per share is presented in accordance with SFAS 128 of the FASB, “Earnings per Share.” Pursuant to this standard, basic earnings (loss) per share excludes the dilutive effects of convertible securities and is computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilutive effect of all convertible securities. Due to the anti-dilutive effect, basic loss per share was equal to diluted loss per share for years 2006, 2005 and 2004. The number of potentially dilutive securities excluded from diluted earnings per share due to the anti-dilutive effect amounted to 1,362,037, 2,444,175 and 754,109 in 2006, 2005 and 2004, respectively.

F - 13

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

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (Cont.)

O. Derivative Financial Instruments

SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” as amended by SFAS No. 138 and SFAS 149, requires, principally, the presentation of all derivatives as either assets or liabilities on the balance sheet and the measurement of those instruments at fair value. Gains and losses resulting from changes in the fair values of derivative instruments would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting.

See Note 14 for disclosure of the derivative financial instruments in accordance with such pronouncements.

P. New Accounting Pronouncements

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

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

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

NOTE 3 – BUSINESS COMBINATION:

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

F - 14

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

NOTE 3 – BUSINESS COMBINATION (Cont.):

The allocation of the purchase price is detailed hereafter:

	2 0 0 6
Property and equipment, net	$	101
Inventory		1,576
Identifiable intangible assets:
Purchased technology		2,003
Costumer base		405
Goodwill		792
Total assets acquired		4,877
Trade accounts payable		540
Current liabilities		371
Long term liabilities		81
Total liabilities assumed		992
Net assets acquired	$	3,885

NOTE 4 – INVENTORIES

A.

	As of December 31,
	2 0 0 6		2 0 0 5
Raw materials	$	2,581	$	931
Work in process		3,628		2,695
Finished goods		2,759		2,980
	$	8,968	$	6,606

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

NOTE 5 – FIXED ASSETS, NET

	As of December 31,
	2 0 0 6		2 0 0 5
Cost:
Electronic equipment	$	5,478	$	5,552
Office furniture and equipment		455		616
Leasehold improvements		1,933		1,802
		7,866		7,970
Accumulated depreciation and amortization:
Electronic equipment		3,466		3,778
Office furniture and equipment		274		429
Leasehold improvements		1,525		1,256
		5,265		5,463
Net book value	$	2,601	$	2,507

F - 15

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

NOTE 6 – INTANGIBLE ASSETS, NET

	As of December 31, 2 0 0 6
Cost:
Goodwill	$	792
Purchased Technology		2,003
Purchased Customer Base		405
		3,200
Accumulated amortization:
Purchased Technology		40
Purchased Customer Base		133
		173
Net book value	$	3,027

NOTE 7 – OTHER CURRENT LIABILITIES

A.

	As of December 31,
	2 0 0 6		2 0 0 5
Accrued salaries and fringe benefits	$	3,011	$	2,229
Accrued warranty costs (See B below)		2,120		1,864
Governmental institutions		759		917
Other		209		18
	$	6,099	$	5,028

b. Accrued warranty costs:

	As of December 31,
	2 0 0 6			2 0 0 5
Balance as of beginning of year	$	1,864		$	2,915
Services provided under warranty		(3,304	)		(3,090	)
Changes in provision		3,560			2,039
Balance as of end of year	$	2,120		$	1,864

NOTE 8 – LIABILITY FOR EMPLOYEE SEVERANCE PAY, NET

Israeli law and labor agreements determine the obligations of the Company to make severance payments to dismissed employees and to employees leaving employment under certain other circumstances. The obligation for severance pay benefits, as determined by Israeli law, is based upon length of service and the employee’s most recent salary.

The liability is partially covered through insurance policies purchased by the Company and deposits in a severance fund.

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

F - 16

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

NOTE 9 – COMMITMENTS AND CONTINGENCIES

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

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

Year	Amount (US dollars)
2007		1,081
2008		262
2009		182

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

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

D. In March 2005 the Company filed a complaint in the United States District Court for the Northern District of California against one of its competitors (hereinafter-the “Competitor”) for infringing its US Patent. The patent relates to the Company’s Integrated Metrology (IM) tools and the fundamental aspects of these systems. The Competitor has filed two counter claims for patent infringement. The Company is unable to determine at this time with any certainty the ultimate outcome of the aforementioned issue and its effect, if any, on the Company’s financial condition, operating results and business.

NOTE 10 – SHAREHOLDERS’ EQUITY

A. Share Capital Transactions

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

B. Rights of Shares

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

F - 17

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

NOTE 10 – SHAREHOLDERS’ EQUITY (cont.)

C. Share Option Plans

The Company’s Board of directors approves, from time to time, employee share option plans, the last of which was approved in May 2006. The options usually vest over four years and their term may not exceed 7 years. The exercise price of each option is usually the market price of the underlying share at the date of each grant.

Through December 31, 2006, 6,906,722 share options have been issued under the plans, of which 1,773,819 options have been exercised, 1,553,063 options have been cancelled, and 2,447,770 options were exercisable as of December 31, 2006.

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

D. Restricted Stock Awards  

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

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

	2 0 0 6					2 0 0 5					2 0 0 4
	Share options			Weighted average exercise price		Share options			Weighted average exercise price		Share options			Weighted average exercise price
Outstanding - beginning of year		3,179,004		$	3.57		3,630,378		$	3.57		2,621,213		$	3.38
Granted		1,175,900			2.03		-					1,250,000			3.86
Exercised		(45,252	)		1.85		(107,079	)		1.51		(138,640	)		2.58
Cancelled		(729,812	)		3.61		(344,295	)		3.46		(102,195	)		3.60
Outstanding - year end		3,579,840			3.07		3,179,004			3.57		3,630,378			3.57
Options exercisable at year-end		2,477,770			3.53		3,170,885			3.57		1,575,108			4.02

F - 18

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

NOTE 10 – SHAREHOLDERS’ EQUITY (cont.)

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

Outstanding as of December 31, 2006							Exercisable as of December 31, 2006
Range of exercise prices	Number outstanding		Weighted average remaining contractual life		Weighted average exercise price		Number exercisable		Weighted average exercise price
(US dollars)			(in years)		(US dollars)				(US dollars)
1.13-1.95		733,792		6.3		1.81		28,492		1.13
2.06		628,245		3.1		2.06		628,245		2.06
2.17-3.69		1,376,303		4.4		2.80		979,533		2.98
4.01		438,035		4.4		4.01		438,035		4.01
5.15		40,000		4.2		5.15		40,000		5.15
6.27-7.37		363,465		1.5		7.02		363,465		7.02
		3,579,840						2,477,770

NOTE 11 – INCOME TAXES

A. Law for the Encouragement of Capital Investments – 1959

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

F - 19

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

NOTE 11 – INCOME TAXES (cont)

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

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

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

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

The income of the Company that is not derived from assets, which are eligible for reduced taxation benefits, as described above, is taxed at the statutory rate for Israeli companies (see H below).

In the event of distribution by the Company of a cash dividend out of retained earnings that were tax exempt due to its approved enterprise status, the Company would have to pay a 25% corporate tax on the income from which the dividend was distributed. A 15% withholding tax may be deducted from dividends distributed to the recipients.

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

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

F - 20

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

NOTE 11 – INCOME TAXES (cont)

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

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

C. Taxation Under Inflationary Conditions

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

D. Deferred Taxes

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

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

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

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

E. Effective Tax Rates

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

F. Tax Assessments

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

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

H. Tax Rates

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

F - 21

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

NOTE 12 – GEOGRAPHIC AREAS AND MAJOR CUSTOMERS

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

	Year ended December 31,
	2 0 0 6		2 0 0 5		2 0 0 4
	%		%		%
USA		68		66		67
Europe - primarily Italy, France and Germany		10		11		11
Japan		13		18		18
Other		9		5		4
Total		100		100		100

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

	Year ended December 31,
	2 0 0 6		2 0 0 5		2 0 0 4
	%		%		%
Customer A		46		48		45
Customer B		9		16		18
Customer C		10		15		12
Other		35		21		25
Total		100		100		100

C. Assets by location

Substantially all fixed assets are located in Israel.

NOTE 13 – TRANSACTIONS AND BALANCES WITH RELATED PARTIES

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

NOTE 14 – FINANCIAL INSTRUMENTS

A. Fair value of financial instruments

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

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

F - 22

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

NOTE 14 – FINANCIAL INSTRUMENTS (Cont.):

B. Hedging activities

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

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

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

NOTE 15 – SUBSEQUENT EVENT

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

F - 23

SIGNATURES

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

NOVA MEASURING INSTRUMENTS LTD.


By: /s/ Gabi Seligsohn
——————————————
Gabi Seligsohn
President and Chief Executive Officer

Date: May 11, 2007

EXHIBIT INDEX

Number Description

1.1 Articles of Association, as amended (filed herewith)

4.1 1997 Stock Option Plan (Plan 2) (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form F-1 (File No. 333-11640))

4.2 Option Plan 3 (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form F-1 (File No. 333-11640))

4.3 Option Plan 4A and 4B (incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form F-1 (File No. 333-11640))

4.4 Option Plan 5 (incorporated by reference to Exhibit 4.4 to the Company's Annual Report for 20-F for 2002 filed May 9, 2002)

4.5 Option Plan 6 (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 filed December 24, 2002 (File No. 333-102193))

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

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

4.8 Agreements between Nova and the Office of the Chief Scientist in Israel (incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form F-1 (File No. 333-11640))

4. 9 Certificate of Approval from the Investment Center in Israel (incorporated by reference to exhibit 10.11 to the Company’s Registration Statement on Form F-1 (File No. 333-11640))

4.10 Lease Agreement between Nova and Ef-Shar Ltd. (incorporated by reference to Exhibit 4.14 to the Company's Annual Report on Form 20-F filed on May 9, 2002)

4.11 Summary of Lease Agreement between Nova and Ef-Shar Ltd. (incorporated by reference to Exhibit 4.15 to the Company's Annual Report on Form 20-F filed on May 9, 2002)

4.12 Employee Stock Purchase Plan 1 (incorporated herein by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 filed on March 24, 2003 (File No. 33-103981))

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

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

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

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

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

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

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

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

12.1 Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (filed herewith)

12.2 Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (filed herewith)

13.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

13.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

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

EX-1.1

EXHIBIT 1.1

NOVA MEASURING INSTRUMENTS LTD.

ARTICLES OF ASSOCIATION

Last Amended: August 31, 2006

1

Articles of Association

Table of Contents

A. Introduction and Interpretation	1 - 3
Article 1	1- 3
Article 2	3
Article 3	3
Article 4	3
B. The Company, its Capital and Purposes	4 - 8
The Company and its Purposes	4
Article 1	4
Article 2	4
Article 3	4
Article 4	4
Article 5	4
The Company Capital	4
Article 6	4
Rights Appurtenant to a Share	5 - 6
Article 7	5
Article 8	5
Article 9	5
Article 10	5
Article 11	5
Article 12	6
Article 13	6
Article 14	6
Article 15	6
Article 16	6
The Shareholders	7 - 8
Article 17	7
Article 18	7
Article 19	7
Article 20	7
Article 21	7 – 8
Change of Share Capital	8
Article 22	8
Article 23	8
Article 24	8
Article 25	8
Article 26	8
C. The Shares	9 - 15
Share Certificate	9 – 10
Article 1	9
Article 2	9
Article 3	9
Article 4	9
Article 5	9
Article 6	9
Article 7	9
Article 8	9 – 10
Calls	10 – 11
Article 9	10
Article 10	10
Article 11	10
Article 12	10
Article 13	10 – 11
Article 14	11

2

Article 15	11
Forfeiture and Encumbrance	11 – 13
Article 16	11
Article 17	11
Article 18	11
Article 19	11
Article 20	11
Article 21	12
Article 22	12
Article 23	12
Article 24	12
Article 25	12
Article 26	12 – 13
Transfer and Delivery of Shares	13 - 15
Article 27	13
Article 28	13
Article 29	13 –14
Article 30	14
Article 31	15
Article 32	15
D. General Meetings	16 - 23
Convening General Meetings	16
Article 1	16
Article 2	16
Article 3	16
Article 4	16
Article 5	16
Article 6	16
Notices regarding Convening a General Meeting	16 – 18
Article 7	16 – 17
Article 8	17
Article 9	17
Article 10	17
Article 11	17 – 18
Article 12	18
Article 13	18
Decisions at General Meetings	18 - 20
Article 14	18 – 19
Article 15	19
Article 16	19
Article 17	19
Article 18	19
Article 19	19
Article 20	19
Article 21	19 – 20
Article 22	20
Article 23	20
Voting of Shareholder by a Representative or Agent	20 – 22
Article 24	20
Article 25	20
Article 26	20
Article 27	20
Article 28	20 – 21
Article 29	21
Article 30	21
Article 31	21 – 22
Voting by Proxy and Delivery of Position Notices	22 - 23
Article 32	22
Article 33	22 – 23

3

E. The Board of Directors	24 - 32
Appointment and Removal of Directors	24 - 25
Article 1	24
Article 2	24
Article 3	24
Article 4	24
Article 5	24
Article 6	24
Article 7	24
Article 8	24
Article 9	24
Article 10	25
Article 11	25
Article 12	25
Article 13	25
Alternate Director and Corporate Representative	25 – 26
Article 14	25 – 26
Article 15	26
Article 16	26
Article 17	26
Article 18	26
Article 19	26
Article 20	26
Article 21	26
Article 22	26
Remuneration of Directors	26
Article 23	26
Chair of the Board of Directors	27
Article 24	27
Article 25	27
Article 26	27
Article 27	27
Article 28	27
Convening and Conduct of Meetings of the Board of Directors	27 – 29
Article 29	27
Article 30	27 – 28
Article 31	28
Article 32	28
Article 33	28
Article 34	28
Article 35	28
Article 36	28
Article 37	28
Article 38	29
Article 39	29
Article 40	29
Article 41	29
Article 42	29
Article 43	29
Notices of Board Meetings	29 - 30
Article 45	29
Article 46	29
Article 47	29 – 30
Article 48	30
Article 49	30
Powers of the Board of Directors	30 - 31
Article 50	30
Article 51	30
Article 52	30

4

Article 53	30
Article 54	30
Article 55	30 – 31
Article 56	31
Committees of the Board of Directors	32
Article 57	32
Article 58	32
Article 59	32
Article 60	32
Article 61	32
F. The Director-General and Officers	33 - 36
The Director-General	33 – 34
Article 1	33
Article 2	33
Article 3	33
Article 4	33
Article 5	33
Article 6	33 - 34
Personal Interest in Company Transactions	34
Article 7	34
Insurance, Discharge and Indemnity of Officers	34 - 35
Article 8	34 – 35
Article 9	35
Article 10	35
Signing in the Name of the Company	36
Article 11	36
G. Minutes, Records and Accounting Books	37 - 39
Minutes	37
Article 1	37
Article 2	37
Article 3	37
Article 4	37
Company Books and Records	37 – 38
Article 5	37
Article 6	37
Article 7	38
Article 8	38
Article 9	38
Article 10	38
Article 11	38
Article 12	38
Accounting Books	38 - 39
Article 13	38 – 39
Article 14	39
Article 15	39
Article 16	39
H. Audit	40
Auditing Accountants	40
Article 1	40
Article 2	40
Article 3	40
Article 4	40
Article 5	40
Internal Comptrollers	40
Article 6	40
Article 7	40
I. Capital Funds, Distribution, Bonus Shares and Decrease of Capital	41 - 45
Capital Funds	41
Article 1	41

5

Article 2	41
Article 3	41
Distribution of Dividends and Bonus Shares	41 - 44
Article 4	41
Article 5	41
Article 6	41
Article 7	41 – 42
Article 8	42
Article 9	42
Article 10	42
Article 11	42
Article 12	42 – 43
Article 13	43
Article 14	43
Article 15	43
Article 16	43
Article 17	43
Article 18	43
Article 19	43 – 44
Article 20	44
Article 21	44
Article 22	44
Decrease of Capital	44
Article 23	44
Article 24	44
Article 25	44
Securities of the Company Purchased by the Company	44 – 45
Article 26	44 - 45
J. Winding-up, Merger and Reorganization	46 - 47
Winding-up	46
Article 1	46
Article 2	46
Article 3	46
Article 4	46
Merger and Reorganization	46 - 47
Article 5	46
Article 6	46 - 47

6

Chapter A: Introduction and Interpretation

1. In these Articles, unless the wording requires another construction, the following words shall have the meanings appearing alongside them:

“Director” or “Directors”	-	Member or members of the Board of Directors, elected in accordance with the provisions of these Articles, and serving at the same time;
“Alternate Director”	-	as defined in Chapter E, Article 14 below.
“The Exchange”	-	Every stock exchange or trading forum, in Israel or abroad, in which Company shares, or any securities issued by the Company which may be converted or realized by Company shares, are registered for trading;
“The Board of Directors”	-	The Board of Directors of the Company, duly elected or appointed in accordance with the provisions of these Articles, and every Board Committee to which and to the extent powers of the Board have been delegated, to the extent that such powers may be delegated by law;
“The Company”	-	Nova Measuring Instruments Ltd.
“The Registering Company”	-	Any Registering Company (as defined in the Companies Law), including any transfer agent operating in foreign capital markets ,in the name of which Company shares are recorded in the Register;
“The Register”	-	Register of shareholders and additional register of shareholders which the Company shall maintain (if it so maintains) outside Israel, in accordance with the Companies Law, 5759 - 1999, provided that shares registered in the Register kept in Israel and in the additional register shall not be counted twice;
“Substantial Register”	-	The Register of substantial shareholders that must be maintained under the Companies Law;
“The Office”	-	The registered office of the Company at the time in question;
“Reduction in Capital”	-	A distribution which does not meet the profit test (“distribution” and “profit test” - as defined in the Companies Law);
“Companies Law”	-	The Companies Law, 5759-1999, as amended from time to time, or any other statute, as amended, that shall replace it;

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“Securities Law”	-	The Securities Law, 5728-1968, as amended from time to time, or any other statute, as amended, that shall replace it;
“Surplus Accounts”	-	The net profit account in the Company’s books;
“Business Day”	-	A day on which services are given to the public by most of the commercial banks both in Israel and USA, except Friday, which shall not be deemed a business day;
“Writing”	-	Including a printed document, photocopy, telegram, facsimile, electronic mail, internet site, and any other form of work or imprinting of words in a visible form, as well as any other graphic sign or symbol stored in a computer or in any other means of storage;
“Information”	-	Including know-how, data, financial reports, accounting documents, documents including drafts, computer files, computer printouts, agreements, minutes, memoranda, business plans, forecasts, client lists, prices, costs, market surveys, and other such information related directly or indirectly to the activity of the Company;
“Director-General”	-	A person who holds said title, as well as one who holds the powers of the Director-General in practice;
“Officer”	-	As defined in the Companies Law;
“Securities in the Company”	-	Including: (a) shares in the Company; or (b) debentures, commercial securities or capital deeds issued by the Company; or (c) certificates, contracts, bills and other documents of any sort whatsoever which grant, directly or indirectly, a right to purchase, convert, realize or sell each and any of the items mentioned in subsections (a) or (b) above; all of the above including both those registered on a person’s name and bearer securities;
“Corporate Representative”	-	as defined in Article 20 of Chapter E below;
“Companies Ordinance”	-	The Companies Ordinance [New Version], 5743-1983, as in effect on 1 February 2000 and as amended from time to time thereafter, or any other statute which shall replace it after 1 February 2000, including amendments thereto;
“Year” or “Month”	-	According to the Gregorian calendar;

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“These Articles” - These Articles of Association as worded herein or as changed from time to time by the general meeting, including Resolutions of the general meeting of the Company in respect of restricting the power of the Company to change these Articles or any of the provisions herein, which were taken lawfully and in accordance with the provisions of these Articles;

2.	Subject to the provisions of Article 1 above, and except inasmuch as the wording requires a different interpretation, terms which have been defined in the Companies Law or the Companies Ordinance, as the case may be, shall bear the same meaning in these Articles as they are given in those statutes; words expressed in the singular form shall include the plural form, and vice versa; words expressed in the masculine form shall include the feminine, and words meaning a person shall include any kind of corporate entity recognized by law.
3.	Any Article herein which determines an arrangement that differs, in part or in whole, from a provision in the Companies Law or the Companies Ordinance, as the case may be, that may be qualified, changed or supplemented, either in whole or with regard to certain issues or with certain restrictions, under any law, shall be deemed to qualify said provision in the Companies Law or the Companies Ordinance, as the case may be, even if the qualification itself was not noted in said Article, and even if the Article explicitly determines that its validity shall be subject to the provisions of any law.
4.	In the event of a contradiction between any Article and a provision of law which may not be qualified, changed or supplemented, said provision of law shall prevail, without, however, vitiating or impairing the force of these Articles or of any other Articles herein.
	When construing or examining the validity of any Article, the Article should be given a construction which aims to fulfill it according to the purpose arising therefrom or from other Articles in these Articles.

9

Chapter B: The Company, its Capital and Purposes

The Company and its Purposes

	Articles 1,2,3,5 and 6 in this chapter B shall be deemed to be the Memorandum of Incorporation of the Company. Any change or amendment of the Memorandum of Incorporation will be deemed valid, if taken in accordance with the provisions of these Articles.
1.	The Company is a public company.
2.	The purposes of the Company shall be to engage in the types of pursuits specified in Article 3 below.
3.	(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 boarders 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.
	(d) To engage in any legal activity, both in Israel and abroad.
	All purposes above shall be in addition to one another and none shall derogate from the other.
4.	The Company may contribute reasonable sums to a purpose or to a worthy type of purposes even if such contributions are not made due to business considerations. The Board of Directors, or whomever the Board has so empowered, shall be authorized to determine the amounts of the contributions, the purpose or type of purposes for which they are made, and the identity of the recipient of the contribution.
5.	The Company may at any time engage in any field or type of business in which it is permitted, explicitly or implicitly, to engage in under these Articles, and may refrain from such business pursuits, whether or not it has begun engaging in said field or type of business, all at the discretion of the Board of Directors.
The Company Capital
6.	The registered share capital of the Company is NIS 400,000 (four hundred thousand New Israeli Shekels), divided into 40,000,000 (forty million) NIS 0.01 par value ordinary shares.

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Rights Appurtenant to a Share

7.	The liability of the shareholders of the Company for the debts, charges and obligations of the Company is limited to payment to the Company of the par value of their shares in the Company.
8.	All of the ordinary shares shall have equal rights for all intents and purposes, and each ordinary share shall grant its owner, inter alia:
	8.1	A right to be invited to and to participate in all general meetings of the Company, both annual and extraordinary, and a right to one vote for each ordinary share owned by him, in every vote at every general meeting of the Company in which he participates, provided that the ordinary share is owned by the shareholder on the date determined in a decision to convene the relevant general meeting;
	8.2	A right to receive dividends (if and to the extent they are distributed), a right to receive bonus shares (if and to the extent they are issued), in proportion to the par value of the ordinary shares, and according to the number of ordinary shares which he held at the date of the decision to distribute the dividend or to issue the bonus or upon distribution (as the case may be) or at such later date as may be determined in said decision;
	8.3	A right to participate in a distribution (as defined in the Companies Law) which is not the distribution of a dividend, in proportion to the par value of the shares he owns and according to the share document he owns at the time of the decision to make a distribution or at such later date as determined in said decision, or in such other manner as shall be determined by the Board of Directors at its absolute discretion.
	8.4	A right to participate in the distribution of surplus assets of the Company at the time it is wound up.
9	deleted.
10.	So long as the shares of the Company are listed for trading on an Exchange, an allotment of another class of shares shall require the approval of the Exchange, to the extent that such approval is necessary according to the rules of the Exchange or the provisions of any law.
11.	Subject to the provisions of any applicable law, the Company may issue shares, both those included in its original capital and those deriving from an increase in capital, with rights of a preferred rank or with rights of a lesser rank, or to issue shares deriving from an increase in capital with rights of a preferred rank or with rights of a lesser rank, or to issue shares with other restricted rights or with other preferred rights in respect of distribution of dividends, voting rights, discharge of capital, distribution (which is not a distribution of a dividend) or in respect of other matters, as the Company may determine from time to time.

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12.	If at any time the share capital is divided into different classes of shares, the general meeting may, unless the terms of the issuance of said class of shares provide otherwise, change, convert, expand, add to or alter in another manner the rights, surplus rights, advantages, restrictions and provisions related thereto (or not related at that time to one of the classes), if it receives the consent of the holders of the shares of the class the rights of which are impaired, which consent shall be given at a meeting of the holders of shares of said class.
13.	13.1	The special rights granted to shareholders or to a class of shares that have been issued, including shares issued with preferred rights or other special rights, shall not be deemed to have been changed or harmed by the creation or issue of additional shares of an equal rank or by the cancellation of registered share capital of the same class which was not allotted, unless the terms of the allotment of those shares determines otherwise.
	13.2	The consolidation or splitting of the share capital of the Company shall not be deemed a change in the rights of the shares being consolidated or split.
14.	The provisions in these Articles regarding general meetings shall apply, mutatis mutandis, to every meeting of shareholders of any class of shares, as the case may be.
15.	Subject to the special provisions in these Articles in this regard, to the extent they exist, all of the shares of the Company which are yet to be allotted shall at all times be under the supervision of the Board of Directors, which may allot them to or otherwise deal with them in any way at its sole discretion, for cash or non-cash consideration, upon such terms and qualifications, whether above their par value or (subject to the provisions of the Companies Law) at a deduction from their par value, at such times which the Board of Directors deems fit. The Board of Directors shall have full power to submit a call for any shares mentioned above, at their par value, at less or at more than their par value, at times, during a period and for consideration which the Board of Directors shall deem fit, and to provide every person a right to demand allotment of any shares at times, during a period and for consideration which the Board of Directors shall determine at its own absolute discretion.
16.	16.1	The Board of Directors may, at its absolute discretion, treat shareholders differently from one another with regard to the amounts demanded for payment, payment times and any other matter.
	16.2	The Board of Directors of the Company may, in respect of every allotment of securities in the Company, pay agent’s fees, underwriters’ fees or commissions in a manner that shall be determined and subject to the provisions of any law.

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Shareholders

17.	Unless determined otherwise in any law or in these Articles, the Company shall be entitled to treat the registered owner, including a shareholder who holds a share as a trustee, of a share as its absolute owner, and as such shall not be obligated to recognize any claim by any other person whatsoever based on a right in equity or on other grounds in respect of such a share, or in respect of a benefit therein for any other person, unless an order is issued by the competent court.
18.	Notwithstanding the provisions of Article 17 above, the following shall also be deemed shareholders in the Company:
	18.1	To the extent required and permitted by law, a person in whose favor a share is listed with a member of the Exchange, and such share is included among the listed shares in the Register in the name of the Registering Company.
	18.2	A person who holds a share certificate issued by the Company under these Articles.
19.	The Board of Directors of the Company may determine from time to time procedures with regard to determining the identity of shareholders of the classes specified in Article 17 above, and with regard to the manner in which any right, benefit, asset or amount shall be transferred or distributed to them, including in respect of distribution of dividends or bonus shares, purchase of securities in the Company or granting any other right, asset or other benefit to the shareholders of the Company, in their capacity as such. Moneys, bonus shares, rights or assets of any type whatsoever which have been transferred to a shareholder (including to his agent, attorney or whomever the shareholder directs) whose identity has been verified according to the procedures as aforesaid, shall be deemed a full discharge and release of a debt of the Company to any person who claims a right to such payment, transfer, distribution or grant of right, as the case may be.
20.	A Registering Company shall not be deemed the owner of shares in the Company, and the shares registered in its name in the Register are owned by those entitled to them under Article 18.1 above.
21.	Subject to the provisions of any applicable law, and without derogating from the provisions of Article 17 above, the Company may, at its absolute discretion, transfer and pay any amount (in cash, by check, by bank transfer or in any other manner of payment accepted at the Exchange) and any asset of any type (including bonus shares) to shareholders under Article 17.1 above, by transfer to members of the Exchange whose identity, along with the scope of the right or asset to be transferred to them, will be notified to the Company by the Registering Company. So long as the Company acted according to the information transferred to it by the Registering Company, the Company shall bear no liability for an amount that is not paid or an asset that is not transferred, in part or in whole, to a shareholder under Article 18.1 above, and the Company shall be deemed to have transferred and paid the full price or asset, as the case may be, at the time they are transferred to the Registering Company and/or to the members of the Exchange whom the Registering Company directed.

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Change in Share Capital

22.	The Company may, from time to time, increase its share capital by creating new shares, whether or not all of the shares which it has decided to issue have been issued up to that date or not, and whether or not all of the shares that have been issued up until that time have been fully paid-up, and the increase shall be in such amount, shall be divided into shares having such par value, shall be issued on such terms and qualifications and with such rights and supplemental rights as the decision on creation of the shares shall direct, and in the event that directions are not given in the decision - as the Board of Directors shall direct; in particular, the shares may be issued with preferred rights or qualified rights (including without rights) to dividends, voting rights, discharge of capital or other such matters.
23.	Except as stated otherwise in a decision approving the increase in share capital, the new shares shall be subject to all provisions of these Articles applicable to existing shares in the capital of the Company.
24.	The Company may, from time to time, cancel registered share capital that has not yet been issued, provided that there is no undertaking of the Company, including a conditional undertaking, to issue the shares.
25.	The Company may, from time to time, cancel share capital which has been issued, subject and according to the provisions of article I.3 of these Articles.
26.	Any of the above acts, mentioned in articles 22 – 25, shall be deemed a change of these Articles as well as amendment to the Memorandum of Incorporation of the Company, and shall be decided upon in accordance with article D.21 herein.

14

Chapter C: The Shares

Share Certificate

1.	A share certificate shall be issued with the Company seal together with the signatures of two Directors, or together with the signature of one Director and the Company Secretary (if a person is appointed to this position) or together with additional or other signatures according to the decision of the Board of Directors.
2.	Every shareholder whose name appears in the Register shall be entitled to receive one share certificate for the shares registered in his name, or, if the Board of Directors so approves (after he shall have paid the amount determined by the Board of Directors from time to time), several share certificates, each for one or more such shares; every share certificate shall indicate the name of the shareholder (or “bearer” in the event of a share warrant), the number of shares for which it was issued, and other details as determined by the Board of Directors.
3.	A share certificate registered in the names of two or more persons shall be delivered to whomever all of the registered owners of said share shall direct, and absent such consent, to the person whose name appears first in the Register among the names of the joint owners.
4.	If a share certificate registered in the name of a person or a bearer share is lost or defaced, the Board of Directors may issue a new certificate in its place, provided that the original certificate has been submitted to it and destroyed by it, or it is proved to the Board’s satisfaction that the certificate has been lost or destroyed, and the Board has received guarantees to its satisfaction for any possible damages, all for consideration, if required.
5.	The Company may issue bearer share certificates (hereinafter also: “share warrant”) for fully paid-up shares which shall grant the holder thereof the rights noted therein and the right to transfer it by delivery of the certificate, and the provisions of these Articles regarding transfer and delivery of shares shall not apply to shares specified in such a certificate.
6.	A holder of a share warrant may return it to the Company and may request, for a payment determined by the Board of Directors, that his name be listed in the Register as a shareholder in the Company for the shares specified in this certificate, and that a share certificate in the name of a person be issued to him. If the register is closed at the time said request is submitted, or the request has not yet been carried out, the actions enumerated in this Article shall be performed by the Company promptly after the opening of the Register.
7.	Shares shall be deemed fully paid up if the entire par value and the premium thereon have been paid, according to the terms of issue of the share.
8.	Subject to the provisions of any law, a holder of a share warrant is entitled to all of the rights held by an owner of a share certificate in the name of a person, provided that he has proved that he holds the share warrant as aforesaid in the following manner:

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	8.1	A holder of a share warrant may vote at a general meeting if he has presented the share warrant to the chair of the general meeting immediately after commencement of the meeting.
	8.2	A holder of a share warrant may deposit the share warrant at the registered office of the Company or at such other place that the Board of Directors shall determine, and may notify the Company regarding the particulars that an owner of a share certificate in the name of a person is obligated to notify to the Company by law or under these Articles. So long as the share warrant is deposited as aforesaid, the depositor shall have all of the rights available to a shareholder to demand that a general meeting of the Company be convened, to vote and to use the other rights of shareholder at any meeting convened at least two days after the deposit, as if his name were listed in the Register as owner of the shares included in the share certificate. Only one person shall be recognized as the depositor of the certificate, and the Company must return the certificate to the depositor if he so requests in writing at least two business days in advance.
Calls
9.	The Board of Directors may, from time to time at its discretion, submit calls for any moneys not yet paid for shares which have been issued and which, according to the terms of their issue, are not to be paid up at predetermined times. Every shareholder shall pay to the Company the amount of the call submitted to him, at the time and place determined by the Board of Directors. A call may be divided into several payments. A call shall be deemed made if a decision approving it has been made by the Board of Directors.
10.	In respect of every call, a prior notice of fourteen days shall be sent, indicating the amount of payment, the place of payment and the person to whom payment should be made, on the condition that before the payment date of such a call the Board of Directors may, by written notice to the shareholder, cancel or extend the payment date of the call.
11.	Joint owners of a share shall be responsible jointly and severally for payment of all calls in respect of such a share.
12.	If, under the terms of issue of each share or otherwise, any amount must be paid at a set time or in payments at set times, whether the payment is on account of the par value or as a premium, any such amount or rate shall be discharged as if it were a call duly submitted by the Board of Directors for which notice was duly given, and all of the provisions in these Articles in respect of calls shall apply to any such amount or rate of payment.

16

13.	If the amount of the call is not discharged on the date of payment or prior thereto, the person who at that time is the owner of the share for which the call was submitted or for which payment is owing, shall pay interest on said amount at a rate determined by the Board of Directors from time to time, from the date determined for its payment until the date of actual payment; however, the Board of Directors may waive payment of the interest, in part or in whole.
14.	If the Board of Directors deems fit, it may receive moneys from a shareholder who wishes to make early payment for amounts that have not yet been called, or for which the payment date has not yet arrived, and which have not yet been discharged in respect of his shares, or part hereof; and unless agreed otherwise with the shareholder, the Company may pay interest on the moneys advanced in said manner, or on part thereof, until the date on which the moneys were to have been paid had they not been paid in advanced, at a rate agreed upon between the Board of Directors and the shareholder, and the Board of Directors may at any time, so long as the payment date has not yet arrived, return the amount advanced as aforesaid to said shareholder.
15.	This chapter shall apply, mutatis mutandis, to any right to purchase or sell shares in the Company, subject to the terms of issue of said right.
Forfeiture and Encumbrance
16.	If a shareholder has not paid any call or rate of payment on or before the date set for payment thereof, the Board of Directors may, at any time thereafter, so long as the call or the rate of payment are not discharged, to send a notice to said shareholder and to demand that he pay them with interest accrued and all expenses that the Company incurred in connection with such failure to discharge.
17.	The notice shall set a date (which shall be at least ten business after the date of the notice) and a place or places where said call or payment shall be paid, with interest and expenses as aforesaid. The notice shall also indicate that in the event of non-payment on the date set therefor or prior thereto and at the place indicated in said notice, the shares for which the call was made or in respect of which said payment date has passed may be forfeited.
18.	If the demands included in said notice are not met, then at any time thereafter, prior to payment of said call or installment, the interest and the expenses owing on account of the shares, the Board of Directors may by decision forfeit the shares in respect of which notice was given as aforesaid. Such forfeiture shall include all dividends announced in respect of the forfeited shares which have not actually been paid prior to the forfeiture.
19.	Every share so forfeited shall be deemed the property of the Company and shall become a dormant share, and the Board of Directors shall be entitled, in accordance with the provisions of these Articles and subject to the provisions of any law, sell, reissue or transfer them in another manner as it deems fit.
20.	The Board of Directors may, at any time prior to sale, reissue or other transfer of every share so forfeited, to cancel the forfeiture in a manner and under terms that it shall determine at its absolute discretion, in which event said share shall cease to be a dormant share.

17

21.	Every shareholder whose shares have been forfeited shall cease to enjoy any right in connection with the forfeited shares, but in spite of this he must pay immediately to the Company all of the calls, installments, payments, interest and expenses owing on account of these shares or for them on the date on which forfeiture is executed, as well as interest on those amounts from the date of forfeiture until the date of execution of all payments (including interest and expenses as aforesaid), at a rate that shall be determined by the Board of Directors; provided, that in any case in which the shares forfeited are resold, the debt of the shareholder whose shares were forfeited shall be reduced to the net amount (after deduction of any taxes and the Company’s expenses incurred in selling the forfeited shares) received in fact from their resale.
22.	The provisions of these Articles regarding forfeiture of shares shall apply also to cases of non-payment of a fixed amount the payment date of which is predetermined, according to the terms of issue of the share or according to the terms of allotment of the share, whether on account of the par value or as a premium, as if this amount to be paid were a call which was sent and notice of it given lawfully.
23.	The Company shall have the first and fundamental right to place an encumbrance on any shares registered in the name of any shareholder, except fully paid-up shares, and on any revenue from the sale thereof, for discharging the debts and obligations of said shareholder to the Company, whether alone or jointly with any other person, for shares which the Company issued to him, whether or not the date of discharge of these debts or the date of performance of these obligations has arrived, and no equity rights in respect of said shares shall be created. Said encumbrance shall apply to all dividends announced from time to time in respect of those shares.
24.	To realize said encumbrance, the Board of Directors may sell the encumbered shares in a manner which it deems fit, at its discretion; however, no share shall be sold unless the shareholders or executors of their estates receive written notice stating that the Company intends to sell said shares, and the shareholder or executors of his estate, as the case may be, have not paid the above debts or have not fulfilled the above obligations within ten days from the date of sending said notice.
25.	The net revenue (after deduction of any taxes and the Company’s expenses incurred in selling the shares) from any such sale shall serve to discharge said debts to perform said obligations of the shareholder, including the debts and obligations the time for discharge or performance of which has not yet transpired, and the surplus, if any, shall be paid to the shareholder or to the executors of his estate.
26.	In the event of a sale after forfeiture or a sale to realize an encumbrance under these Articles, the Board of Directors may appoint a person to sign a deed of transfer of the shares sold, and to direct that the buyer be registered in the Register as the holder of the shares sold, and the buyer shall bear no duty to verify that these actions are done properly, nor shall it be his concern for which purposes the moneys from the sale were expended; after his name is registered in the Register in respect of these shares, the validity of the sale shall be unassailable, and the only remedy of any person harmed by the sale shall be in filing a claim for damages from the Company alone.

18

Transfer and Delivery of Shares

27.	Transfer of shares in the Company shall be effected in the following manner:
	27.1	Transfer of a share warrant duly issued under these Articles shall be effected by delivery of the share warrant to the transferee.
	27.2	Any other transfer of shares in the Company shall be done against delivery of a share transfer deed in the wording specified in Article 29 below, which includes all particulars, and the signatures of the transferor, the transferee and witnesses to their signatures.
28.	Once a transfer of shares is effected in accordance with Article 27.1 above, the transferor shall be deemed to remain the holder of the share until the name of the recipient of the share is registered in the Register of members in respect of the transferred share.
29	The following provisions shall apply to a share transfer under Article 27.1 above:
	29.1	The transfer deed of the share shall be worded as follows, or in as similar a manner as possible or in an ordinary or accepted form that shall be approved by the Board of Directors:
		“I, __________________________ (I.D. number/Company registration number _________________________)(hereinafter: “the transferor”), in consideration of the sum of USD_________________ paid to me by _________________________ whose address is _______________________________________ (hereinafter: “the transferee”), hereby transfer to the transferee _________ shares [from _________ to ___________ inclusive] of Nova Measuring Instruments Ltd., to be in the possession of the transferee, the executors of his estate, his guardians and representatives, according to all of the terms under which I held them immediately prior to signing this deed, and I, the transferee, hereby agree to receive the above shares according to the above conditions.
		In witness whereof we have signed this ____th day of _______, ________.
		_______________________	__________________________
		Transferor	Transferee
		________________________	__________________________
		Witness to transferor’s signature	Witness to transferee’s signature”

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		(To the extent that the transferor or transferee is a corporation - a confirmation of an attorney or accountant or other person acceptable to the Company should be added, regarding the authority of the persons signing the deed on behalf of the corporation to execute or to receive the transfer.)
		Unless approved by the Board of Directors, the share transfer deed shall relate only to one class of shares.
	29.2	Any document (including the certificate for the transferred share) required by the Board of Directors in connection with the transfer should be submitted together with the share transfer deed. If the share transfer is approved, all said documents shall remain in the possession of the Company. If the share transfer is not approved, said documents shall be returned to the person who submitted them, if he so requests.
	29.3	The Board of Directors may:
		29.3.1	Refuse to register the transfer of a share that has not been fully paid up.
		29.3.2	Not to recognize a share transfer deed until the certificate of the transferred share and other particulars necessary to prove the right of the transferor to transfer the share are attached thereto. Transfer deeds which are registered shall remain in the possession of the Company, but any transfer deed that the Board of Directors refuses to register shall be returned to its sender at his demand.
		29.3.3	Not to recognize a share transfer deed until it receives payment for registration of the transfer in accordance with Article 30 below.
	29.4	Should the Board of Directors refuse to approve a transfer of shares, it shall notify the transferor to this effect no later than seven (7) days after the date on which the transfer deed and the share certificate were received by the Company.
30.	The Company shall be entitled to collect payment for registration of a transfer of shares in the Register (including registration of those registered in the name of the Registering Company for their owners), in an amount to be determined from time to time by the Board of Directors and which shall not exceed forty (40) USD (linked to the Consumer Price Index from the index known on the date on which these Articles enter into force until the index known on the actual date of payment) for registration of one share transfer deed (and for transfer of shares from the name of a Registering Company to the name of the shareholder -- for registration of every request for transfer of shares to the name of the shareholder which the Registering Company submits).

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31.	Notwithstanding the provisions of Article 27 above -
	The Company shall change the registration of ownership of shares in the Register of shareholders in each of the following instances:
	(1)	A court order to amend the Register is sent to the Company;
	(2)	The conditions under law for endorsement of the right are proved to the Company.
32.	The Company may destroy share transfer deeds after six years have passed from registration of the transfer, and cancelled share certificates after three years of their cancellation; it shall be presumed prima facie that all the transfer deeds and certificates that were destroyed were fully valid, and that the transfers, cancellations and the registrations effected by virtue thereof were lawful.

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Chapter D: General Meetings

Convening of General Meetings

1.	An annual meeting shall be convened at least once every calendar year, and no later than fifteen 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.
2.	Except if explicitly determined otherwise by a competent court, the provisions of these Articles shall apply, mutatis mutandis, to the notice and conduct of a general meeting convened at the order of the competent court, of a general meeting duly convened other than by the Board of Directors, and of the voting at these meetings.
3.	Subject to the provisions of the Companies Law, every general meeting shall be convened at a place where the Board of Directors directs, or, if the Board of Directors did not determine the place of the meeting, at a place directed by the chair of the Board of Directors. If the place of the meeting is not set by the Board of Directors or by the chair of the Board, the meeting shall be convened at the Office.
4.	The Board of Directors shall convene an extraordinary meeting by its decision, as well as at the demand of any of the following:
	4.1	Two directors or one-quarter of the directors then serving;
	4.2	One or more shareholders who hold at least five per cent of the allotted capital and at least one per cent of the voting rights in the Company.
	4.3	One or more shareholders who hold at least five per cent of the voting rights in the Company.
5.	The agenda of the general meeting shall be set by the Board of Directors and also shall include those issues for which the convening of an extraordinary meeting was demanded as mentioned in Article 4 above. One or more shareholders that hold(s) at least one per cent of the voting rights at the general meeting, may ask the Board of Directors to include a topic in the agenda of a future general meeting.
6.	Only decisions on items specified in the agenda shall be taken at a general meeting.
Notices regarding Convening a General Meeting
7.	A notice regarding a general meeting shall be sent at least 21 days before the date of the meeting to every shareholder registered in the Register of shareholders; however, subject to any law, the Board of Directors may set a shorter period for sending the notice of the general meeting, provided that the notice is sent to the shareholders registered in the Register no later than seven days prior to convening the meeting.

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8.	The notice shall state the time and place of the meeting, the agenda, the decisions proposed and arrangements for voting by proxy, if the issues on the agenda of the meeting include those on which the shareholders may vote by proxy under law or these Articles.
9.	When the Company has grounds to assume that an address provided to it by a shareholder is no longer his address, said shareholder shall be deemed not to have provided the Company with his address in each of the following instances:
	9.1	When the Company has sent him a letter by registered mail to said address, in which he is asked to confirm that said address is still his address, or to notify the Company of a new address, and the Company receives no answer within 60 days from the date on which the Company posts the aforesaid letter at the post office.
	9.2	When the Company has sent him at said address a letter by registered mail and the Postal Authority (including any postal service outside Israel), upon returning the letter or without doing so, notifies the Company that the letter was not delivered to him at said address because he is not known at that address or for any other similar reason.
10.	Subject to any law:
	10.1	The Company may send any notice or document to a shareholder by delivering them to him personally or by sending them by post to the address which he gave the Company. If the notice has been sent by post, it shall be deemed duly sent if the letter containing the notice bears the address which the shareholder sent to the Company, and it is given to the postal service duly stamped; unless the contrary is proved, it shall be deemed delivered within 72 hours from its posting by the Company with the postal service when the address is in Israel, and within six days of its posting by the Company with the postal service when the address is outside Israel.
	10.2	Subject to applicable law and the relevant rules and regulations of the Exchange, if the shares of the Company are listed for trading on an Exchange in Israel, the Company may send a notice to shareholders, whether they hold bearer shares or shares registered in the name of a person, by publishing a notice at least once in a daily newspaper published in Israel, and the date of publication of the newspaper shall be deemed the date on which notice was received by the shareholders. If the shares of the Company are listed for trading on an Exchange outside Israel, said notice to shareholders may be sent by publishing as aforesaid in a newspaper of general circulation published in the country in which the Company’s shares are listed. In the event that a notice is published in the manner determined in this Article, the Company shall bear no duty to give notice by other means.

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	10.3	The Company may send any notice or document to a shareholder by giving it to him in any other manner in writing, provided that doing so is not prohibited by law.
	10.4	A written confirmation signed by a director or the secretary regarding sending a writing or giving notice in any of the manners specified in paragraphs 10.1, 10.2, 10.3 above, shall be deemed conclusive evidence regarding every particular included therein.
	10.5	A notice regarding a general meeting shall be sent in one of the above ways to every person who has the right to a share upon the death or bankruptcy or winding up of a shareholder, and who would have been entitled to receive notice of an annual meeting had such circumstances not occurred.
	10.6	Every shareholder may waive his right to receive notice or his right to receive notice at a particular time, and may agree that the general meeting shall be convened and shall take decisions even without his having received notice thereof or without having received notice thereof within a particular time period, subject to the provisions of any law which forbid such waiver or consent.
11.	The Company may give notice to the joint owners of a share by notice to the joint owner whose name is listed first in the Register of shareholders with regard of said share.
12.	Subject to applicable law, the validity of decisions taken at a general meeting shall not be impaired if the Company mistakenly did not send a notice of the meeting to a shareholder who is entitled to receive notice of a general meeting by letter, or sent an incomplete or erroneous notice regarding the meeting, its convening or agenda, or did not send such a notice to the shareholder, or sent or gave notice as aforesaid tardily.
13.	Every document or notice sent by the Company according to the provisions of these Articles shall be deemed duly sent despite the death, bankruptcy or winding up of said shareholder (whether or not the Company knew thereof), so long as someone else is not registered in lieu of the shareholder in the Register, and delivery or sending as aforesaid shall be deemed adequate in all respects with regard to any person who claims a right in said shares.
Decisions at General Meetings
14.	No deliberation at a general meeting may be commenced unless a legal quorum is present at the time it is commenced. Except in cases in respect of which these Articles determine otherwise, or according to any law or the order of a competent court, a legal quorum shall be deemed to be the attendance of at least two shareholders, themselves or by their representatives or by proxy, who hold in the aggregate at least one third (33.33%) of the voting power in the Company.

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15.	If, after one-half hour has passed from the time set for the general meeting, there is not a legal quorum present, the meeting shall be automatically postponed to the same day one week hence, at the same time and place as set for the original meeting (with no need for any notice to the shareholders), or to a later date if said date is indicated in the prior notice of the general meeting or if the Company has sent to the shareholders a prior notice of no less than 72 hours before the date set for the postponed meeting.
16.	If, at the postponed meeting under Article 15 above or under Article 19 below, there is not a legal quorum after one-half hour has passed from the time set for the meeting, any number of participants shall constitute a legal quorum and may deliberate on the matters on the agenda of the original meeting (and at a postponed meeting under Article 19 below, on issues that were on the agenda of the original meeting and the discussion of which either was not concluded or did not commence).
17.	Notwithstanding the provisions of Article 16 above (including the Articles mentioned therein), if the convening of an extraordinary meeting other than by decision of the Board of Directors is demanded, the postponed meeting shall take place only if at least two shareholders holding no less than fifteen percent (15%) the voting rights are present. If there is no such presence as aforesaid at the postponed meeting, the meeting shall not be postponed to another date, and the proposed decisions on the agenda shall be deemed rejected by the meeting.
18.	The Chair of the Board of Directors shall serve as chair of every general meeting of the Company. If there is no chair of the Board of Directors, or the Board did not determine that another individual shall chair the meeting as aforesaid, or if the intended chair was not in attendance 15 minutes from the time set for the meeting, or if he did not wish to chair the meeting, the shareholders present at the meeting shall elect, by themselves or through their representatives, a shareholder or a representative present at the meeting as chair of the meeting.
19.	The chair of the meeting may, with the consent of a meeting in which legal quorum is present, to postpone the meeting from time to time and from place to place, and he must postpone it as aforesaid if the meeting directs him to do so. At a postponed meeting as aforesaid only those matters shall be discussed which were on the agenda of the original meeting and the discussion of which was not concluded or was not commenced. No notice need be given regarding the postponement and the matters on the agenda of the postponed meeting.
20.	A decision at the general meeting shall be taken by a poll of shareholders who are in attendance and who take part in the voting, by themselves, by an agent or by proxy (on issues with regard to which these Articles or any law permits voting by proxy).

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21.	Unless otherwise prescribed in these Articles or under applicable law, all decisions of the general meeting require a majority of fifty per cent (50%) of the total number of votes at the meeting. In polling regarding any particular proposed resolution which was brought before the general meeting, the votes of those who abstained or who did not vote in regard to said proposed resolution shall not be counted. Any amendment of these Articles and/or the Company Memorandum of Incorporation and/or any decision winding up of the Company, shall require a majority of seventy-five per cent (75%) of the total number of votes in the meeting and all other rules shall apply mutatis mutandis with regard to such vote.
22.	Every shareholder present, either himself or by a representative, has the right to one vote for each share which he owns and which grants him voting rights, regardless of its par value.
23.	An announcement by the chair that a decision was taken unanimously or by a particular majority or was rejected shall constitute prima facie evidence of its contents. An announcement as aforesaid and a note recorded to this effect in the minutes of the Company shall constitute testimony to their contents, and there shall be no need to prove the number or proportion of votes in favor of or against the decision.
Voting of Shareholders by a Representative or Agent
24.	A corporation which is a shareholder in the Company may authorize, by a decision of its directors or of another managing body, an officer in the corporation as its representative at any meeting of the Company. A person so authorized may use, on behalf of the corporation, the same powers that the corporation itself would have been able to use were it a flesh and blood shareholder in the Company.
25.	A shareholder who is a minor, and any shareholder whom a competent court has declared incompetent may vote only through his guardian, and any guardian as aforesaid may vote by means of a representative.
26.	In the case of joint shareholders, the view of the head of the joint shareholders, given by himself, his representative, his agent or by proxy shall be controlling, and the views of the other joint owners shall not be considered. For the purposes of this Article, the head of the joint owners shall be the shareholder whose name appears first in the Register in respect of the relevant share.
27.	A shareholder may appoint an agent to vote in his place. Such an agent need not be a shareholder in the Company. Appointment of an agent shall be in writing, signed by the appointing shareholder or his representative authorized to this end, and if the appointing shareholder is a corporation, then by the person or persons authorized to bind the corporation by their signature.
28.	The document appointing a voting agent (hereinafter: “the writ of appointment”) and a power-of-attorney (if such exists) by virtue of which the writ of appointment was signed, or a copy thereof confirmed to the satisfaction of the Board of Directors, shall be deposited at the Office or at the intended location of the general meeting at least 48 hours prior to the time set for the beginning of the meeting at which the person mentioned in the document is to vote, or shall be delivered by hand to the chair of the meeting at the beginning of the meeting; however, the chair of the meeting may waive this requirement regarding a particular meeting.

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29.	A shareholder who holds more than one share may appoint more than one agent, subject to the following provisions:
	29.1	The writ of appointment shall indicate the class and the number of the shares for which it is given;
	29.2	If the total number of shares of a particular class stated in the writ of appointment given by a single shareholder exceeds the total number of shares of that class which he holds, all deeds of appointment given by that shareholder shall be invalid;
	29.3	If only one agent is appointed by a shareholder and the writ of appointment does not indicate the number and class of shares for which it is given, the writ of appointment shall be deemed to have been given for all shares held by the shareholder as of the determining date for entitlement to participate in and vote at the meeting (if the writ of appointment is given for a particular meeting) or for all shares held by the shareholders on the day of deposit of the writ of appointment with the Company, or on the date it is delivered to the chair of the meeting, as the case may be. To the extent that the writ of appointment is given for a number of shares fewer than the number of shares held by the shareholder, the shareholder will be deemed to have abstained from voting his remaining shares, and the writ of appointment shall be valid for the number of shares indicated therein.
30.	Every writ of appointment of an agent, whether for a specifically noted meeting or otherwise, shall be in the following form, as far as the circumstances permit:
	“I, _________________________(I.D. number/Corporate registration no.) of _____________________________, as a shareholder in Nova Measuring Instruments Ltd., hereby appoint __________________________ (I.D. number/corporate registration no.______________________) of ____________________________ or, in his/her absence, _______________________________ (I.D. number/corporate registration no.____________________) of _____________________________ or, in his/her absence ______________________________________ (I.D. number/corporate registration no. ___________________________), to vote for me and in my name in respect of ______________ class _______ shares held by me, at the (annual/extraordinary) meeting of the Company, which shall be held on _______ of the month of _____________, ______________(year).
	In witness whereof I have set my hand hereto on this _____th day of ____________, __________(year).”

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31.	A vote in accordance with the instructions in a document appointing an agent shall be valid despite the death of the appointing shareholder or the annulment of the power of attorney or transfer of the share for which he voted as aforesaid, unless written notice of said death, cancellation or transfer is received by the Company or the chair of the meeting, by the time of the vote.
Voting by Proxy and Delivery of Position Notices
32.	Subject to the provisions of the Companies Law and provisions established thereunder, from time to time, the board of Directors may from time to time and at its absolute discretion:
	32.1	Determine, update and change procedures, on any matter related to voting of shareholders by proxies or to sending of position notices to shareholders in the Company, including in respect of any matter specified in this regard in the Companies Law.
	32.2	Determine those matters on which decisions at the general meeting may be taken by way of proxy, and to change said matters determined by it.
	32.3	Establish, update and change procedures in respect of voting by means of proxies at some or all class meetings, and in respect of sending position notices to shareholders of particular classes. Such procedures may differ from the provisions that shall apply to general meetings by operation of law or under Article 32 above.
	To the extent that the Board of Directors establishes procedures and matters as aforesaid, these procedures and matters shall be brought to the attention of the shareholders by making them available for inspection by the shareholders at any reasonable time at the Office or in another or an additional location as determined by the Board of Directors or in any other or additional manner approved by the Board of Directors.
33.	Subject to the provisions of any law, decisions taken at general meetings at which shareholders were entitled to vote by proxy shall not be nullified if the Company mistakenly -
	33.1	Did not send a proxy, a notice of the general meeting or a notice regarding the possibility of voting at said general meeting by proxy, to the shareholders, or if no position notice was sent to the shareholders;
	33.2	Sent documents and notices as aforesaid in Article 33.1 tardily or to an incorrect address;
	33.3	Did not provide documents and notices as aforesaid in Article 33.1 to shareholders, or did so tardily for any reason;

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33.4	Did not count the votes of shareholders as specified in proxies duly given to the Company at said general meeting, or counted votes as aforesaid incorrectly or imprecisely, provided the counting of said votes would not change the decisions taken at the general meeting nor impair the validity of the of the general meeting had said votes been precisely accounted for.
33.5	Did not act in absolute conformity with the provisions of law or the procedures to be determined under Article 32 above in respect of voting by proxy and sending position notices.

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Chapter E: The Board of Directors

Appointment and Removal of Directors

1.	So long as the general meeting does not determine otherwise, the number of members of the Board of Directors shall be not less than five (5), but not more than nine (9).
2.	The Directors of the Company, except for external directors, shall be elected by the general meeting, either at an annual or an extraordinary meeting.
3.	The general meeting may remove a director before the end of his term at any general meeting (whether an annual or extraordinary meeting), provided that the Director is given a reasonable opportunity to bring his position before the general meeting.
4.	So long as the Company is required under law to appoint external directors, the general meeting of the Company, both at an annual meeting and at an extraordinary meeting, may appoint external directors, in a number and manner and under terms stipulated by law.
5.	The tenure of a director appointed by the general meeting shall begin on the date determined by the general meeting and shall end on the date of the subsequent annual general meeting, provided, however, that in the event that the general meeting does not elect at least the minimum number of directors under these articles, then the outgoing Board of Directors shall continue its tenure until the general meetings elects at least such minimum number of directors.
6.	Without derogating from the provisions of Article 2 above, in addition to directors appointed by the general meeting, the Board of Directors of the Company is authorized to appoint additional directors at its discretion, provided that the number of directors after such appointment shall not exceed the maximal number stated in Article 1 above. To eliminate any doubt, the Board of directors may, at anytime, appoint additional directors as aforesaid even if, for any reason, the number of directors serving, at the time of such appointment(s) is less than the minimum prescribed under these Articles.
7.	The tenure of a director appointed by the Board of Directors shall begin on the date determined by the Board of Directors and shall end on the date on which the Board of Directors decides to terminate his tenure or on the date on which the annual general meeting is convened, whichever is earlier.
8.	Without derogating from the provisions of any law or from the authority of the general meeting as determined in these Articles, the Board of Directors is authorized to remove a director appointed by the Board under Article 6 above from office for any reason.
9.	Every replacement, appointment or reappointment of a director under Article 6 above shall be done by majority vote of the directors present and voting at a meeting of the Board of Directors at which the issue was placed on the agenda.

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10.	Subject to the provisions of any law, a director who has ceased serving is competent to be reappointed.
11.	Subject to the provisions of any law, the tenure of a director (including that of an alternate director and a corporate representative as such) shall expire automatically in any of the following instances:
	11.1	On his death;
	11.2	If he is declared incompetent;
	11.3	If he is declared bankrupt, or, in the event that the director is a corporation, if a temporary or permanent receiver, liquidator, special director, or trustee is appointed over it or its property in the context of a settlement with creditors or an order to freeze proceedings;
	11.4	If he resigns from office by written notice to the Company, to the Chair of the Board of Directors or to the Board, whereupon his tenure shall expire on the date of delivery of such notice or at such later date as determined in the notice as the effective date of the resignation.
	11.5	If his tenure ends under Articles 5 or 7 above, or if he is dismissed under Article 8 above;
	11.6	If a director is convicted in a final judgment of an offense as a result of which a person may not serve as a director.
12.	Notwithstanding any provision in these Articles, an appointment of a director, alternate director or corporate representative (hereinafter referred to in these Articles as: “the appointee”), as the case may be, until the appointee gives the Company written notice in which he declares that he is qualified to be appointed as a director of the Company under law and he agrees to be appointed as an appointee of the Company, and which contains his personal particulars for the purpose of registering him in the register of directors of the Company and as required under law. The wording of said notice may be determined by the Board of Directors from time to time, and may be by way of affidavit prepared and verified according to law applicable at the time.
13.	If no director is appointed, or if no appointment of any director enters into force, or if a director position becomes vacant, the remaining directors may act in any manner, so long as they number no less then the minimum number of directors stipulated in Article 1 above. Should the number of directors fall below said minimum, the directors may not act except in urgent cases, or for the purpose of convening a general meeting, or to appoint additional directors under Article 6 above.
Alternate Director and Corporate Representative
14.	A director may at any time appoint a deputy (“alternate director”), who is qualified to be appointed as a director in the Company (except if such person is serving at the time as a director, an alternate or other director, or as an individual “corporate representative”). So long as an appointment of an alternate director is in force, he shall be entitled to participate in every meeting of the Board of Directors from which the appointing director is absent, in the name and in place of the appointing director, and may make use, subject to the provisions of the writ of appointment under which he was appointed and which was given to the Company, all powers held by the director and shall act as his alternate (except for the power to appoint a deputy for himself).

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15.	An alternate director shall not serve as the alternate or “corporate representative” of more than one director.
16.	The appointment of an alternate director shall be effected by a writ of appointment which he shall deliver to the Company, and shall enter into force after depositing the writ of appointment with the Company or on the date determined in the writ of appointment, whichever is later.
17.	A director who appoints an alternate director may annul the appointment at any time. The position of the alternate director shall also become vacant whenever the alternate director notifies the Company in writing of his resignation from his tenure as an alternate director, or whenever the tenure of the director who appointed him as his deputy ends, in any manner, or whenever his tenure shall expire according to law or the provisions of these Articles.
18.	Every appointment and nullification of an appointment of an alternate director shall be effected by written notice delivered to the Company.
19.	A corporation is fit to serve as a director and as an alternate director in the Company.
20.	A corporation which serves as a director or as an alternate director shall appoint an individual who is qualified to be appointed as a director of the Company to serve on its behalf on the Board of Directors (“corporate representative”).
21.	The appointment or nullification of appointment of a corporate representative shall be effected by written notice which the appointing corporation shall deliver to the Company, and shall enter into force on the date of notice to the Company as aforesaid.
22.	The appointing corporation shall not be entitled to the powers and rights of a director during the time in which the corporation does not have a representative whose appointment is valid.
Remuneration of Directors
23.	A director is entitled to receive remuneration, benefits, and payments to compensate or cover expenses from the Company, subject to the approvals required under law.

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Chair of the Board of Directors

24.	Subject to the provisions of any law, the Board of Directors shall elect, from time to time, one of the directors to serve as Chair of the Board, and may remove the Chair and appoint another Chair in his place. The Chair of the Board shall not have an extra vote or deciding vote at meetings of the Board of Directors.
25.	The tenure of the Chair shall continue, with no need for reelection, even after convening the annual meeting at which the tenure of the Board of Directors ends, if the Chair of the Board is reelected or reappointed as a director (whether by the Board of Directors under Article 6 above or by the general meeting under Article 2 above).
26.	The Chair may, from time to time, by written notice to the Company, appoint another Director as Deputy Chair of the Board of Directors, to remove the Deputy and to appoint another in his place; however, the tenure of a Deputy Chair of the Board of Directors shall not expire if the tenure of his appointor as Chairman of the Board or as a director is terminated, unless the Board of Directors decides otherwise. If the Chair of the Board of Directors is not present at a meeting of the Board after 15 minutes have passed from the beginning of the meeting, or if he does not wish to sit as Chair of the meeting, his Deputy shall conduct the meeting and may use all powers given to the Chair of the Board and enjoy all powers, rights and authorities given him under these Articles or under law.
27.	The Chair of the Board of Directors shall have all powers, rights and authorities given to him under these Articles or under law. Without derogating from the generality of the aforesaid, the Chair of the Board of Directors is entitled to any power or authority necessary to carry out his functions and to use his rights and authorities effectively, including the power to act in the name of and in place of the Company in the matters mentioned above,
28.	Should both the Chair of the Board of Directors and his deputy be absent from a meeting of the Board of Directors or should they not wish to chair the meeting, the Board shall elect one of its members (including an alternate director or corporate representative) to conduct the meeting and to sign the minutes thereof; however, said chair of the meeting shall not have an additional or deciding vote in votes of the Board of Directors.
Convening and Conduct of Meetings of the Board of Directors
29.	The Board of Directors shall convene for meetings according to the needs of the Company, and no less than once every three months. The Chair of the Board of Directors may convene the Board at any time.
30.	The Board of Directors shall be convened as follows:
	(1)	According to the decision of the Chair of the Board of Directors at any time;

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	(2)	At the request of two directors;
	(3)	In any other case in which the Chair of the Board of Directors bears a legal duty to convene the Board of Directors.
31.	If the Chair of the Board of Directors does not convene the Board within 10 business days of the date on which he was required to convene a meeting, anyone authorized by law to convene a meeting of the Board may do so (hereinafter: “special meeting”).
32.	The special meeting shall deal with issues specified in a notice or report and for which the special meeting was convened, and solely with these issues.
33.	The special meeting shall be held at the Company offices (unless the Chair of the Board of Directors directs that it shall be held at another location or in another manner at least five days prior to the date of the meeting), and the convenors of the meeting shall send prior notice as stipulated in Article 45 below, at least ten days prior to the date set for the special meeting. A prior notice as aforesaid shall not be sent before the end of the period set for the Chair of the Board to convene the meeting, as mentioned above.
34.	Unless otherwise stipulated is these Articles, all of the provisions of these Articles applicable to meetings of the Board of Directors which were convened by the Chair of the Board shall apply to a special meeting.
35.	Whoever convenes a meeting of the Board of Directors under Articles 29 and 30 above may be assisted to this end by the Secretary of the Company (and if the Company has not appointed a Secretary, by the Director-General of the Company or by another person whom the Director-General has appointed for this purpose) and to instruct him, subject to the provisions of these Articles, regarding the acts to be performed in order to convene the meeting.
36.	The agenda of the meeting of the Board of Directors shall be set by the Chair of the Board, and shall include (with the exception of matters raised at a special meeting as specified in Article 32 above):
	(A)	Matters determined by the Chair of the Board;
	(B)	Matters to be discussed at a special meeting;
	(C)	A matter which a director or the Director-General of the Company asked the Chair of the Board to include in the agenda a reasonable time prior to the meeting of the Board.
37.	Subject to the provisions of any law, the Board of Directors may conduct meetings, hold votes and take decisions, among other things, by means of telecommunications (including by means of several types of telecommunications media, and including in a manner in which part of the directors are present in person at the place of the meeting and the remaining directors participate in the meeting are present by means of telecommunications media), as permitted by applicable law.

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38.	Subject to the provisions of Article 13 above, the legal quorum for opening a meeting of the Board of Directors shall be a majority of the number of directors.
39.	The Board of Directors may take a decision without actually convening, provided that all of the directors entitled to participate in the discussion and to vote on the matter brought for decision have so agreed, and said decision shall have the same force for any purpose as if it had been taken at a duly convened and conducted meeting of the Board, and may be taken by a simple majority.
40.	The Chair of the Board of Directors or whomever is appointed as his Deputy shall record minutes of the decisions taken without convening the Board of Directors as aforesaid and shall sign them.
41.	At all votes of the Board of Directors each Director shall have one vote.
42.	Decisions of the Board shall be taken by an ordinary majority of the Directors who voted on the agenda item being decided.
43.	Every act done by or according to a decision of the Board of Directors, or by or according to a committee of the Board of Directors or by a director in his capacity as such, shall be valid even if it turns out afterward that there was some defect in the election of the directors, or that all or any one of them were legally unqualified, as if each of them were duly elected and had all the necessary qualifications for being a director, an alternate director, a corporate representative or a member of said committee, as the case may be.
Notices of Board Meetings
45.	A notice of a meeting of the Board of Directors to be convened by the Chair of the Board may be delivered in writing, at least three business days before the date set for the meeting, unless the Chair of the Board set a shorter date for giving notice due to the urgency of the matter on the agenda of the meeting.
46.	A notice of a Board meeting shall be sent to every director. If a director has appointed an alternate director for himself, the notice shall be sent solely to the alternate director (unless the writ of appointment by virtue of which the alternate director was appointed directs otherwise). Notice to a director which is a corporation shall be delivered to the representative of the corporation (unless the corporation instructs the Company otherwise in writing), and a notice delivered to an alternate director or to a corporate representative, as the case may be, shall be deemed a notice delivered to the director who appointed them.
47.	A notice of a meeting of the Board of Directors shall be deemed delivered at the following times, according to the means used:
	47.1	If sent by registered mail - one business day after its posting at the post office.
	47.2	If placed at the address of the director or in his post office box - at the time of delivery, according to the matter.

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	47.3	If sent by facsimile or electronic mail-- two hours after transmission.
	47.4	If transmitted by telegram -- six hours after sending the telegram.
	The address of the director and the other particulars necessary for communication with him for the purpose of sending notices shall be the information appearing in the Register of Directors which the Company maintains, or of which he notified the Company in a written request that they be used for the purpose of sending notices.
48.	A notice of a meeting of the Board of Directors shall include reasonable details, as well as relevant ancillary material, as determined by the Chair of the Board, in respect of all of the matters on the agenda of the meeting, as well as the location and time set for the meeting.
49.	Notwithstanding the aforesaid in Article 45 above, all of the directors (in respect of a corporate director or a director who appointed a deputy -- the corporate representative or alternate director, as the case may be) may agree to the convening of a meeting of the Board of Directors by advance notice shorter than that required under Article 45 above, or without notice.
Powers of the Board of Directors
50.	The Board of Directors shall formulate the policy of the Company, and shall oversee the execution of the functions and actions of the Director-General. The Board of Directors shall have the powers and authority necessary, in the view of the Board, to carry out its functions fully and effectively.
51.	Without derogating from the generality of the provisions of Article 50 above, the Board of Directors may use all powers and authorities, and my take all actions or do any deeds available to it under law or contract or under these Articles or under the memorandum of incorporation of the Company.
52.	The Board of Directors may instruct the Director-General how to act in respect of a particular matter. If the Director-General does not follow the instructions, the Board of Directors may exercise the authority necessary to carry out the instructions in his place.
53.	The Board of Directors may exercise the powers of the Director-General if the latter is prevented from doing so.
54.	The Board of Directors may exercise any power of the Company which was not granted under these Articles or by law to the Director(s)-General of the Company or to the general meeting, and said power shall be deemed granted to the Board of Directors under these Articles.
55.	The power of the Board of Directors shall be subject to law, to these Articles, to the Memorandum of Incorporation of the Company and to any regulation promulgated by the Company at the general meeting, to the extent that it does not contradict said provisions or Articles, provided that no such regulation shall annul the legal force of any act done prior thereto by the Board of Directors or pursuant to its decisions which would have been legally valid had said regulation not been promulgated.

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56.	To exercise the general powers granted to the Board of Directors, and without limiting or constricting to any degree said powers or any one of them, it is hereby declared explicitly that the Board of Directors shall have the following powers:
	56.1	The Board of Directors may, from time to time, appoint by majority decision one or more persons (whether or not he is a member of the Board) as Director-General of the Company, either for a set period or without limitation in time, and may from time to time (taking into account the terms of any contract between him or them and the Company) release him or them from their office and appoint another person or other persons in his or their place.
	56.2	Subject to any law, the compensation of the Director-General shall be determined from time to time (taking into account the terms of any contract between him and the Company) by the Board of Directors, and may be in the form of a fixed salary, a commission on dividends, profits or revenues of the Company or of any other company in which the Company has an interest, or by sharing in such profits, or by one or more of these methods or in any other manner that the Board of Directors deems fit.
	56.3	The Board of Directors shall determine the compensation of the auditing accountant of the Company for the services rendered by him.
	56.4	For the purpose of setting Company policy and supervision of its actions, any Director may examine the Company documents and records and receive copies thereof, may examine the assets of the Company and receive professional advice at Company expense if said expense was approved by the Board of Directors or by the court.
	56.5	56.5.1	The Company may issue redeemable securities on terms determined by the Board of Directors of the Company.
		56.5.2	The Board of Directors of the Company may attach to such redeemable securities the characteristics of shares, including voting rights and the right to share in profits.
	56.6	To decide on allotment of non-par value shares; in the event that non-par value shares are allotted, only their number shall be noted in the Articles, and the provisions of the Companies Law dealing with the registered or issued capital shall apply, with the necessary changes.

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Committees of the Board of Directors

57.	The Board of Directors may, from time to time, form committees, appoint members of such committees from among the directors and determine, subject to the provisions of any law, the powers of the Board of Directors to be delegated to the Board committees; and may, from time to time, cancel said delegation of powers, in part or in whole, and cancel any of said Board committees.
58.	Every Board committee must, in using its powers, follow the instructions of the Board of Directors.
59.	Subject to Article 60 below, the meetings, decisions and actions of the Board committees shall be conducted and convened according to the provisions of these Articles in respect of convening and conduct of the meetings, decisions and actions of the Board of Directors, with the necessary changes.
60.	Subject to the provisions of any law and notwithstanding the aforesaid in Article 59 above, the Board of Directors may, from time to time, establish procedures and directives in respect of convening and conduct of meetings, decisions and actions of the Board committees.
61.	The Board of Directors shall appoint from among its members an audit committee, the composition and functions of which shall be in accordance with the provisions of the Companies Law. The audit committee shall consist of at least three (3) directors, among them all of the external directors.

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Chapter F: The Director-General and Officers

The Director-General

1.	The Director-General is responsible for the day-to-day administration of the Company’s affairs, in the framework of the policy determined by the Board of Directors and subject to its instructions.
2.	The Director-General shall have all administrative and executive powers which have not been granted by operation of law or these Articles to another organ of the Company, and he shall be under the supervision of the Board of Directors
3.	The Director-General may delegate any of his powers to another person subordinate to him, subject to the approval of the board of Directors.
4.	The power of the Director-General shall be subject to the provisions of any law, to these Articles, to any regulation promulgated by the Company at the general meeting to the extent it does not contradict said provisions or Articles, and any directive or rule determined by the Board of Directors from time to time, provided that no regulation, directive or rule as aforesaid shall cancel the legal validity of any act taken prior thereto by the Director-General or pursuant to his decisions which would have been legally valid had said regulation not been promulgated or had said directive or rule not been determined.
5.	The Chair of the Board of Directors may be empowered by decision of the general meeting to carry out the functions of the Director-General or to exercise his powers, for a period that shall not exceed three years from the date of such decision.
6.	Without derogating from the general powers granted to the Director-General under Article 1 above or any of the other powers granted to him under these Articles, , it is hereby declared explicitly that the Director-General shall have the following powers:
	6.1	To appoint a person or persons (whether incorporated or not) to receive and to hold in trust for the Company any property owned by the Company or in which the Company has an interest, or for any other purpose, and to perform or do any actions, deeds or things necessary in respect of such trust.
	6.2	To initiate, conduct, defend, compromise or abandon any legal proceedings on behalf of or against the Company’s employees or others having a relation to the Company’s affairs, and to settle a compromise and extend the date of payment or discharge of any debt owing to the Company or any claim or demand by the Company or against it.
	6.3	To refer to arbitration any claim or demand by or against the Company.

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	6.4	From time to time, and at any time, to appoint by virtue of power-of-attorney any person or persons to be the representative or representatives of the Company for such purposes and with such powers, authorities, discretion (which shall not exceed those given or available to the Director-General under law or these Articles), for such period and subject to such terms as the Director-General shall deem fit from time to time.
		All such powers-of-attorney may contain such powers for the protection or convenience of persons who come in contact with such representatives as the Director-General shall deem fit.
	6.5	The Director-General may appoint from time to time on behalf of the company an attorney or attorneys in Israel or abroad to represent the Company before any court, legal body, any governmental, municipal or other office or body in Israel or abroad, and may grant any such attorney such powers as the Director-General deems fit, including the authority to transfer his powers, in part or in whole, to another or to others.
	6.6	Subject to the principles of finance, credit and any other policy directive or rule which the Board of Directors determines, the Director-General may loan any sum or sums for the purposes of the Company, and may issue in the name of the Company individual debentures, promissory notes and bills of exchange.
Personal Interest in Company Transactions
7.	A transaction by the Company with one of its officers, or a transaction by the Company with another person in which transaction an officer has a personal interest, which is not a extraordinary transaction (as defined in the Companies Law), shall not be subject to any approval, provided however that a decision regarding the employment terms of an office holder shall be considered an extraordinary transaction.
Insurance, Discharge and Indemnity of Officers
8.	The Company may, from time to time and subject to the provisions of any law:
	8.1	Enter into a contract for insuring the liability of an officer, in part or in whole, for an obligation imposed on him as a result of an act or omission performed in his capacity as an officer, in each of the following instances:
		8.1.1	Breach of duty of care with respect to the Company or another person.
		8.1.2	Breach of trust with respect to the Company, provided that the officer acted in good faith and had reasonable grounds to presume that the act would not impair the Company’s best interests.

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	8.1.3	A monetary obligation imposed on him for the benefit of another person.
8.2	Indemnify an officer of the Company for an obligation or expense specified in this Article 8.2.1 below, which was imposed on him or which he spent as a result of an act which he performed in his capacity as an officer:
	8.2.1	(a)	A monetary debt imposed on him for the benefit of another person under a judgment, including a compromise settlement judgment or an arbitrator’s decision which was approved by a court.
		(b)	Reasonable litigation expenses, including attorney’s fees, which the officer incurred due to an investigation or procedure conducted against him by an authority authorized to conduct such an investigation or procedure, provided that such an investigation or procedure concluded without the filing of an indictment against the officer and without imposition of a monetary liability in lieu of criminal proceedings, or that such an investigation or procedure concluded without the filing of an indictment against the officer but the officer is imposed with a monetary liability in lieu of criminal proceedings that the offense in question does not require proof of mens rea. In this Section – “the conclusion of a procedure without the filing of indictment in an issue in which a criminal investigation began” and “monetary liability in lieu of criminal proceedings”- as their meaning in Section 260(A)(1a) to the Companies Law.
		(c)	Reasonable litigation expenses, including attorneys’ fees, which the officer incurred or for which he was obligated by a court, in a proceeding filed by the Company or in its name or by another person against him, or in criminal proceedings of which he was acquitted, or in criminal proceedings in which he is convicted provided that the offense in which he was convicted does not require proof of mens rea.
	8.2.2	The Company may obligate in advance to indemnify an officer, as follows:
		(a)	as specified in Article 8.2.1(a) provided however that the obligation shall be limited to the events which, according to the Board of Directors’ opinion, are foreseen in light of the Company’s actual activities at the time of granting the obligation to indemnify, and to an amount of criteria that the Board of Directors deems reasonable under the circumstances, and that in the obligation to indemnify the events which, according to the Board of Directors’ opinion are foreseen in light of the Company’s actual activities at the time of granting the obligation to indemnify, and the amount or criteria that the Board of Directors deems reasonable under the circumstances shall be specified.

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			(b)	As specified in Article 8.2.1(b) and in Article 8.2.1(c).
		8.2.3	The Company may indemnify an officer, as specified in Articles 8.2.1(a), 8.2.1(b) and 8.2.1(c) after the occurrence of such event which is to be indemnified.
	8.3	(a) The Company may exempt an officer in advance from his liability, in part or in whole, for damages resulting from breach of the officer’s duty of care with respect to the Company.
		(b) Notwithstanding Article 8.3(a) above, the Company may not exempt a Director in advance from his liability toward the Company due to the breach of duty of care in the event of a distribution, as defined in the Companies Law.
9.	The above provisions neither intend, nor shall they be construed, to limit the Company in any manner whatsoever in respect of its entering into a contract of insurance, discharge or indemnity:
	9.1	With respect to those who are not officers in the Company, including employees, contractors or advisors of the Company who are not officers therein;
	9.2	With respect to officers in the Company, to the extent that the insurance, discharge or indemnity are not explicitly forbidden by law.
10.	The provisions of Articles 8 and 9 above shall also apply to a corporate representative as if he were an officer of the Company.
Signing in the Name of the Company
11.	Every signature in the name of the Company shall be effected by the person authorized to do so under law, under these Articles or under a decision of the Board of Directors, and shall be accompanied by the Company seal or a seal in the name of the Company.

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Chapter G: Minutes, Records and Accounting Books

Minutes

1.	The Board of Directors shall see to it that minutes are properly recorded in books prepared for this purpose, regarding:
	1.1	The names of the members of the Board of Directors present at any meeting of the Board of Directors and at every meeting of a Board Committee (including in every decision of the Board of Directors or any of its committees which was taken without actually convening).
	1.2	The names of the shareholders present at every general meeting.
	1.3	The instructions given by the Board of Directors to the Board Committees.
	1.4	The proceedings at the general meetings, Board of Directors’ meetings and Board Committee meetings, including decisions taken without actually convening.
2.	All such minutes of a meeting of the Board of Directors or of any of its Committees, or of the general meeting of the Company, which purports to be signed by the Chair of the meeting or by the chair of the subsequent meeting, shall be prima facie evidence of its contents.
3.	The Company shall preserve the minutes mentioned in this chapter as required by law.
4.	The Register of minutes of the general meetings shall be open to the inspection of the Company’s shareholders at any reasonable time, and a copy thereof shall be sent to any shareholder who so requests, subject to the procedures determined by the Board of Directors from time to time regarding the times at which the Register shall be open for such inspection (including in respect of the periods in which the Register shall be closed), regarding verification of the identity of the shareholder and the fee required for inspection or delivery as aforesaid.
Company Books and Records
5.	The Director-General shall comply with all provisions in the Companies Law in respect of registration of charges and encumbrances , maintenance and administration of the Register of Directors, the Register of Shareholders, an additional Register of Shareholders, a Register of Substantial Shareholders, and a ledger of encumbrances.
6.	Every book, register, ledger and written record that the Company must maintain under the Companies Law or these Articles, shall be maintained by recording in ordinary books, or by electronic means, as the Director-General shall decide, provided that those entitled to inspect them shall have the opportunity to receive copies of the documents.

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7.	The Company may, taking into account the provisions of the Companies Law or any other law, maintain in any other country to which the provisions apply, a register or registers of shareholders who live in said other country, and may use all of the powers enumerated in the Companies Law in respect of such registers, subject to the power of the Minister of Justice to set guidelines in respect of maintaining the register.
8.	If the Company decides to maintain an additional Register of Shareholders outside Israel, it must note in the Register of Shareholders the number of shares registered in the additional Register of Shareholders, and the numbers of said shares, if they are numbered.
9.	The Company may close the Register and any other register or ledger which it maintains or shall maintain (whether by operation of law, pursuant to a contract or at the Company’s election) in connection to all securities of the Company, as the case may be, for such period as the Board of Directors may deem fit, provided that it shall not exceed 14 business days each year. Subject to applicable law as well as the relevant rules and regulations of the Exchange, the Company shall publish a notice regarding closing of a ledger at least three business days in advance, in a daily newspaper circulated in Israel in the Hebrew language and if listed for trade in an Exchange outside Israel - in a daily newspaper circulated in the country in which in which its securities are registered for trade.
10.	Subject to the provisions of any law and the rules of the Exchange, the Company may determine a record date for the purpose of entitlement to receive notices of general meetings, to participate in and vote at them, provided that such date shall be more than 21 business days prior to the date set for the general meeting.
11.	The Company shall be entitled to collect payment for a change in registration of shares in the Register from the name of a Registering Company to that of a shareholder under Article 17.1 of Chapter B above, in an amount to be determined from time to time by the Board of Directors, which sum shall not exceed 40 USD, linked to the Consumer Price Index from the index known on the date on which these Articles enter into force until the index known on the date of actual payment) for registration of any request to effect a change in the Register.
12.	The Company may destroy requests for changes in the Register after six years have passed from the change in the Register pursuant thereto, and it shall be presumed that all requests for changes in the Register were fully valid and every action done by virtue thereof were lawful.
Accounting Books
13.	All information in the possession of the Company shall be held at the Office, or at any other location or locations as the Chair of the Board of Directors shall deem fit, and shall be open to inspection by the Directors, subject to internal directives and procedures which the Chair of the Board of Directors shall determine in respect of inspection of documents. Such directives, however, shall not substantially undermine the directors’ ability to oversee the Company’s operations.

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14.	Except for documents and information which the shareholders are entitled to receive under law or these Articles, a shareholder shall not be entitled to receive any information or documents of the Company unless decided otherwise by the general meeting.
15.	The Company shall keep books and shall prepare financial reports in accordance with the applicable law. The financial reports shall be approved by the Board of Directors and signed in its name.
16.	Subject to any law, the Company may determine the manner and form of presentation of documents which the shareholders are entitled to inspect, and may determine that a payment shall be made for giving a copy thereof.

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Chapter H: Audit

Auditing Accountants

1.	At least once a year the financial reports of the Company shall be audited by an auditing accountant or accountants who will render their opinion thereon.
2.	The Company shall appoint at an annual meeting an auditing accountant or accountants who will serve until the next annual meeting; however, the annual meeting may appoint an auditing accountant who will serve for a period of up to three years.
3	An auditing accountant may be invited to and participate in every general meeting of the Company, and may express his opinions in respect of matters related to his status as auditing accountant of the Company.
4.	Subject to the provisions of the Companies Law, every act performed by the auditing accountants of the Company shall be valid as against any person who deals in good faith with the Company, despite any defect in the appointment or qualification of the auditing accountants.
5.	The compensation of the auditing accountant for the audit shall be determined by the Board of Directors or by the Audit Committee, if it is so authorized by the Board of Directors. When the compensation for the audit has been set by the Board of Directors or the Audit Committee, the Board of Directors shall report the compensation of the audit accountant to the annual meeting.
Internal Comptroller
6.	So long as the Company is a public company, the Board of Directors shall appoint an internal comptroller at the nomination of the Audit Committee.
7.	The organizational superior of the internal comptroller shall be the Chair of the Board of Directors. The internal comptroller shall submit a proposed annual or periodic work plan to the Board of Directors, which will approve such plan with changes as it deems fit, at its discretion.

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Chapter I: Capital Funds, Distribution, Bonus Shares and Decrease of Capital

Capital Funds

1.	The Board of Directors may, at any time, set aside from surplus accounts amounts as it deems fit, as a reserve fund for distribution of dividends, for distribution of bonus shares, for purchase of securities in the Company or for any other purpose which it deems fit. In addition, the Board of Directors may direct the manner of administration and use of the amounts in any fund or part thereof, including use of the amount of the fund or part thereof in the Company’s business, without having to maintain them separately from the other assets of the Company.
2.	The Board of Directors may transfer, from time to time, sums set aside to a reserve fund as aforesaid to the surplus account.
3.	The Board of Directors may, from time to time, subject to the provisions of any law and these Articles, change the intended use of the amounts in any capital fund of whatever sort or the manner of its administration, or may split or consolidate capital funds, or may transfer the amount of any capital fund to the surplus account or to any other account on the Company’s books. Notwithstanding the aforesaid, the Board of Directors may not transfer an amount from a share premium account except to share capital of the Company or for the purpose of reducing capital.
Distribution of a Dividend and Bonus Shares
4.	Every ordinary share shall grant its owner the right to receive dividends and bonus shares, if and when they are distributed, in proportion to the paid up par value of the shares, or that which is deemed paid up, without taking account of any premium paid therefor.
5.	A decision of distribution (as defined in the Companies Law) shall be taken by the Board of Directors. However, the Board of Directors, at its discretion, may transfer the decision in this matter to the general meeting.
6.	The Company shall not pay interest on dividends, including on dividends paid after the date set for their payment for any reason. The Board of Directors may determine from time to time, both with respect to the payment of a specific dividend and with respect to a class of dividends, at its absolute discretion, that the Company shall pay linkage differentials in accordance with some price index (whether Israeli or foreign) or in accordance with the exchange rate of some foreign currency for dividends paid after the date set for their payment.
7.	A dividend may be paid, in whole or in part, by way of distribution of assets of any sort (including several types of assets), including by distribution of shares of the Company which were partially paid for (including such shares the par value of which was not paid up but the amount of demanded for which is less than their value), securities convertible to shares in the Company, shares, debentures or a series of debentures of any other company. Distribution of assets as aforesaid may be effected by assignment, endorsement, transfer of ownership, giving a contractual or property right, or any other manner which the Board of Directors shall direct.

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8.	If the Board of Directors decides to distribute a dividend, in part or in whole, by way of issuing shares in the Company for an amount less than their par value and distribution of said shares among those entitled to a dividend, the Company shall turn part of its profits in respect of which the dividend is to be distributed into share capital, in an amount equal to the difference between the par value of said shares and the consideration therefor.
9.	The Board of Directors may decide, from time to time, that all or part of the amount in the surplus account, from the amount in the share premium account, from the balance of a capital fund of any sort with a positive balance or from any other source included in the Company’s own capital, shall become part of the share capital of the Company and shall be deemed full discharge (in an amount, to be determined by the Board of Directors, which will not be less than their par value) for bonus shares of classes and in a number determined by the Board of Directors. Said bonus shares shall be issued, for no consideration, to shareholders in the Company, who were entitled to receive the amount that became share capital for the purpose of distributing bonus shares had said amount been distributed as a cash dividend, and in the same proportion.
10.	The Board of Directors may, from time to time, transfer to owners of securities issued by the Company which may be converted to or realized in the form of shares in the Company, bonus shares or dividends which the Company distributed during the period from the date of issue of said securities until the date of realization or conversion to shares in the Company.
11.	The Board of Directors may make all arrangements and take all actions necessary for the speedy and efficient performance of the provisions of Article 10 above, may determine the rights which the owners of the convertible securities shall receive and the manner in which they will receive such rights, may execute any assignment necessary for the rights of the owners of the convertible securities as a result of executing more than one distribution of dividends or bonus shares, and may use any power available to it in respect of distributing a dividend or a bonus share to shareholders in the company, mutatis mutandis, at the absolute discretion of the Board of Directors.
12.	To execute any decision regarding distribution of a divided or bonus shares or acquisition of securities in the Company, the Board of Directors may:
	12.1	Resolve as it best sees fit any difficulty that may arise in connection with such distribution and take all steps which it deems proper to overcome such difficulty.
	12.2	To issue certificates for share fractions or to decide that shares in the Company which entitle their owners to share fractions at a rate lower than that determined by the Board of Directors shall not entitle their owners in respect of said distribution, or to sell share fractions and to pay the net price (after deducting expenses of sale and any tax on the sale) to those entitled to them.

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	12.3	To make any other arrangements that will be necessary in the view of the Board of Directors to enable the distribution or to make it more efficient.
13.	The Board of Directors may appoint trustees for shareholders who, during a period as determined by the Board of Directors, did not apply to the Company to receive dividends, bonus shares or any other right (in Articles 4-22 -- “bonus”) which the Company issued or distributed to its shareholders in their capacity as such. Every action taken by said trustees, and any contract between the Board of Directors and the trustees, shall be valid and shall bind the shareholders for whom the trustees were appointed.
14.	Said trustees shall be appointed for the purpose of realizing, collecting and receiving a bonus, but may not transfer the bonus or part thereof or grant any rights in the bonus or use it, an may not vote any securities in the Company which were included in the bonus.
15.	The trustees shall transfer the bonus, including any earnings thereon and after deduction of their fees as determined by the Board of Directors, to the shareholders entitled to the bonus as promptly as possible after receiving the shareholder’s first written demand, subject to verification of the identity of the shareholder and all terms of the bonus to which he is entitled in accordance with procedures determined by the Board of Directors. The provisions of Article 18 in Chapter B above shall apply to transfer of the bonus, with the necessary changes.
16.	The Board of Directors may determine from time to time the manner of payment of dividends or distribution of bonus shares, and related arrangements, with respect to the various classes of shareholders. Without derogating from the generality of the aforesaid, the Board of Directors may pay any dividends or moneys for shares by sending a check by registered mail, and if the bonus, in part or in whole, is an asset or right, by sending by registered mail any document attesting to or creating said right, to the address of the shareholder as listed in the Register. Every said posting of a check or document shall be done at the risk of the shareholder.
17.	The Board of Directors may withhold any dividend, bonus, rights or amounts to be paid for shares in respect of which the Company has an encumbrance/a lien, and may use the proceeds of realization to discharge the debts in respect of which the Company has such encumbrance/lien.
18.	The Board of Directors may decide that the bonus shares shall be of the same class of shares held by the shareholders, participating in the distribution of bonus shares, or of a different class of shares regardless held by the aforesaid shareholders or a combination of the two classes.
19.	A transfer of shares shall not grant the transferee the right to a dividend or to any other distribution announced after said transfer but before registration of the transfer in the Register, provided that if the transfer of shares requires approval by the Board of Directors, the date of approval shall come in place of the date of registration of the transfer in the Register.

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20.	In the case of a dividend the payment of which was not demanded within seven years from the date of the decision to distribute it, the person entitled to it shall be deemed to have waived it and it shall revert to the ownership of the Company.
21.	The Board of Directors may deduct from any dividend, grant or other moneys to be paid to a shareholder (including to a person who is one of several joint owners of a share), any amounts owing from said shareholder which he must discharge (either by himself or jointly with another person) to the Company on account of payment demands or for any other debt which the shareholder owes to the Company in his capacity as shareholder.
22.	To the extent that several persons are registered as joint owners of a share, each of them may give the Company a valid receipt for any dividend, bonus shares paid or transferred in respect of the share or for any amount that the Company pays for acquiring the share, or for any other moneys or beneficial rights given in relation to or by virtue of said share.
Decrease of Capital
23.	The Board of Directors may, from time to time and subject to the approval of a court as required under law, execute a reduction in capital if, in the view of the Board of Directors, said distribution meets the solvency test (as defined in the Companies Law).
24.	The Board of Directors shall determine the source in the capital of the Company (, the surplus account, a capital fund or a combination of all or part of these) from which the reduction in capital shall be executed and may create a special capital fund with a negative balance to this end.
25.	Subject to the instructions of the court in respect of approval of a reduction in capital, the provisions applicable to a distribution which meets the profit test shall apply to a reduction in capital, with the necessary changes in the circumstances or with the changes decided by the Board of Directors.
Securities of the Company Purchased by the Company
26.	The Board of Directors may take any action that may be taken by law in connection with securities in the Company which were acquired by the Company (and to establish, change or cancel procedures in this respect from time to time) including the following:
	26.1	To determine the manner in which said securities will be held and the manner and terms under which they shall be sold;
	26.2	To determine that said securities shall expire or be canceled and to take any actions necessary to this end;

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26.3	To appoint a trustee who will hold said securities, in whole or in part, for the Company or for others, and to give instructions to the trustee regarding the manner in which he will hold the securities and the manner and terms under which he will sell the securities, including possession and sale of the securities in a blind trust;
26.4	To convert said securities or to realize them in the form of shares in the Company, subject to execution of a distribution in an amount that was to have been paid to the Company as a supplementary realization had said securities been held by a third party. Shares in the Company which it received as a result of such conversion or realization shall be deemed dormant shares (as defined in the Companies Law) and the provisions of this Article 26 shall apply to them.
26.5	To create a special capital fund for distribution and granting a bonus to a buyer of said securities from the Company or from the trustee after he buys said securities or for the purpose of accumulating the right of said securities to said bonuses, or to cancel and expropriate the bonus, in whole or in part, and to transfer any amount transferred to the special capital fund as aforesaid to the surplus account.
	In this Article 26, “bonus” shall mean a dividend, bonus shares, interest (including linkage or currency exchange differentials) or any other right or benefit to which the owner of said securities would have been entitled had they been held by a third party on the date of the distribution or granting of the bonus, including any additional bonus to which the bonus would have entitled its owner had the owner been a third party, and had an additional bonus been given during the period in which said securities were held by the Company.

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Chapter J: Winding up, Merger and Reorganization

Winding up

1.	Subject to the provisions of section 319(1) of the Companies Ordinance, the general meeting may take a decision in respect of the winding up of the Company, provided that said decision is taken by the majority required by law or, absent a requirement by law, by a majority required to take decisions under these Articles.
2.	If the Company is wound up and its assets available for distribution among the shareholders are not sufficient for full payment of its paid-up capital, these assets shall be distributed, to the extent possible, in such a manner that the shareholders will entitled to the remainder of assets in proportion to the paid up capital, or to the capital which should have been paid up when the winding-up commenced, according to the respective shares held by them.
3.	To the extent that, at the time of winding up, the assets available for distribution among the shareholders are more than adequate for payment of the full paid up capital as of the time winding up commenced, the surplus shall be divided among the shareholders in proportion to the paid up capital that should have been paid up at the commencement of the winding up according to the respective shares held by them. This Article shall not impair the rights of shareholders which were issued on special terms (for the purpose of distributing Company property at the time of winding up payments made, if at all, as premiums on shares shall not be taken into account).
4.	If the Company is wound up, whether voluntarily or otherwise, the liquidators may, if the general meeting so approves by a majority required by law or, absent such requirement in law, by a majority necessary for taking decisions under these Articles, to distribute in kind among the shareholders any portion of the property of the Company, and they may by similar approval deposit any portion of the property of the Company with trustees in trust for the benefit of the shareholders. The general meeting which approves any such distribution may also approve a distribution in a manner other than according to the legal rights of the shareholders, an it may give special rights to some class of shareholders; however, in the event that it is decided to approve some distribution not according to the legal rights of the shareholders, a shareholder harmed thereby shall have the right to oppose such decision and rights related thereto, in every respect as if this decision was a decision taken according to the majority required in section 334 of the Companies Ordinance.
Merger and Reorganization
5.	Subject to the provisions of any law, a merger shall be approved by decision of the general meeting.

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6.

In the event of any sale of the assets of the Company, the directors (or the liquidators in the event of winding up, if they were so authorized by a decision taken by the general meeting by a majority required under law) may receive fully, or partly-paid-up shares, debentures or any sureties of another company, Israeli or foreign, whether in existence or in the process of formation, for the purpose of purchasing assets of the Company in whole or in part, and the directors or the liquidators may distribute in kind such shares or debentures or sureties or any other property of the Company among the shareholders without realizing them, or may deposit them in trust for the shareholders, and any decision of the general meeting as aforesaid may order a distribution or allotment of cash, shares or other sureties, rights or property in a manner other than according to the legal rights of the shareholders or the participants in the Company, in consideration for the value of the sureties or the property at a price and in a manner that the meeting shall direct, and all of the shareholders shall receive the value or the distribution approved as aforesaid and shall waive their existing rights, except in the event that the Company is about to be wound up or is in winding up proceedings, and the legal rights (if any) according to the provisions of the Companies Ordinance or the Companies Law, as the case may be, may not be changed or cancelled by the provisions of this Article.

7.

Notwithstanding Article 6 of the Israeli Securities Regulations (Tender Offer), 2000 (the “Regulations”), a Special Tender Offer, as such term is defined under the Regulations, shall not be accepted by any Offeree, as such term is defined under the Regulations, unless the terms of such Special Tender Offer state that the Acceptance Period, as such term is defined under the Regulations, is not less than forty five (45) days, but not more than sixty (60) days from the date of the Specifications, as such term is defined under the Regulations, on a day of trade.

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EX-4.16

Exhibit 4.16

AMENDED AND RESTATED

ASSET PURCHASE AGREEMENT

among

NOVA MEASURING INSTRUMENTS LTD.

(“Buyer”)

and

HYPERNEX, INC.

(the “Corporation”)

and

THE PERSONS LISTED ON SCHEDULE 4(a)

(the “Stockholders”)

dated

August 8, 2006

TABLE OF CONTENTS

		Page
1.	Acquisition Transaction	1
2.	Purchase Price; Payment to Employees	4
3.	Employment Agreements, Agreements Not to Compete, Restricted Stock Agreements	4
4.	Representations, Warranties and Agreements of Corporation	4
5.	Representations, Warranties and Agreements of Buyer	24
6.	Continuation and Survival of Representations and Warranties	26
7.	Covenants of the Corporation and Stockholders Prior to Closing	26
8.	Covenants of Buyer Prior to Closing	27
9.	Conditions Precedent to Corporation's and Stockholders' Obligation to Close	27
10.	Conditions Precedent to Buyer's Obligation to Close	28
11.	Termination	29
12.	Closing Date	30
13.	Deliveries by the Corporation at Closing	30
14.	Deliveries by Buyer at Closing	31
15.	Indemnification	32
16.	Board Observer	34
17.	Piggyback Registration Rights	35
18.	Further Assurances	35
19.	Dispute Resolution	36
20.	Representative	37
21.	Miscellaneous	37

EXHIBITS:

Exhibit “A-1” – Form of Employees Employment Agreement

Exhibit “A-2” – Form of Employees Agreement Not to Compete

Exhibit “A-3(i)” – Form of Employees Restricted Stock Agreement

Exhibit “A-3(ii) – Form of Managers Restricted Stock Agreement

Exhibit “B” – Bill of Sale

Exhibit “C” – Assignment of Registrable IP

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AMENDED AND RESTATED ASSET PURCHASE AGREEMENT

        This AMENDED AND RESTATED ASSET PURCHASE AGREEMENT (the “Agreement”), made this 8th day of August, 2006 (the “Execution Date”), by and among Nova Measuring Instruments Ltd., a company organized and existing under the laws of the State of Israel (“Buyer”), HyperNex, Inc. a company organized and existing under the laws of the State of Delaware (the “Corporation”) and the Persons (as hereinafter defined) listed in Schedule 4(a) (each individually, a “Stockholder” and together the “Stockholders”).

BACKGROUND

        The Corporation is engaged in the business of designing, developing, manufacturing and selling metrology products and services which allow for rapid thin film phase identification, and crystallographic texture and grain size data analysis (the “Business”).

        The Corporation, the Buyer and the Stockholders have entered into an Asset Purchase Agreement (the “Prior Agreement”) dated April 24, 2006, for the acquisition of substantially all the assets of the Corporation and the assumption of certain liabilities of the Corporation all as set forth in the Prior Agreement.

        The parties now desire to amend and restate the Prior Agreement in its entirety such that Buyer shall acquire substantially all the asset of the Corporation and assume certain liabilities and the Corporation will sell and assign to the Buyer such assets and liabilities all under the terms and conditions hereinafter set forth.

        NOW THEREFORE, in consideration of the premises and of the mutual covenants hereinafter set forth, the parties hereto, intending to be legally bound, hereby agree as follows:

    1.       Acquisition Transaction.

    (a)       Purchase and Sale of Assets. On the Closing Date (as hereinafter defined), upon the terms and conditions herein set forth, Buyer agrees to purchase from the Corporation, and the Corporation agrees to sell, transfer, convey and deliver to Buyer, all of the Acquired Assets (as hereinafter defined) in consideration of the assumption of liabilities as provided in subsection 1(c) and the payment specified in Section 2. As used herein, “Acquired Assets” shall mean the Corporation’s right, title to and interest in all of the properties, rights and assets of the Corporation, wherever situated, of every kind, nature and description, tangible or intangible, whether arising by contract, law or otherwise, except for the Excluded Assets (as hereinafter defined), all as the same shall exist on the Closing Date, including, without limitation, the following:

    (i)       all account receivable due to the Corporation;

    (ii)       all prepaid expenses and deposits;

    (iii)       all furniture, fixtures, equipment and other fixed assets and leasehold improvements used by the Corporation;

    (iv)       all inventory and all work in production, preparation or process, in each case whether in the possession of the Corporation or third parties;

    (v)       all lists, mailing lists, documents, information and records (whether in printed form or computer or other electronic media) related, in each case, to past, present and prospective customers of the Corporation;

    (vi)       copies of all existing files, accounting records, correspondence, internal reports and contractual documents, including databases and records (whether in printed form or computer or other electronic media);

    (vii)       all promotional materials, market research studies, and sales media;

    (viii)       all rights of the Corporation in the Corporation Intellectual Property (as hereinafter defined) including the right to the Corporation’s name “HyperNex, Inc.”;

    (ix)       all rights, powers, privileges and claims arising under any contract, agreement, commitment or arrangement of any kind including all Company Agreements (as hereinafter defined);

    (x)       all licenses, permits and approvals that are transferable or assignable;

    (xi)       all rights of the Corporation in the software, software systems, databases and database systems, whether owned, leased or licensed; and

    (xii)       all of the goodwill and going concern value related to the Corporation and the Business.

    (b)       Excluded Assets. Notwithstanding any other provision of this Agreement, the “Acquired Assets” shall not include:

    (i)       copies of the Corporation’s company books and records of internal company proceedings, tax records and work papers that the Corporation required by law to retain;

    (ii)       Corporation’s charter, governing documents, corporate minute books and stock transfer records; and

    (iii)       Corporation’s rights under this Agreement.

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    (c)       Assumption of Liabilities. With the exception of those liabilities expressly assumed by Buyer in accordance with the provisions of subsection 1(d) (the “Assumed Liabilities”), Buyer does not assume and shall in no event be liable for any debts, liabilities or obligations of the Corporation or any Stockholder, whether fixed or contingent, known or unknown, liquidated or unliquidated, secured or unsecured, or otherwise (“Excluded Liabilities”). Without limiting the foregoing, Buyer does not assume:

    (i)       any liability for Taxes (as hereinafter defined) payable for any periods prior to and including the Closing Date, unless specifically set forth on Schedule 1(d)(i);

    (ii)       any liability or obligation to any employee, director, officer or stockholder of the Corporation, including without limitation, any liability in connection with any Employee Benefit Plan (as hereinafter defined) not specifically set forth on Schedule 1(d)(i);

    (iii)       any trade payables not specifically set forth on Schedule 1(d)(i);

    (iv)       unless specifically set forth on Schedule 1(d)(i), any liability or obligation for brokerage commissions, finders’ fees or professional services of any kind, including attorneys’ fees, incurred in connection with the negotiation and execution of this Agreement and the consummation of the transactions contemplated hereby whether or not disclosed in this Agreement;

    (v)       any liability or obligation arising under any arbitration or litigation proceeding, whether or not disclosed in this Agreement, unless such liability is pursuant to a settlement agreement executed prior to the date hereof and included herein as an Assigned Contract (as hereinafter defined);

    (vi)       any liability or obligation arising from events occurring on or prior to the Closing Date, whether or not disclosed in this Agreement, arising from (A) environmental matters, (B) the infringement by the Corporation upon any intellectual property rights of others, or (C) the failure to comply with any requirements of law or any requirements of governmental bodies or agencies having jurisdiction over the Corporation, the Acquired Assets or the conduct of the Business; and

    (vii)       any liability or obligation arising as a result of, or which existence constitutes, a breach of any of the Corporation’s representations, warranties or covenants contained in this Agreement.

    (d)       On the Closing Date, upon the terms and conditions herein set forth, Buyer agrees to assume and become responsible for only the liabilities that are Assumed Liabilities. As used herein, “Assumed Liabilities” shall mean:

    (i)       all liabilities and obligations set forth on Schedule 1(d)(i); and

    (ii)       all liabilities, obligations and agreements accruing after the Closing Date under the terms of such agreements, contracts or arrangements specifically set forth on Schedule 1(d)(ii) (each, an “Assigned Contract”).

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    2.       Purchase Price; Payment to Employees.

    (a)       In consideration of the sale, conveyance, transfer and assignment of the Acquired Assets to Buyer, Buyer shall issue to the Corporation at the Closing, One Million Two Hundred and Eight Thousand (1,208,000) ordinary shares of Buyer, each having a par value of NIS 0.01 (“Buyer Shares” and the Buyer Shares issued pursuant to this subsection 2(a) are hereinafter collectively being referred to as the “Consideration Shares”).

    (b)       To encourage certain employees of the Corporation listed in Schedule 2(b) (each, an “Employee” and together the “Employee”) including David S. Kurtz, Krzystof J. Kozaczek and Paul Moran (each, a “Manager” and together the “Managers”) to dedicate their efforts and attention to the Buyer’s business and in consideration of the Employees executing such agreements and instruments as set forth in Section 3 herein, Buyer shall issue at the Closing, Three Hundred and Ninety Two Thousand (392,000) Buyer Shares to the Employees (collectively, “Employees Shares”) to be allocated among the Employees in accordance with the percentages set forth opposite each Employee’s name or as otherwise specified on Schedule 2(b).

    (c)       Allocation of Consideration. Buyer and the Corporation shall agree to allocate the aggregate amount of Consideration Shares to be issued under this Agreement, among the Acquired Assets for all purposes (including financial accounting and tax purposes) substantially in accordance with the allocation schedule set forth on Schedule 2(c). Such allocation shall be binding upon the parties. Buyer, the Corporation and the Stockholders agree to conform with such allocation in reporting the sale of the Acquired Assets for federal, state and local income tax purposes, and in filing all information returns, including IRS Form 8594.

    3.       Employment Agreements, Agreements Not to Compete, Restricted Stock Agreements. At or prior to Closing, Buyer (or such subsidiary of Buyer as Buyer may direct) and the Employees shall enter into employment agreements, agreements not to compete and restricted stock agreements substantially in the forms attached hereto as Exhibit “A-1” (the “Employees Employment Agreements”), Exhibit “A-2” (the “Employees Agreements Not to Compete”), Exhibit “A-3(i)” (“Employees Restricted Stock Agreements”) and Exhibit “A-3(ii)” (“Managers Restricted Stock Agreements”).

    4.       Representations, Warranties and Agreements of Corporation. As material inducement to Buyer to enter into this Agreement and to close hereunder, the Corporation hereby makes the following representations, warranties and agreements to and with Buyer, which representations, warranties and agreements shall be true and correct as of the date of this Agreement and as of the Closing Date:

    (a)       Corporate Status of the Corporation. The Corporation is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the power and authority to own its properties and to carry on its business as it is now being conducted, and is duly qualified to do business as a foreign corporation in the jurisdictions specified in Schedule 4(a), which constitute(s) all the jurisdictions in which the failure to so qualify would have an adverse effect on the Corporation. The Stockholders listed on Schedule 4(a) are the record and beneficial holders of all the issued and outstanding shares of capital stock of the Corporation. Schedule 4(a) lists (i) the authorized capital stock of the Corporation; and (ii) the number of shares of capital stock of the Corporation held by each shareholder. Except as set forth on Schedule 4(a) no shares of the capital stock of the Corporation are issued and outstanding or reserved for any purpose, and there is no outstanding option warrant or any other agreement or instrument granting any Person the right to acquire any shares of the capital stock of the Corporation.The minute books and stock records or similar documentation of the Corporation are complete and accurate in all material respects and all signatures included therein are the genuine signatures of the Persons indicated as signing. True, correct and complete copies of the Corporation’s minute books and stock records or similar documentation, including the Corporation’s Certificate of Incorporation and Bylawsand all amendments thereto to date, have been delivered to Buyer. The Corporation is not in default under or in violation of any provision of its Certificate of Incorporation or Bylaws.

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    (b)       Due Authorization and Validity of Agreement. The Corporation has the requisite corporate power and authority to enter into, execute, deliver and perform this Agreement and the other agreements, documents or certificates being executed and delivered pursuant to this Agreement, and to consummate all transactions contemplated hereby. The execution, delivery and performance of this Agreement and each other document, instrument or agreement contemplated hereby have been duly authorized by all necessary corporate action on behalf of Corporation and on behalf of each Stockholder which is a corporate entity. This Agreement constitutes the valid and binding obligation of the Corporation and Stockholders enforceable in accordance with its terms except as enforceability may be limited by bankruptcy, insolvency, moratorium and other similar laws affecting creditors’ rights generally and by general principles of equity, whether considered in a proceeding at law or in equity.

    (c)       No Violation or Approval. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby and thereby, by the Corporation or any Stockholder will not result in a breach or violation of, or a default under, the Certificate of Incorporation of the Corporation, any statute applicable to the Corporation or any agreement to which the Corporation is a party or by which the Corporation or any of the Acquired Assets are bound, any fiduciary duty or any order, judgment, decree, rule or regulation of any court having jurisdiction over the Corporation or the Acquired Assets. No consent, approval, order or authorization of, or negotiation, declaration or filing with, any Federal, state or municipal authority or other Person is required of the Corporation in connection with the execution, delivery, and performance of this Agreement or the consummation of any of the transactions contemplated hereby or thereby, by the Corporation.

    (d)       Subsidiaries and Joint Ventures. The Corporation does not own or control and has never owned or controlled any direct or indirect interest of any kind in any corporation, limited liability company, partnership, joint venture, association or any other Person.

    (e)       Officers; Directors; Bank Accounts. Set forth on Schedule 4(e) is a correct and complete list of all directors and officers of the Corporation, all bank accounts and safe deposit boxes of the Corporation and all persons authorized to sign checks drawn on such accounts and to have access to such safe deposit boxes.

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    (f)       Financial Statements. The Corporation has provided the Buyer true and complete copies of the consolidated financial statements of the Corporation consisting of (i) audited consolidated balance sheets of the Corporation as of December 31, 2005, 2004 and 2003, and the related audited consolidated statements of income, changes in owners’ equity and cash flows for the calendar years then ended (including the notes or other supplementary information thereto) (the “Year-End Financial Statements”), (ii) a reviewed, unaudited consolidated balance sheet of the Company as of March 31, 2006, and the related unaudited consolidated statements of income, changes in owners’ equity and cash flows for the three months then ended; and (iii) an unreviewed draft of the consolidated balance sheets of the Company as of June 30, 2006 and the related unreviewed consolidated statements of income, changes in owners’ equity and cash flows for the three months then ended ( such statements set forth on clauses (ii) and (iii) are hereinafter referred to as the “Interim Financial Statements,” and, collectively with the Year-End Financial Statements, the “Financial Statements”) copies of all of which constitute Schedule 4(f). The Financial Statement were prepared in accordance with US GAAP, consistently applied throughout the periods reported upon and with past periods (except for inconsistencies resulting from the revenue recognition policy restatement described in the financial statements for the year ended December 31, 2005), and fairly and accurately present the financial position of the Corporation as at the dates of such balance sheets, and the results of the operations and cash flows of the Corporation for the periods ended on such dates, except that the Interim Financial Statements are subject to normal and recurring year-end adjustments. The financial statements as of and for the one year period ended December 31, 2005 were audited by Urish Popeck & Co., LLC whose reports are included in such financial statements. The financial statements for the one-year periods ended December 31, 2004 and 2003, were audited by Parente Randolph, LLP whose reports are included in such financial statements.

    (g)       Title to Assets. The Corporation has good and marketable title to all of the Acquired Assets in each case free and clear of any and all liens, pledges, claims, security interests, encumbrance, rights and options (collectively, “Liens”). No claim has been asserted by any Person to prevent or in any way limit the use by the Corporation of any of the Acquired Assets or challenging the validity or effectiveness of the Corporation’s ownership thereof, and the Corporation is not aware of any such claims. Except as set forth on Schedule 4(g), none of the rights of the Corporation in the Acquired Assets arises pursuant to contract rights (i) that by their terms are not assignable without the consent of the other contracting party or parties, (ii) that may be terminated by the other party thereto as a result of the consummation of the transactions contemplated by this Agreement, or (iii) in respect of which the consummation of the transactions contemplated by this Agreement would create a default. The Acquired Assets include all assets necessary to conduct the Business as presently conducted by the Corporation.

    (h)       Real Estate.

    (i)       The Corporation does not have any obligation or duty relating to, or any right, title or interest in, any real estate except for the single property disclosed on Schedule 4(h)(i) which the Corporation leases (the “Leased Property”). Except as set forth in Schedule 4(h)(i), the Leased Property is available to be used without restriction in the conduct and operation of the business of the Corporation. The Leased Property is in good operating condition and repair and does not require any repairs other than normal routine maintenance to maintain them in good condition and repair.

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    (ii)       The Corporation has not received any written notice from any insurance company which has issued a policy with respect to the Leased Property or from any public official or board of fire underwriters (or other body exercising similar functions) claiming any defects or deficiencies in, or suggesting or requesting the performance of any repairs, alterations or other work to, the Leased Property, except for any written notices as to which all defects and suggested repairs, alterations or other work have been fully performed. The Corporation has not received any written notice from the applicable Landlord that such Landlord’s insurance premium for Landlord’s fire and extended coverage insurance for the building of which the Corporation’s Leased Property is a part has increased on account of the operations and activities conducted by the Corporation at its Leased Property.

    (iii)       There are no property management, service, equipment, supply, security, maintenance, construction, concession or other agreements with respect to or affecting the Leased Property that will burden Buyer after the date hereof, except as disclosed on Schedule 4(h)(iii).

    (iv)       All certificates of occupancy or similar documentation and all other licenses, permits, authorizations, consents, certificates and approvals required by all governmental authorities having jurisdiction over the Leased Property to the extent required to be obtained by the tenant or subtenant under the Lease (as hereinafter defined) for the Leased Property and any requisite certificates of the local board of fire underwriters (or other body exercising similar functions) have been issued for the Leased Property, have been paid for (to the extent applicable), are unconditional, valid and in full force and effect, and will not be invalidated, violated or otherwise adversely affected by the execution or performance of this Agreement or the consummation of any of the transactions contemplated herein. The Corporation is, to its knowledge, (A) in compliance with all provisions of the Americans with Disabilities Actand the regulations promulgated thereunder with respect to the Leased Property, and (B)in material compliance with all laws applicable to the use and occupancy by a tenant of the Leased Property.

    (v)       (A) All leases or subleases and any and all amendments and supplements thereto (collectively, the “Leases”) of the Leased Property, whether oral or written, are disclosed on Schedule 4(h)(v), including for each its date, the name of the landlord (and owner if different from the landlord), the name of the lessee and any sublessee, the location and use of the property, the monthly base rental payment, any scheduled or formula increases or decreases in base rent, a description of any provisions for tax or expense pass-throughs, the amount of any security deposit, the lease expiration date, all options to renew, expansion rights, termination rights, unfunded tenant improvement allowances and rights of first offer or refusal to purchase or lease and whether there are any non-disturbance agreements from mortgagees or paramount lessors; (B) The Corporation has delivered to Buyer true, correct and complete copies of all Leases, and all such non-disturbance agreements; (C) except as disclosed on Schedule 4(h)(v), the Corporation is the holder of the lessee’s or sublessee’s interest, as applicable, in each Lease and the Corporation has not assigned any Lease or any interest therein or subleased any portion of the Leased Property; (D) each Lease is in full force and effect; (E) the Corporation is paying its rent currently and has not asserted any claim for set-off against rent which has not been resolved; (F) the Corporation is not, and, to the knowledge of the Corporation, each landlord under any Lease is not, in default under any Lease, and no event has occurred which, with the giving of notice or passage of time or both, would constitute a default by the Corporation or, to the knowledge of the Corporation, any landlord under any Lease; and (G) neither the execution or performance of this Agreement nor the consummation of any of the transactions contemplated herein will result in a breach of or constitute a default under any of the Leases.

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    (i)        Personal Property. Except as disclosed on Schedule 4(i), (A) the Corporation is the owner, lessee or licensee of all the personal property now located in or upon the premises occupied by the Corporation and of all personal property that it uses in the operation of its business (a complete list of which is set forth on Schedule 4(i), (B) all equipment, furniture and fixtures, and other tangible personal property of the Corporation is in good operating condition and repair and does not require any repairs other than normal routine maintenance to maintain such property in good operating condition and repair, and (C) all of the Corporation’s inventory carried at any value on the Corporation’s balance sheet of December 31, 2005 (including raw materials and work in process) is usable in the ordinary course of its business and is free from material defects and all finished goods are salable to the Corporation’s knowledge at customary profit margins in the ordinary course of its business.

    (j)       Intellectual Property.

    (i)       The Corporation owns or has the right to use all patents, trademarks, service marks, trade names, trade dress, domain names, logos, designs, corporate names and copyrights (including issued patents, registrations and applications pertaining thereto (whether or not filed) and extensions, continuations, renewals or divisions of any such issued patents, registrations or applications) and all other intellectual property rights, trade secrets, processes, formulas, know-how, inventions, customer lists, supplier lists, manufacturer lists, manuals and other confidential or proprietary information, processes and formulae used in the Business or otherwise necessary for the conduct of its Business (collectively, “Intellectual Property”), free and clear of all Liens except as otherwise disclosed on Schedule 4(j)(i). Schedule 4(j)(i) contains a complete and accurate list of all Intellectual Property owned or used by the Corporation or used by the Corporation (“Corporation Intellectual Property”), which includes a separate list of all U.S. and foreign registered patents trademarks and service marks and applications for registration of any marks, domain name registrations, all registered copyrights and applications for registration of copyrights, and all filed patent applications and issued patents and invention disclosures of the Corporation (collectively, “Registrable IP”).

    (ii)       Schedule 4(j)(ii) contains a complete and accurate list of all of the Corporation’s Intellectual Property licensed by the Corporation (“Licensed Intellectual Property”) and all agreements for the use of all such Licensed Intellectual Property. Schedule 4(j)(ii) contains a complete and accurate list of all domain name registrations owned or held by or for the Corporation, the dates of each registration and renewal, the registrars, user names and passwords for each registration, and any disputes regarding such domain names.

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    (iii)       The Corporation has used reasonable efforts to ensure that any trade secret (A) have been treated as confidential and proprietary and (B) have been disclosed by the Corporation only to (1) employees and contractors who have had a “need to know” the contents thereof in connection with the performance of their duties to the Corporation and who have executed written agreements requiring the recipient to keep the information in strict confidence, or (2) existing or prospective customers and strategic business contacts who have executed written agreements requiring the recipient to keep the information in confidence. There has been no violation by any Person that has resulted, or would result, in the loss of protection of any trade secret or confidential information of the Corporation.

    (iv)       Except as disclosed in Schedule 4(j)(iv), all Persons who now, or have been during the three (3) year period prior to the date of this Agreement, employees, agents, consultants and/or contractors of the Corporation, who have contributed to or participated in any material way in the conception and/or development of Intellectual Property for or on behalf of the Corporation have executed nondisclosure agreements in the form provided to Buyer and either (A) have been a party to a “work-for-hire” arrangement or agreements with the Corporation in accordance with applicable law that has accorded the Corporation exclusive ownership of all tangible and intangible property thereby arising, or (B) have executed appropriate instruments of assignment in favor of the Corporation as assignee that have conveyed to the Corporation exclusive ownership of all tangible and intangible property thereby arising, with the result that the Corporation is the sole and exclusive owner of, without limitation, all right, title and interest in and to the Corporation Intellectual Property.

    (v)       The existence and the manufacture, importation into any country in the world, offering for sale, license, lease, transfer, use, reproduction, distribution, modification or other exploitation by the Corporation of any Corporation Intellectual Property, as Corporation Intellectual Property, is or was, or is currently contemplated to be, sold, licensed, leased, transferred, used or otherwise exploited by such Persons, does not and will not (A) infringe on any patent, trademark, copyright or other intellectual property right of any Person, (B) constitute a misuse or misappropriation of any trade secret, know-how, process, proprietary information or other Intellectual Property of any other Person or (3) entitle any other Person to any interest therein, or right to compensation from the Corporation. The Corporation has not received from any other Person any notification with respect to any matters of the type contemplated by the immediately preceding sentence. There are no restrictions on the Corporation’s ability to manufacture, import, market, offer for sale, sell, license, lease, transfer, use, reproduce, distribute, modify, disclose or otherwise exploit any Corporation Intellectual Property. The Corporation has no knowledge of any infringement, misappropriation or other violation of any Corporation Intellectual Property by any third Person.

    (k)       Software. The Corporation has the right to use, or is indemnified for or otherwise protected from any risk for using, the computer software used by the Corporation in connection with its businesses. The Corporation has no knowledge of any claim or proceeding asserted or threatened in which infringement by such software upon the rights of any third parties is alleged. The Corporation has complied in all material respects with all of their software license agreements. The Corporation shall not be in breach of any software license agreement as a result of entering into this Agreement or by consummating any of the transactions contemplated hereunder.

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    (l)       Accounts Receivable. Each of the accounts receivable of the Corporation outstanding as of the Closing Date constitutes on such date a valid claim in the full amount thereof against the debtor charged therewith on the books of the Corporation and was acquired in the ordinary course of the Corporation’s business. No account debtor has any valid set-off, deduction or defense with respect thereto and no account debtor has asserted any such set-off, deduction or defense. Such accounts receivable will be fully collected to the extent of the face value thereof.

    (m)       Insurance. The Corporation maintains insurance policies bearing the numbers for the terms, with the companies, in the amounts, having the named insureds, providing the general coverage, and with the premiums disclosed on Schedule 4(m). All of such policies are in full force and effect, the Corporation is not in default of any provision thereof and all premiums due (without regard to any grace period) with respect to such policies have been paid. The Corporation has not been refused any insurance for which it has applied and has not received notice from any issuer of any policy issued to it of the insurer’s intention to cancel or refusal to renew any such policy issued by such insurer. True, correct and complete copies of all such policies have been delivered to Buyer.

    (n)       Liabilities. At the Closing, the Corporation shall not have any liabilities, whether fixed, contingent, or otherwise, except as and to the extent reflected in the Financial Statements or disclosed on Schedule 4(n).

    (o)       Contracts, Leases, Agreements and Other Commitments.

    (i)       All of the Company Agreements (as hereinafter defined) are in full force and effect and are valid, binding and enforceable against the Corporation and against the other respective parties thereto, in accordance with their respective terms. The Corporation and all other parties to all of the Company Agreements have performed all obligations required to be performed to date under the Company Agreements and neither the Corporation nor any such other party is in default or in arrears under the terms thereof, and no condition exists or event has occurred which, with the giving of notice or lapse of time or both, would constitute a default thereunder or otherwise result in any payment obligations on the part of the Corporation not reserved for in the books of the Corporation. Except as set forth in Schedule 4(o)(i), the execution of this Agreement and the consummation of the transactions contemplated hereby do not and will not, with or without the giving of notice, the lapse of time, or both, result in an impairment or termination of, or result in a breach of any of the terms or provisions of, or constitute a default under, or conflict with, any Company Agreement. None of the terms or provisions of any Company Agreement adversely affects, or with the passage of time may reasonably be anticipated to adversely affect, the business, prospects, conditions, affairs or operations of the Corporation or any of its properties or assets. The Corporation has not received any notice of any intention by any party to terminate or amend any Company Agreement.

    (ii)       Schedule 4(o)(ii) discloses (A) all outstanding written and oral proposals, bids, offers or guaranties made by the Corporation, which, if accepted, would result in any or could impose any debts, obligations or liabilities upon the Corporation, and (B) all unexpired warranties relating to the Corporation’s products or services, detailing the products or services covered by each warranty (the “Product Warranties”).

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    (iii)       For purposes of subsection 4(o) the term “Company Agreements” means (A) any material written, oral or implied contract or agreement, including but not limited to any contract or agreement for the purchase or sale of merchandise or for the rendition of services, (B) any material written, oral or implied lease, or (C) any written, oral or implied power of attorney, guaranty, surety arrangement or other commitment granted by the Corporation to or for the benefit of any third party. A “material” agreement, contract or lease shall mean an agreement, contract or lease pursuant to which the Corporation is obligated to pay, or provide services valued at, or is entitled to receive, amounts in excess of $5,000. Any lease of real property shall be deemed a material lease. Schedule 4(o)(iii) contains a complete list of all Company Agreements. True and correct copies of all Company’s agreements have been provided to the Buyer.

    (p)       Labor Relations, Employees.

    (i)       Set forth on Schedule 4(p)(i) is a list (which with respect to any oral agreement, commitment or arrangement also contains a description) of:

    (A)       all employment agreements to which the Corporation is a party or by which it is bound;

    (B)       all non-compete and non-solicitation agreements to which the Corporation is a party or by which it is bound;

    (C)       all agreements protecting proprietary or confidential processes to which the Corporation is a party or by which it is bound; and

    (D)       all independent contractor or consulting agreements to which the Corporation is a party or by which it is bound.

    (ii)       Set forth on Schedule 4(p)(ii) is a list of all employees of the Corporation, broken down by location, together with their exempt or non-exempt status, rate of base compensation, compensation arrangement (including wage or salary increases, bonus or increase in any other direct or indirect compensation), job title, original date of hire, accrued vacation benefits, sick leave benefits (including information as to whether or not such benefits are payable in cash upon termination of employment) and any severance benefits to which each employee is entitled, and other similar benefits, for each employee of the Corporation performing services for the Corporation.

    (iii)       The Corporation has delivered to Buyer true, complete and correct copies of all of the documents referred to in Schedule 4(p)(i) hereof and all of the personnel policies, handbooks, procedures, and forms of employment applications relating to the employees of the Corporation.

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    (iv)       (A) there is no union representing or purporting to represent any of the employees of the Corporation and the Corporation is not subject to any collective bargaining agreements with any union representing or purporting to represent the employees of the Corporation; (B) there have been no strikes, slowdowns, or other work stoppages, lockouts, grievance proceedings, arbitrations, labor disputes, lawsuits, administrative proceedings or representation questions pending or, to the knowledge of the Corporation, threatened, between the Corporation on the one hand, and any labor union representing or purporting to represent any employees of the Corporation, on the other; (C) the Corporation is in compliance and has at all times complied with all laws relating to the employment, and employment practices including, but not limited to, equal employment opportunity laws including the obligations not to discriminate on the basis of age, sex (including sexual harassment, religion, national origin, disability or any other status protected by Federal, state or local law and the obligation not to retaliate under Federal, state or local law); wage and hour laws including the Fair Labor Standards Act (“FLSA”) and state law; family medical leave laws including the Family Medical Leave Act (“FMLA”) and state law; immigration laws including the Immigration Reform and Control Act (“IRCA”); benefit-related laws including the Consolidated Omnibus Budget Reconciliation Act (“COBRA”); health and safety laws including the Occupational Safety and Health Act (“OSHA”); law related to the notice of layoff or termination and payment in the absence thereof including the Worker Adjustment and Retraining Notification Act (“WARN”); workers compensation and collective bargaining laws including the National Labor relations Act (“NLRA”); the payment of social security, unemployment compensation and similar taxes. The Corporation is not liable for any arrears of wages or any taxes or penalties for failure to comply with any of the foregoing; and (D) there are no and since the Corporation’s inception there have never been any charges, suits, actions, administrative proceedings or investigations, and/or claims, instituted by or against, pending, or, to the knowledge of the Corporation, threatened against, affecting, naming and/or involving the Corporation, whether domestic or foreign, before any court, governmental agency, department, board of instrumentality, or before any arbitrator (collectively “Actions”), concerning, or in any way related to the employees or to the employment practices of the Corporation, including, without limitation, Actions involving unfair labor practices, collective bargaining, failure to pay wages or overtime, breach of implied or express employment contract, wrongful discharge and/or any other restriction on the right of the Corporation to terminate its respective employees, employment discrimination or retaliation, occupational safety and health, workers’ compensation family and medical leave, violations of any whistleblower protection and notice of layoff or termination;

    (v)       No action has been taken that could result in an involuntary termination of the employment of a substantial number of the Corporation employees on or prior to the Closing Date which could give rise to any obligation under WARN or any similar state or local law.

    (vi)       There are no express or implied agreements, policies, practices, or procedures, whether written or verbal, pursuant to which any employee or agent or contractor of the Corporation is not terminable at will. The Corporation has no knowledge of, or reason to believe that, any senior employee of the Corporation will leave the employ of the Corporation as a result of the transactions contemplated hereby.

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    (q)       Employee Benefit Plans.

    (i)       Schedule 4(q)(i) is a complete and accurate list of all employee benefit plans which the Corporation and any of its ERISA Affiliates (as hereinafter defined) maintain, sponsor, contribute to, are liable for (directly or indirectly) or are bound, legally or otherwise, including, without limitation, any profit sharing, deferred compensation, bonus, payroll, sick leave, consulting, stock option, stock purchase, stock bonus, employee stock ownership plan (within the meaning of Section 4975(e)(7) of the Code), pension, retainer, retirement, vacation, change of control, disability, severance, insurance, welfare or incentive pay policy, agreement, practice or arrangement; any plan, agreement or arrangement if providing for fringe benefits or perquisites to employees, officers, directors or agents of the Corporation and any of its ERISA Affiliates, including but not limited to benefits relating to employer supplied automobiles, clubs, medical, dental, hospitalization, life insurance and other types of insurance, retiree medical, retiree life insurance and any other type of benefits for retired and terminated employees; any employment agreement; and any other plan, policy agreement or arrangement whether or not an “employee benefit plan” (within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) through the date of this Agreement) (herein referred to individually as “Plan” and collectively as “Plans”). For purposes of this Agreement, “ERISA Affiliate” means all Persons which are treated as being under common control with the Corporation, as the case may be or any ERISA Affiliate under Section 414(b), (c), (in) or (o) of the Internal Revenue Code of 1986, as amended (“Code”).

    (ii)       Neither the Corporation nor any ERISA Affiliate has ever been obligated to file an IRS Form 5500 with respect to any Plan. True and complete copies of the following documents with respect to any Plan of the Corporation and each ERISA Affiliate, as applicable, have been delivered to Buyer: (A) the most recent Plan document and trust agreement (including any amendments thereto), (B) all summary plan descriptions, (C) a written description of each material non written Plan, (D) each written communication to employees intended to describe a Plan or any benefit provided by such Plan, and (E) all correspondence with the IRS, the Department of Labor and the Pension Benefit Guaranty Corporation (“PBGC”) concerning any controversy.

    (iii)       Each Plan is and has been maintained in compliance in all material respects with applicable law, including but not limited to ERISA, and the Code and with any applicable contractual obligations.

    (iv)       No Plan is subject to Section 412 of the Code.

    (v)       No Plan is or ever has been subject to Title IV of ERISA.

    (vi)       There are no pending or, to the knowledge of the Corporation, threatened claims, actions or lawsuits, other than routine claims for benefits in the ordinary course, asserted or instituted against (A) any Plan or its assets, or (B) any fiduciary with respect to any Plan for which the Corporation or any ERISA Affiliate may be directly or indirectly be liable, through indemnification obligations or otherwise.

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    (vii)       Neither the Corporation nor any ERISA Affiliate has ever contributed to or been obligated to contribute to any Plan that is a “multiemployer plan” as defined in Section 4001(a)(3) of ERISA or that is subject to Title IV of ERISA.

    (viii)       Neither the Corporation nor any ERISA Affiliate has engaged, directly or indirectly, in a non-exempt prohibited transaction (as defined in Section 4975 of the Code or Section 406 of ERISA) in connection with any Plan.

    (ix)       No Plan is a nonqualified deferred compensation plan (as that term is used for purposes of Section 409A of the Code).

    (x)       During the last two years there have been no amendments to any Plan, no written interpretation or announcement (whether or not written) by the Corporation or any ERISA Affiliate relating to any Plan, no Plan has been established, and there have been and are no negotiations, demands, or proposals which are pending that concern any Plan, which resulted in or could reasonably be anticipated to result in a material increase in (A) the accrued or promised benefits of any employees of the Corporation or any ERISA Affiliate and (B) the level of expense incurred in respect thereof.

    (xi)       Neither the Corporation nor any ERISA Affiliate sponsors, maintains or has obligations, direct, contingent or otherwise, with respect to any Plan that is subject to the laws of any country other than the United States.

    (xii)       Neither the Corporation nor any ERISA Affiliate sponsors, maintains or has obligations, direct, contingent or otherwise, with respect to any Plan that is intended to be a tax-qualified plan under Section 401 of the Code.

    (xiii)       Each Plan that provides welfare benefits has been operated in compliance with all requirements of Sections 601 through 608 of ERISA and Section 4980B of the Code and regulations thereunder, relating to the continuation of coverage under certain circumstances in which coverage would otherwise cease. Neither the Corporation nor any ERISA Affiliate has contributed to a nonconforming group health plan (as defined under Code Section 5000(c)) and no ERISA Affiliate has incurred a tax under Section 5000(a) of the Code which could become a liability of the Corporation or any ERISA Affiliate. No retired or former employee of the Corporation or any ERISA Affiliate is entitled to benefits under any Plan other than continuation of health coverage as required by Section 4980B of the Code and any such former employee or retiree who is covered pursuant to the requirements of Section 4980B is paying for such coverage at the maximum rate payment for continuation coverage may be required. The Corporation and each ERISA Affiliate has complied in all respects with the requirements of the Health Insurance Portability and Accountability Act of 1996 with respect to each Plan that provides welfare benefits. The Corporation does not maintain any plan which is an “employee welfare benefit plan” (as such term is defined under Section (1) of ERISA) that has provided any “disqualified benefit” (as such term is defined in Section 4976(b) of the Code) with respect to which an excise tax could be imposed under Section 4976.

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    (xiv)       Each of the Corporation and its ERISA Affiliates has funded each Plan in accordance with the terms of such Plan through the date hereof, including the payment of applicable premiums on insurance contract funding a Plan, for coverage provided through the date hereof.

    (xv)       Except as contemplated herein or required by law, the execution of this Agreement and the consummation of the transactions contemplated hereby, do not constitute a triggering event under any Plan, policy, arrangement, statement, commitment or agreement which (either alone or upon the occurrence of any additional or subsequent event) will result in any obligation of the Corporation or any ERISA Affiliate to make any payment (whether of severance pay, including, and not limited to, salary, related vacation pay, pension pay and other similar payments and costs, or otherwise) or to accelerate, vest or increase the amount of benefits payable to any employee or former employee or director of the Corporation or any ERISA Affiliate. No Plan or agreement provides for the payment of severance benefits upon the termination of any employee’s employment. No amounts paid or payable by Corporation will fail to be deductible for federal income tax purposes by reason of Section 280G of the Code.

    (xvi)       The balance sheets of the Corporation as of December 31, 2003, 2004 and 2005, properly and adequately reflect, in accordance with US GAAP consistently applied with prior periods, any and all liabilities and obligations of the Corporation and its ERISA Affiliates relating to any period ending on or prior to the date hereof to or in respect of current and former employees of the Corporation or any ERISA Affiliate or the Plans, for (A) unpaid compensation, salaries, wages, vacation pay, disability payments and other payroll items (including, without limitation, bonus, incentive or deferred compensation), (B) unpaid contributions, costs and expenses to or in respect of any Plans, and (C) severance or other termination benefits relating to, resulting from or arising in respect of any termination of employment occurring on or prior to the date hereof.

    (r)       Litigation. Except for the matters set forth on Schedule 4(r), (A) Neither the Corporation nor any of the Acquired Assets, is a party or is subject to, or to the knowledge of the Corporation, threatened with, any suit, action, arbitration, administrative or other proceeding, either at law or in equity, or governmental investigation by or before any court, governmental department, commission, board, agency or instrumentality, domestic or foreign; (B) to the knowledge of the Corporation, there is no basis for any suit, action, arbitration, or administrative or other proceeding against the Corporation; (C) there is no judgment, decree, award or order outstanding against the Corporation; (D) the Corporation is not contemplating the institution by it of any suit, action, arbitration, administrative or other proceeding; and (E) to the knowledge of the Corporation, there has been no occurrence that may result in a claim for damages against the Corporation. The insurance carriers of the Corporation have agreed to defend and indemnify the Corporation against any loss resulting to the Corporation therefrom.

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    (s)       Suppliers and Customers. Schedule 4(s) is a complete and accurate list of the names of all suppliers and customers of the Corporation which respectively contribute more than 5% of all sales and services to, and orders and use of services from, the Corporation (“Suppliers” and “Customers,” respectively). The relationships of the Corporation with its Suppliers and Customers are good commercial working relationships and no Supplier or Customer of the Corporation has canceled or otherwise terminated, or, to the knowledge of the Corporation, threatened to cancel or otherwise terminate, its relationship with the Corporation, or has during the last twelve (12) months decreased materially, or, to the knowledge of the Corporation, threatened to decrease or limit materially, its business with the Corporation. No interruptions or shortages in the supply of raw materials and other key supplies are threatened or anticipated. To the knowledge of the Corporation (i) no new products have been developed by others that would result in a material loss of business to the Corporation, render the Corporation’s products obsolete, or otherwise place the Corporation’s products at a competitive disadvantage; and (ii) the acquisition of the Acquired Assets by Buyer will not adversely affect the relationship of the Buyer, as successor to the Corporation, with any such Supplier or Customer.

    (t)       Conflicting Interests. No director, officer or manager of the Corporation (i) has any pecuniary interest in any supplier or customer of the Corporation or in any other business enterprise with which the Corporation conducts business or with which the Corporation is in competition; (ii) is indebted to the Corporation; (iii) is a party to any transaction or agreement with the Corporation (apart from such Person’s status as a director, officer or manager as such); or (iv) has any business or other interest in conflict with the interests of the Corporation.

    (u)       Compliance with Law and Regulations. The Corporation is in compliance with, and has at all times complied with, all requirements of U.S. Federal, state, and local law and, where applicable, their foreign equivalents, and all requirements of all governmental bodies or agencies having jurisdiction over it, the conduct of its business, the use of its properties and assets, and all premises occupied by it. Without limiting the foregoing,the Corporation has paid all monies to obtain, and has obtained and now holds, all licenses, permits, certificates, and authorizations needed or required for the conduct of its business as currently conducted and the current use of its properties and the premises occupied by it. The Corporation has properly filed all reports and other documents required to be filed with any Federal, state, local and foreign government or subdivision or agency thereof. The Corporation has not received any notice from any Federal, state or municipal authority or any insurance or inspection body that any of its properties, facilities, equipment, or business procedures or practices fails to comply with any applicable law, ordinance, regulation, building or zoning law, or requirement of any public authority or body. All licenses, permits, orders and approvals issued by any governmental body or agency currently in effect and pertaining to the Acquired Assets are listed on Schedule 4(u) and, except as noted on Schedule 4(u) none of the items so listed will lapse or expire as a result of the transactions contemplated hereby.

    (v)       Environmental Matters.

    (i)       The Corporation and to the knowledge of the Corporation, any predecessor of the Corporation is and at all times have been in compliance with all Environmental Laws (as hereinafter defined) governing their business, operations, properties and assets, which compliance includes, but is not limited to: (A) the possession by the Corporation of all permits and other governmental authorizations required under applicable Environmental Laws, which permits are in full force and effect, and compliance with the terms and conditions thereof, (B) all requirements relating to the Discharge (as hereinafter defined) and Handling of Regulated Substances (as hereinafter defined) and Wastes (as hereinafter defined); (C) all requirements relating to notice, record keeping and reporting; and (D) all applicable writs, orders, judgments, injunctions, governmental communications, decrees, informational requests or demands issued pursuant to, or arising, under, any Environmental Law (“Environmental Demands”). The Corporation has not received any communication from any governmental authority, employee, group or third party alleging that it is not in such full compliance or that it has investigatory or remedial obligations or other liability pursuant to Environmental Law. To the knowledge of the Corporation, there are no circumstances that may prevent or interfere with such full compliance or give rise to investigatory or remedial obligations or other liabilities pursuant to any Environmental Law in the future. All permits and other governmental authorizations currently held by the Corporation pursuant to any Environmental Laws and Environmental Demands issued to the Corporation are identified in Schedule 4(v).

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    (ii)       There are no Environmental Claims (as hereinafter defined) pending or, to the knowledge of the Corporation, threatened against the Corporation or, to the knowledge of the Corporation, against a predecessor of the Corporation.

    (iii)       No Regulated Substances (as hereinafter defined) is present on or under or is migrating from any of the Leased Properties other than Regulated Substances in concentrations, quantities, types and/or locations as customarily used in the conduct of the Corporation’s business, and that will not require remediation pursuant to any applicable Environmental Law.

    (iv)       No portion of any of the Leased Properties constitutes land which is restricted by applicable Environmental Law due to its physical characteristics, including without limitation, a wetland or waterway, or land which is geologically unsuited for any use related to the conduct of the business of the Corporation or by virtue of a use restriction in connection with environmental remediation.

    (v)       No underground or above-ground storage tanks are present on any of the Leased Properties.

    (vi)       No mold at levels posing a risk to the health of occupants is present on any of the Leased Properties nor do any conditions exist which are conducive to the growth of mold.

    (vii)       No asbestos or asbestos-containing materials is present on any of the Leased Properties.

    (viii)       The Corporation has provided Buyer with all (i) permits and governmental authorizations and applications for same; (ii) reports and other submissions to any governmental authority in connection with any Environmental Law; (iii) records required to be maintained pursuant to Environmental Laws; (iv) Environmental Demands; (v) Environmental Claims; and (vi) records and reports of any environmental tests pertaining to, or any environmental assessments of, any of the Leased Properties.

    (ix)       None of the Leased Properties are located in any state or province having a law requiring the performance of environmental investigation and remediation upon the sale of a business, or, in the event of the Leased Properties are located in such a jurisdiction, the operations conducted by the Corporation at such Leased Property(ies) are not subject to any such law.

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    (x)       For purposes of this Agreement:

    (A)       “Discharge” means any manner of spilling, leaking, dumping, discharging, release or emitting, as any of such terms may further be defined in any Environmental Law, into any medium including, without limitation groundwater, surface water, soil or air.

    (B)       “Environmental Claim” means any notice, Lien, claim, action, cause of action, order, communication, investigation, request for information or proceeding (written or oral) by any Person alleging potential liability (including, without limitation, potential liability for investigatory costs, cleanup, removal or remediation costs, governmental response costs, natural resource damages, property damages, personal injuries, or penalties) arising out of, based on or resulting from (a) the presence, or threatened Discharge into the environment of any Regulated Substance at any location, whether or not owned or operated by the Corporation, and (b) circumstances forming the basis of any violation, or alleged violation, of, or liability pursuant to any Environmental Law.

    (C)       “Environmental Law” means any and all U.S. or Canadian Federal, state, provincial, regional, county and local or foreign laws, regulations, codes, orders, plans, common law injunctions, decrees, rulings, and judicial or administrative interpretations thereof, which govern, purport to govern, or relate to pollution, protection of the environment (including, without limitation, ground water, surface water, soil and air) and public health and safety, including, without limitation: the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendment and Reauthorization Act of 1986, 42 U.S.C. 9601, et seq. (collectively, “CERCLA”); the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 and subsequent Hazardous and Solid Waste Amendments of 1984, 42 U.S.C. 6901, et seq. (collectively, “RCRA”); the Hazardous Materials Transportation Act, as amended, 49 U.S.C. 1801, et seq.; the Clean Water Act, as amended, 33 U.S.C. 1311, et seq.; the Clean Air Act, as amended, 42 U.S.C. 7401, et seq.; the Toxic Substances Control Act, as amended, 15 U.S.C. 2601, et seq. (the “TSCA”); the Emergency Planning and Community Right-to-Know Act of 1986, as amended, 42 U.S.C. 11001, et seq. (“EPCRA”); and the Occupational Safety and Health Act of 1970, as amended, 29 U.S.C. 65 1, et seq. (“OSHA”) and their Canadian counterparts.

    (D)       “Handling” means any manner of generating, accumulating, storing, treating, disposing of, transporting, transferring, labeling, handling, manufacturing, processing or using, as any such terms may further be defined in any Environmental Law, of any Regulated Substance.

    (E)       “Regulated Substance” shall be broadly construed to include without limitation any chemical, pollutant, contaminant, material, waste, toxic or hazardous substance, petroleum, petroleum product, asbestos, asbestos containing material, and polychlorinated biphenyl regulated, listed, identified or controlled by, under or pursuant to any Environmental Law.

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    (F)       “Waste” shall be broadly construed to include bulky wastes, construction and demolition debris, garbage, solid wastes, liquid wastes, recyclable materials, sludge, special wastes, used oils, hazardous waste and plant and yard trash as those terms are defined under any Environmental Law.

    (w)       Tax Matters.

    (i)       Definitions. The following terms shall have the meanings set forth in this subsection 4(w) for purposes of this subsection 4(w) of this Agreement (except for “Tax” and “Taxes,” which shall have said meaning for all purposes of this Agreement):

        “Affiliated Group” means any affiliated group within the meaning of Code Section 1504(a) or similar group defined under a similar provision of state, local or foreign law.

        “Code”means the Internal Revenue Code of 1986, as amended, or any successor statute. All references to specific sections of the Internal Revenue Code shall be deemed to include any provisions of the Internal Revenue Code (or a related statute) which replace or supersede the sections in effect at the time this Agreement is executed.

        “Regulation”or “Treasury Regulation” means regulations issued under the Code as such regulations may be amended. All references herein to specific sections of the Regulations shall be deemed also to refer to any provisions of the Regulations which replace or supersede the sections in effect at the time of the execution of this Agreement.

        “Return”and “Returns” mean any return, report, declaration, estimate, information statement, claim for refund, notice, form or any other kind of document, including any schedule or attachment thereto, and including amended versions of any of the foregoing, relating to or required to be filed in connection with any Tax.

        “Tax”and “Taxes” means any Federal, state (including District of Columbia), provincial, local, foreign (including possessions or territories of the United States) or other tax (whether income, gross receipts, franchise, excise, customs, sales, use, value added, ad valorem, real or personal property, license, transfer, employment, social security or any other kind of tax or payment in lieu of tax no matter how denominated including any amount payable by the Corporation pursuant to a tax-sharing or other agreement relating to the sharing or payment of tax), or any assessment, levy, impost, withholding, fee or other governmental charge in the nature of a tax, and shall include all additions to tax, interest, penalties and fines with respect thereto.

    (ii)       Tax Matters Relating to the Corporation.

    (A)       Except as set forth on Schedule 4(w)(ii)(A), the Corporation has at all times filed or will file when due in a timely fashion all Returns that are required to be filed on or before the date hereof or the Closing Date by or with respect to the Corporation (taking into account all extensions of time within which to file to which they are entitled or which they may have been granted). All such Returns are correct and complete. Except as set forth on Schedule 4(w)(ii)(A), the Corporation is not the current beneficiary of any extension of time within which to file any Return. No claim has been made by a taxing authority in a jurisdiction where the Corporation does not file Returns that any of them is or may be subject to or liable for any Tax imposed by that jurisdiction.

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    (B)       All Taxes for which the Corporation is liable and that are due on or before the date hereof or the Closing Date (whether or not shown to be due on any Return) have been paid when due in a timely fashion (taking into account all extensions of time within which to pay to which they are entitled or which they may have been granted). There are no Liens on any assets of the Corporation that arose in connection with any failure (or alleged failure) to pay any Tax other than Liens for Taxes not yet due and payable or for Taxes that the Corporation is contesting in good faith through appropriate proceedings as set forth on Schedule 4(w)(ii)(B).

    (C)       The Corporation has withheld or collected and paid or deposited all Taxes required to have been withheld or collected and paid or deposited in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, member, partner or other third party.

    (D)       No taxing authority has asserted or to the knowledge of the Corporation, threatened to assert, or provided notice of its intention to assert or consideration of asserting any adjustment, deficiency or assessment for any Taxes against the Corporation, and no basis exists for any such adjustment, deficiency or assessment which would result in additional Taxes owed by the Corporation for any period for which Returns have been filed. Schedule 4(w)(ii)(D) lists all Federal, state, provincial, local, and foreign income Returns filed with respect to the Corporation and indicates those Returns of the Corporation that have been audited and those Returns of the Corporation with respect to Taxes of the Corporation that currently are the subject of audit. Corporation has delivered to Buyer correct and complete copies of all Federal, state, local and foreign income tax Returns filed, examination reports issued, and statements of deficiencies assessed against or agreed to by the Corporation or statements of deficiencies for which Corporation may be liable.

    (E)       Except as set forth on Schedule 4(w)(ii)(E), the Corporation has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax adjustment, assessment or deficiency except for such waivers or extensions which, by their terms, have elapsed as of the date of this Agreement.

    (F)       Except as set forth on Schedule 4(w)(ii)(F), the Corporation does not have any income or gain that may be reportable for a period ending after the date hereof or the Closing Date without the receipt of an equal amount of cash, which is attributable to a transaction occurring in or a change in accounting method made for a period ending on or prior to the date hereof or the Closing Date.

    (G)       There are no currently outstanding requests made by the Corporation or any Stockholder for tax rulings, determinations or information that could affect the Taxes of the Corporation.

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    (H)       The Corporation has not been obligated to deduct and withhold Taxes under Code Sections 1441 or 1445.

    (I)       No Stockholder is a foreign corporation within the meaning of Code Section 7701(a)(5).

    (J)       The Corporation is not and has not been, within the past six years, a party to any Tax allocation or sharing agreement. The Corporation has not been a member of an Affiliated Group defined in Code Section 1504(a) filing a consolidated federal income Tax Return and has any liability for the Taxes of any Person (other than the Corporation) under Regulation Section 1.1502-6 (or any similar provision of state, local, or foreign law), or as a transferee or successor by contract or otherwise. The Corporation has not been a member of a group of companies filing a unitary, consolidated, combined state or foreign Return.

    (K)       Schedule 4(w)(ii)(K) sets forth the following information with respect of the Corporation as of the beginning of its current taxable year: (a) the federal income tax basis in its assets; and (b) the amount of any net operating loss, net capital loss, unused investment or other credit, unused foreign tax credit, or excess charitable contribution allocable to the Corporation.

    (L)        The unpaid Taxes of the Corporation did not as of the date hereof and will not through the Closing Date exceed $150,000.

    (M)       The Corporation has not made any payments, is not obligated to make any payments, and is not a party to any agreement or arrangement that could obligate it to make payments of any “excess parachute payment” within the meaning of Code Section 280G.

    (N)       With respect to the Corporation’s contractors, consultants and other independent personnel (the “Contractors”), the Corporation has evaluated and classified the Contractors as independent contractors and employees in accordance with Internal Revenue Service rules and regulations. The Corporation has maintained, monitored and continues to maintain and monitor those Contractors who are independent contractors to assure compliance with Internal Revenue Service rules and regulations.

    (x)       Conduct of Business; No Material Adverse Change. Since December 31, 2005, the Corporation has conducted its business in a good and diligent manner in the ordinary and usual course consistent with past practice, and there has not been:

    (i)       any material damage, destruction or loss (whether or not covered by insurance) with respect to any assets or properties owned or leased by the Corporation;

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    (ii)       any material change by the Corporation in its accounting methods, principles or practices;

    (iii)       any declaration, setting aside or payment of any dividends on or distributions in respect of any of the capital stock of the Corporation , or any redemption, purchase or other acquisition by the Corporation of any of its securities;

    (iv)       any increase in the benefits under, or the establishment or amendment of, any bonus, insurance, severance, retention, change of control, deferred compensation, pension, retirement, profit sharing, option (including, without limitation, the granting of stock options, stock appreciation rights, performance awards, or restricted stock awards), stock purchase or other employee benefit plan, or any increase in the compensation payable or to become payable to directors, consultants, officers or employees of the Corporation, except for any increases in salaries or wages payable or to become payable in the ordinary course of business and consistent with past practice;

    (v)       any payment by the Corporation to any director or officer or any Affiliate of any of the foregoing, whether as a loan or otherwise, except regular compensation and usual benefit payments made in the ordinary course of business consistent with past practice;

    (vi)       any entry by the Corporation into any contract with any director or officer, of the Corporation or any Affiliate of the foregoing other than on an arms-length basis;

    (vii)       any material acquisition of any assets, business or Person (other than the purchase of assets from suppliers or vendors in the ordinary course of business);

    (viii)       any sale, transfer, lease, exchange or other disposition of any material assets or properties owned or leased by the Corporation (other than in the ordinary course of business consistent with past practice);

    (ix)       any capital expenditures made by or on behalf of the Corporation in excess of $10,000 in the aggregate;

    (x)       any waiver, release, discharge, transfer or cancellation by the Corporation of any material rights or claims, other than in the ordinary course of business;

    (xi)       the creation of any Lien on any assets or properties owned or leased by the Corporation, except in the ordinary course of business or pursuant to a Loan Agreement dated June 1, 2006 between the Corporation and Buyer;

    (xii)       any disclosure of any confidential information, except to employees and contractors who reasonably need to know of the same and owe a duty of confidentiality to the Corporation; or

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    (xiii)       any agreement or commitment by the Corporation to do any of the foregoing.

    (y)       Shares Not Registered. The Corporation and the Stockholders acknowledge and agree that the Consideration Shares have not been registered under the Securities Act of 1933 (the “Securities Act”), or registered or qualified under any state securities laws (“State Acts”), and are “restricted securities” within the meaning of SEC Rule 144. The Corporation, and to the extent that Buyer Shares have been distributed by the Corporation to the Stockholders, the Stockholders are acquiring the Consideration Shares for the Corporation’s or each Stockholder’s own account, as a principal, for investment purposes and not with a view to or for the sale or other disposition thereof. The Corporation and the Stockholders agree that they will not sell, assign, distribute or otherwise dispose of the Consideration Shares in violation of the Securities Act or any applicable State Act. The Corporation and the Stockholders acknowledge and agree that the stock certificates representing the Buyer Shares that may be issued to the Corporation under this Agreement shall bear a restrictive legend substantially reading as follows:

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”) NOR HAVE THEY BEEN APPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES REGULATORY AUTHORITIES OF ANY STATE OF THE UNITED STATE NEITHER THE SECURITIES NOR ANY INTEREST OR PARTICIPATION THEREIN MAY BE OFFERED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED, ENCUMBERED OR IN ANY OTHER MANNER TRANSFERRED OR DISPOSED OF IN THE UNITED STATES OR TO A “U.S. PERSON” (AS DEFINED IN REGULATIONS PROMULGATED UNDER THE ACT) UNLESS EFFECTED PURSUANT TO AND IN COMPLIANCE WITH AN AVAILABLE EXEMPTION OR OTHERWISE REGISTERED UNDER THE ACT.”

    (z)        No Broker or Finder. Except for its obligation to Needham & Company, Inc., none of the Corporation or the Stockholders have incurred any obligation, contingent or otherwise, to a broker, finder, agent or other intermediary for introducing the parties in connection with, or otherwise procuring, this Agreement or the transaction(s) contemplated hereby.

    (aa)        Statements and Other Documents Not Misleading. Other than with respect to Buyer’s representations, warranties and agreements contained in Section 5 herein and such documents to be delivered by Buyer pursuant to Section 13 herein, neither this Agreement, including all Exhibits and Schedules, nor the closing documents, contains or will contain any untrue statement of any material fact or omits or will omit to state any material fact necessary to be stated in order to make any statement contained therein, document or other instrument not false or misleading.

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    5.        Representations, Warranties and Agreements of Buyer. As material inducement to the Corporation to enter into this Agreement and to close hereunder, the Buyer makes the following representations, warranties and agreements to and with the Corporation, which representations, warranties and agreements shall be true and correct as of the date of this Agreement and as of the Closing Date:

    (a)        Corporate Status. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Israel, and has the corporate power and authority to execute, deliver and perform this Agreement and the documents contemplated hereby. The Buyer’s authorized capital consists of 40,000,000 ordinary shares, par value of NIS 0.01 per share (the “Buyer Shares”). As of March 31, 2006, 15,480,144 Buyer Shares were issued and outstanding and approximately390,000 Buyer Shares may be issued upon exercise of outstanding options granted pursuant to various stock option and stock award programs of Buyer. All Buyer Shares to be issued pursuant to subsections 2(a) and 2(b) will be, when so issued, duly authorized, validly issued, fully paid and nonassessable, and will not be issued in violation of any preemptive rights. Since the close of business on the Capital Structure Date, no shares of capital stock or other equity securities of Buyer have been issued or reserved for issuance or become outstanding, other than Buyer Shares described in this subsection 5(a) that have been issued upon the exercise of outstanding options.

    (b)        Authority. Buyer has the requisite corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and, to consummate the transactions contemplated hereby. This Agreement and the documents contemplated hereby to be executed and delivered by Buyer have been duly executed and delivered by Buyer, or will be duly executed and delivered by Buyer, and constitute, or will constitute when executed and delivered, the legal, valid and binding obligations of Buyer, enforceable against Buyer, in accordance with their respective terms, except as enforceability hereof and thereof may be limited by bankruptcy, insolvency, moratorium and other similar laws affecting creditors’ rights generally and by general principles of equity (whether considered in a proceeding in equity or at law or under applicable legal codes).

    (c)        Governmental Authorization. The execution, delivery and performance by Buyer of this Agreement and the consummation by Buyer of the transactions contemplated hereby require no action by or in respect of, or filing with, any governmental body, agency, official or authority other than (i) the filing by Buyer of a current report on form 6-K with the U. S. Securities and Exchange Commission (the “Commission”); (ii) the filing of a Notice of Sale of Securities on Form D with the Commission and such state agencies as required under any applicable State Act; and (iii) the filing of a copy thereof with Israeli Securities Authority and the Tel Aviv Stock Exchange.

    (d)        Non-Contravention. The execution and delivery of this Agreement, the consummation of the transactions provided for herein, and the fulfillment of the terms hereof by Buyer do not and will not, with or without the giving of notice, the lapse of time, or both, result in the breach of any of the terms and provisions of, or constitute a default under, or conflict with, or cause any acceleration of any obligation of Buyer under, any agreement, indenture or other instrument by which Buyer is bound; Buyer’s Articles of Association; any judgment, decree, order, or award of any court, governmental body, or arbitrator; or any applicable law, rule, or regulation.

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    (e)        Buyer’s Reports and Financial Statements.

    (i)       Since January 1, 2003, Buyer has filed all material forms, reports, schedules, statements and other documents with the Commission relating to periods commencing on or after such date required to be filed by it pursuant to the U.S. federal securities laws and the Commission rules and regulations thereunder (such forms, reports, schedules, statements and other documents, in each case, as amended, being hereinafter referred to as the “Buyer Commission Filings”). As of their respective dates, the Buyer Commission Filings complied in all material respects with all applicable requirements of the U.S. Federal securities laws and the Commission rules and regulations promulgated thereunder, applicable to a “Foreign Private Issuer” as such term is defined in SEC Rule 405 and SEC Rule 3b-4, including, to the extent applicable, the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder, did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.

    (ii)       Except as set forth on Schedule 5(e)(ii), each of the consolidated financial statements of Buyer contained in the Buyer Commission Filings complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the Commission applicable thereto, has been prepared in accordance with US GAAP (except (A) as may be indicated therein or in the notes or schedules thereto) and (B) in the case of unaudited quarterly consolidated statements, as permitted by applicable commission rules and regulations) and presents fairly, in all material respects, the consolidated financial position of Buyer as of the dates thereof and the consolidated results of its operations and changes in cash flows for the periods then ended (subject, in the case of unaudited quarterly statements, to normal year-end audit adjustment).

    (f)       Other than with respect to the Corporation’s representations, warranties and agreements contained in Section 4 herein, and such documents to be delivered by the Corporation pursuant to Section 14 herein, neither this Agreement, including all Exhibits and Schedules, nor the closing documents, contains or will contain any untrue statement of any material fact concerning Buyer or omits or will omit to state any material fact concerning Buyer necessary to be stated in order to make any statement contained therein, document or other instrument not false or misleading.

    (g)       No Broker or Finder. Except for its obligation to SVB Alliant, Buyer has not taken any action, or incurred any obligation, contingent or otherwise, which would give rise to a valid claim against Stockholders and/or the Corporation by a broker, finder, agent or other intermediary for introducing the parties in connection with, or otherwise procuring, this Agreement or the transaction(s) contemplated hereby.

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    6.       Continuation and Survival of Representations and Warranties.

    (a)       The representations and warranties of the parties hereunder shall survive the consummation of the transaction provided for in this Agreement and shall expire after fifteen months from the Closing Date, except for the representations and warranties that are set forth in subsection 4(b), 4(g), 4(w), 5(a) and 5(b) which shall expire upon expiration of the applicable statute of limitations, and provided further that there shall be no expiration with respect to Knowing Misrepresentations on the part of the Corporation or Buyer . “Knowing Misrepresentation” shall mean any breach of a representation or warranty that is qualified as to the Corporation’s or Buyer’s knowledge, or any knowing breach of a representation or warranty that is not qualified as to the Corporation’s or Buyer’s knowledge as to which the Corporation or Buyer had actual knowledge of its falsity. “To the knowledge,” “knowing” or similar expressions shall mean (i) with respect to the Corporation, the actual knowledge of the Managers, the Corporation’s officers and the members of the Corporation’s Board of Directors as of the date hereof, and (ii) with respect to the Buyer, the actual knowledge of Giora Dishon and Dror David.

    (b)       Each representation, warranty and covenant contained herein is independent of all other representations, warranties and covenants contained herein (whether or not covering an identical or a related subject matter) and must be independently and separately complied with and satisfied. Exceptions or qualifications to any representations or warranties contained herein shall not be construed as exceptions or qualifications to any other warranty or representation. No representation or warranty of the Corporation contained herein shall be deemed to have been waived, affected or impaired by any investigation made by, or knowledge of, Buyer.

    7.       Covenants of the Corporation and Stockholders Prior to Closing.

    (a)       Between the date of this Agreement and the Closing Date the Corporation shall, and the Stockholders will cause the Corporation to, conduct the Business in the ordinary course and preserve intact the organization of the Corporation, maintain relations and good will with suppliers, customers, landlords, creditors, employees, agents and others having business relationships with the Corporation, and pay all of its obligations to suppliers, creditors and others in a timely manner.

    (b)       Between the date of this Agreement and the Closing Date the Corporation shall, and the Stockholders will cause the Corporation to, use its reasonable efforts to avoid taking (or failing to take) any action which they know or should know would result in the inaccuracy of, or the breach or violation of, any of the representations, warranties, covenants and agreements of the Corporation set forth herein.

    (c)       Between the date of this Agreement and the Closing Date, the Corporation and the Stockholders shall promptly notify Buyer in writing if they become aware of any fact or condition that causes or constitutes an inaccuracy in, or the breach or violation of, any of the representations, warranties, covenants or agreements of the Corporation and the Stockholders set forth herein.

    (d)       Between the date of this Agreement and the Closing Date the Corporation shall and Stockholders shall cause the Corporation to, afford Buyer (and its attorneys, accountants, representatives and agents) during normal business hours, upon reasonable advance notice, with full and free access to the Corporation’s premises, accounts, books and records, personnel, properties, assets, contracts, financial and tax information, and such other documents, data and information as Buyer may reasonably request, and to provide Buyer with such copies thereof as Buyer may reasonably request; provided, however, that Buyer shall schedule such access in such a way as to avoid material disruption of the normal business operations of the Corporation.

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    8.       Covenants of Buyer Prior to Closing.

    (a)       Between the date of this Agreement and the Closing Date, Buyer shall use its reasonable efforts to avoid taking (or failing to take) any action which it knows or should know would result in the inaccuracy of, or the breach or violation of, any of the representations, warranties, covenants and agreements of Buyer set forth herein.

    (b)       Between the date of this Agreement and the Closing Date, Buyer shall promptly notify the Corporation in writing if Buyer becomes aware of any fact or condition that causes or constitutes a material inaccuracy in, or the material breach or violation of, any of the representations, warranties, covenants or agreements of Buyer.

    (c)       Buyer shall use commercially reasonable efforts to maintain a presence in State College, Pennsylvania, which location will serve as the principal place of business for the Managers.

    9.       Conditions Precedent to Corporation’s and Stockholders’ Obligation to Close. Corporation’s and Stockholders’ obligation to sell the Acquired Assets, to take the other actions required to be taken by the Corporation at Closing, and to otherwise close the transactions subject to this Agreement, is subject to the satisfaction, at or prior to Closing, of each of the following conditions (any of which may be waived, in whole or in part, by the Corporation):

    (a)       All of Buyer’s representations and warranties in this Agreement must have been accurate in all material respects as of the date of this Agreement and must be accurate in all material respects as of the Closing Date as if made on the Closing Date, except for changes contemplated by this Agreement or consented to in writing by Corporation.

    (b)       All of the covenants and obligations that Buyer is required to perform or comply with pursuant to this Agreement at or prior to Closing must have been performed and complied with in all material respects, except as otherwise consented to in writing by the Corporation.

    (c)       Buyer must have delivered each of the documents required to be delivered to the Corporation pursuant to Section 14.

    (d)       Buyer must have issued the Consideration Shares and the Employees Shares.

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    (e)       There shall be (i) in effect no injunction, decree, or order of any court of competent jurisdiction that prohibits the sale of the Acquired Assets to Buyer, or that otherwise prohibits this Agreement or the consummation of the transactions contemplated by this Agreement, that has been adopted or issued, or has otherwise become effective, since the date of this Agreement, and (ii) no action or litigation pending or threatened in writing by any Person since the date of this Agreement in which (A) an injunction is or may be sought against this Agreement or the transactions contemplated by this Agreement, or (B) relief is or may be sought against any party hereto as a result of this Agreement or the transactions contemplated hereby, and in which in the good faith judgment of the Corporation (relying on the advice of its legal counsel), such Person has a reasonable possibility of prevailing and such relief would have a material adverse effect on the Buyer or the Corporation as a whole.

    10.       Conditions Precedent to Buyer’s Obligation to Close. Buyer’s obligation to buy the Acquired Assets, to assume the Assumed Liabilities, to issue the Consideration Shares or the Employee Shares, to take the other actions required to be taken by Buyer at Closing, and to otherwise close the transactions pursuant to this Agreement, is subject to the satisfaction, at or prior to Closing, of each of the following conditions (any of which may be waived, in whole or in part, by Buyer):

    (a)       All of the representations and warranties of the Corporation in this Agreement must have been accurate in all material respects as of the date of this Agreement and must be accurate in all material respects as of the Closing Date as if made on the Closing Date, except for changes contemplated by this Agreement or consented to in writing by Buyer.

    (b)       All of the covenants and obligations that the Corporation is required to perform or comply with pursuant to this Agreement at or prior to Closing must have been performed and complied with in all material respects, except as otherwise consented to in writing by Buyer.

    (c)       The Corporation must have delivered each of the documents required to be delivered to Buyer pursuant to Section 13.

    (d)       Buyer shall have negotiated and executed new agreements in form and substance satisfactory to Buyer amending the agreements listed on Schedule 10(d) with the Persons listed therein.

    (e)       There shall not have occurred any theft, loss, damage, or destruction to or of a material portion of the assets, properties, or business of the Corporation, whether or not covered by insurance.

    (f)       There shall be (A) in effect no injunction, decree, or order of any court of competent jurisdiction that prohibits the sale of the Acquired Assets to Buyer, or that otherwise prohibits this Agreement or the consummation of the transactions contemplated by this Agreement, that has been adopted or issued, or has otherwise become effective, since the date of this Agreement, and (B) no action or litigation pending or threatened in writing by any Person since the date of this Agreement in which (x) an injunction is or may be sought against this Agreement or the transactions contemplated by this Agreement, or (y) relief is or may be sought against any party hereto as a result of this Agreement or the transactions contemplated hereby, and in which in the good faith judgment of Buyer (relying on the advice of its legal counsel), such Person has a reasonable possibility of prevailing and such relief would have a material adverse effect on Buyer, the Corporation or the Business.

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    (g)       There shall not have been a material adverse change in the financial condition and in the results of operations of, and there shall not have been any material adverse change in the condition of the assets of or in the business prospects of the Corporation (taken as a whole).

    (h)       Buyer shall have completed its due diligence review of the Corporation and the results of such review shall be satisfactory to Buyer. (i) Buyer’s Board of Directors shall have approved the consummation of the transactions contemplated by this Agreement.

    11.       Termination.

    (a)       This Agreement may be terminated, and the purchase of the Acquired Assets, the assumption of the Assumed Liabilities and the other transactions contemplated by this Agreement may be abandoned, as follows:

    (i)       By the mutual written consent of the Buyer and the Corporation.

    (ii)       By the Corporation, if any of the conditions set forth in Section 9 has not been satisfied or waived in writing by the Corporation on or prior to Closing.

    (iii)       By Buyer, if any of the conditions set forth in Section 10 have not been satisfied or waived in writing by Buyer on or prior to Closing.

    (iv)       By Buyer or the Corporation, if Closing has not been consummated (for any reason other than a breach or violation of any representation, warranty, covenant or agreement contained in this Agreement by the party seeking such termination) on or before August 31, 2006 (or such later date, as to which the Corporation and Buyer, in their respective sole and absolute discretion, may agree in writing).

    (v)       By Buyer, if the Corporation in good faith files on or before Closing any petition in bankruptcy, reorganization, liquidation or receivership, or a petition in bankruptcy, reorganization, liquidation or receivership is filed on or before Closing against the Corporation by any Person not a party to this Agreement and is not withdrawn or dismissed on or before Closing.

    (vi)       By the Corporation, if Buyer in good faith files on or before Closing any petition in bankruptcy, reorganization, liquidation or receivership, or a petition in bankruptcy, reorganization, liquidation or receivership is filed on or before Closing against the Buyer by any Person not a party to this Agreement and is not withdrawn or dismissed on or before Closing.

    (b)       If the Corporation terminates this Agreement in accordance with subsection 11(a), the Corporation shall give Buyer prompt written notice of such termination, including in reasonable detail the basis for such termination.

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    (c)       If Buyer terminates this Agreement in accordance with subsection 11(a), Buyer shall give the Corporation prompt written notice of such termination, including in reasonable detail the basis for such termination.

    (d)       The termination of this Agreement shall render null and void, and of no further force or effect, all of the rights and obligations of the parties under this Agreement; provided, however, that no such termination shall be deemed to relieve any defaulting or breaching party from any liability to the other parties hereto, or to otherwise eliminate, reduce or affect in any way any cause of action, action or claim, whether at law, in equity or otherwise, which any non-defaulting and non-breaching party may or shall have against the defaulting or breaching party under or arising out of this Agreement, or to be deemed an election of remedies which precludes, waives or otherwise affects any of the foregoing.

    12.       Closing Date. The Closing of the transactions provided for in this Agreement (herein sometimes called the “Closing”) shall take place at the offices of Buyer’s counsel, Wolf, Block, Schorr and Solis-Cohen LLP, 1650 Arch Street, 22nd Floor, Philadelphia, PA, at 11:30 a.m. on August 3, 2006, or at such other place, date and time as shall be agreed to in writing between Buyer and the Corporation. The date and time of Closing is sometimes herein called the “Closing Date.”

    13.       Deliveries by the Corporation at Closing. At the Closing, the Corporation will deliver or cause to be delivered to Buyer the following in form and substance reasonably acceptable to counsel to Buyer:

    (a)       Bill of Sale in the form attached hereto as Exhibit “B”;

    (b)       Assignment of Registrable IP in the form attached hereto as Exhibit “C”;

    (c)       a certified copy of the Certificate of Incorporation of the Corporation, and all amendments thereto, issued by the Department of State of Delaware and dated as of a date within thirty (30) days prior to the Closing Date;

    (d)       “good standing” and “no tax Lien” certificates for the Corporation issued by each jurisdiction in which the Corporation is incorporated or qualified to do business as a foreign corporation, all of which shall be dated as of a date within thirty (30) days prior to the Closing Date;

    (e)       the Employees Employment Agreements duly executed and delivered by each Employee on or prior to the Closing Date, each substantially in the form attached hereto as Exhibit “A-1";

    (f)       the Employees Agreements Not to Compete duly executed and delivered by each Employee on or prior to the Closing Date, each substantially in the form attached hereto as Exhibit “A-2";

    (g)       the Employees Restricted Stock Agreements duly executed and delivered by each Employee (other than the Managers) on or prior to Closing Date each substantially in the form attached hereto as Exhibit “A-3(i)";

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    (h)       the Managers Restricted Stock Agreements duly executed and delivered by each Manager on or prior to Closing Date each substantially in the form attached hereto as Exhibit “A-3(ii)";

    (i)       a certificate executed by the Chief Executive Officer of the Corporation certifying as to the matters set forth in subsection 10(a) and subsection 10(b);

    (j)       a certificate of the Secretary dated the Closing Date, certifying the Corporation’s certificate of incorporation, bylaws and resolutions of Corporation’s board of directors and Stockholders relating to this agreement and the transactions provided for herein including without limitation, any waiver by each Stockholder of any right, preference or privilege to which such Stockholder is entitled in connection with the transactions contemplated hereby; and

    (k)       all such further documents, instruments and agreements which may be reasonably requested by Buyer or its counsel to assign the Assigned Contracts and effect and carry out any provision of this Agreement.

    14.       Deliveries by Buyer at Closing. At the Closing, Buyer will deliver or cause to be delivered to, as the case may be, to the Corporation, the following:

    (a)       the duly executed stock certificates representing the Consideration Shares;

    (b)       a Certificate of the Secretary of Buyer, dated as of the Closing Date, confirming that all necessary corporate action has been taken to authorize the execution and delivery of this Agreement by Buyer;

    (c)       the Employees Employment Agreements duly executed and delivered on or prior to the Closing Date, each substantially in the form attached hereto as Exhibit “A-1", the terms of each taken as a whole being, with respect to each employee, no less favorable than the terms each such Employee received from the Corporation immediately prior to the date hereof;

    (d)       the Employees Agreements Not to Compete duly executed and delivered on or prior to the Closing Date, each substantially in the form attached hereto as Exhibit “A-2";

    (e)       the Employees Restricted Securities Agreement duly executed and delivered by each Employee (other than the Managers) on or prior to Closing Date, each substantially in the form attached hereto as Exhibit “A-3(i)";

    (f)       the Managers Restricted Securities Agreement duly executed and delivered by each Manager on or prior to Closing Date, each substantially in the form attached hereto as Exhibit “A-3(ii)";

    (g)       a certificate executed by the President or Chief Executive Officer of Buyer certifying as to the matters set forth in subsections 9(a) and 9(b); and

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    (h)       all such further documents, instruments and agreements which may be reasonably requested by the Corporation or counsel to the Corporation to effect and carry out any provision of this Agreement.

    15.       Indemnification.

    (a)       Indemnification of Buyer. Subject to any provisions hereof to the contrary, the Corporation the Stockholders and the Managers hereby, jointly and severally, indemnify and agree to hold harmless Buyer, its successors and assigns and each such entity’s officers, directors, shareholders and agents (collectively, the “Buyer Indemnified Parties”) (each of whom shall be a third party beneficiary hereof) from, against and in respect of the amount of any and all Corporation Deficiencies (as hereinafter defined); provided, however, that other than as specifically set forth herein, each Stockholder’s liability for Corporation Deficiencies shall be several and not joint.

    (b)       Definition of “Corporation Deficiencies”. As used in this Section 15, “Corporation Deficiencies” means any and all loss or damage incurred by the Buyer Indemnified Parties resulting from:

    (i)       any misrepresentation, breach of any representation or warranty, or any non-fulfillment of any representation, warranty, covenant or agreement on the part of the Corporation contained in Section 4 herein;

    (ii)       the conduct of the Corporation’s business to the extent not constituting an Assumed Liability;

    (iii)       any Excluded Liability; or

    (iv)       any and all actions, suits, proceedings, demands, assessments, penalties, liabilities, judgments, reasonable attorneys’ fees, costs, expenses and interest incident to any of the foregoing.

    (c)       Indemnification of the Corporation and Stockholders. Subject to any provisions hereof to the contrary, Buyer hereby indemnifies and agrees to hold harmless the Corporation and the Stockholders, and each of their respective successors and assigns and each such entity’s officers, directors, shareholders and agents (collectively the “Seller Indemnified Parties”) (each of whom shall be a third party beneficiary hereof) from, against and in respect of the amount of any and all Buyer Deficiencies (as hereinafter defined).

    (d)       Definition of “Buyer Deficiencies”. As used in this Section 15, “Buyer Deficiencies” means any and all loss or damage incurred by the Corporation or the Stockholders resulting from:

    (i)       any misrepresentation, breach of any representation or warranty, or any non-fulfillment of any representation, warranty, covenant or agreement on the part of the Buyer contained in Section 5 herein;

    (ii)       any Assumed Liability;

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    (iii)       any liability or obligation arising from the conduct of the business by Buyer after the Closing Date to the extent that such liability or obligation would not be the result of any Corporation Deficiency set forth in subsection 15(b); or

    (iv)       any and all actions, suits, proceedings, demands, assessments, penalties, liabilities, judgments, reasonable attorneys’ fees, costs, expenses and interest incident to any of the foregoing.

    (e)       Procedures for Establishment of Deficiencies.

    (i)       In the event that any claim shall be asserted against a party which, if sustained, would result in a Deficiency, the indemnified party, within a reasonable time after learning of such claim, shall notify the indemnifying party of such claim, and shall extend to the indemnifying party a reasonable opportunity to defend against such claim, at the indemnifying party’s sole expense and through legal counsel reasonably satisfactory to the indemnified party, provided that the indemnifying party proceeds in good faith, expeditiously and diligently. The indemnified party shall, at its option and expense, have the right to participate in any defense undertaken by the indemnifying party with legal counsel of its own selection. If the indemnifying party, in the reasonable judgment of the indemnified party, has failed to prosecute such defense in good faith in an expeditious and diligent manner, the indemnified party shall have the right to defend and/or settle such claim on behalf of the indemnifying party. No settlement or compromise of any claim which may result in a Deficiency may be made by the indemnifying party without the prior written consent of the indemnified party unless the proposed settlement is solely a monetary settlement and prior to such settlement or compromise the indemnifying party acknowledges in writing the indemnifying party obligation to pay in full the amount of the settlement and all associated expenses and the indemnified party is furnished with either (A) security reasonably satisfactory to the indemnified party that the indemnifying party will in fact pay such amount and expenses, or (B) a full release from the claimant in form and substance reasonably satisfactory to the indemnified party.

    (ii)       In the event that the indemnified party asserts the existence of any Deficiency, the indemnified party shall give written notice to the indemnifying party of the nature and amount of the Deficiency asserted. The indemnified party shall reasonably cooperate with such actions as the indemnifying party may seek to take to mitigate the impact of any alleged breach. Such request shall not be deemed to constitute an admission of liability on the part of the indemnifying party. If the indemnifying party, within a period of fifteen (15) business days after the giving of such notice by the indemnified party, shall not give written notice to the indemnified party announcing its intention to contest such assertion of the indemnified party (such notice by the indemnifying party being hereinafter called the “Contest Notice”), such assertion of the indemnified party shall be deemed accepted and the amount of the Deficiency shall be deemed established. In the event, however, that a Contest Notice is given to the indemnified party within said 15-day period, then the contested assertion of a Deficiency may be established pursuant to the provisions of Section 19 herein.

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    (iii)       The indemnified and indemnifying parties may agree in writing, at any time, as to the existence and amount of a Deficiency, and, upon the execution of such agreement, such Deficiency shall be deemed established.

    (f)       Payment of Deficiencies. Subject to the limitations set forth in subsection (g), the indemnifyingparty hereby agree to pay in cash the amount of each established Deficiency to the indemnified party within five (5) business days after the final establishment thereof. Any amounts not paid by the indemnifying party when due under this subsection 15(f) shall bear interest from the due date thereof until the date paid at a rate equal to 3% over the “prime rate” as published from time to time in The Wall Street Journal.

    (g)       Limitation.

    (i)       With the exception of (A) any Deficiencies resulting from any misrepresentation or breach of representation or warranty contained in subsections 4(b), 4(g), 4(w), 5(a) and 5(b) herein or (B) any claims of Knowing Misrepresentation on the part of any party to this Agreement, there shall be no liability for any Deficiencies resulting from any misrepresentation or breach of representation or warranty on the part of either the Corporation under Section 4 or Buyer under Section 5.

    (ii)       With respect to Deficiencies resulting from any (A) misrepresentation or breach of representation or warranty contained in subsections 4(b), 4(g), 4(w), 5(a) and 5(b) herein; or (B) any Knowing Misrepresentation, neither party shall be liable or otherwise responsible for that portion of any such Deficiencies that exceeds an amount equal to the value at the Closing Date of the Buyer Shares issuable pursuant to this Agreement. The Corporation, the Stockholders or the Managers, may satisfy and discharge such liability by tendering back to the Buyer the Buyer Shares received by them pursuant to this Agreement, such Buyer Shares being deemed to have the value of such Buyer Shares at the Closing Date.

    (iii)       Notwithstanding any of the foregoing, any party to this Agreement shall have unlimited recourse against any other party that has committed any Knowing Misrepresentation.

    16.       Board Observer. As of Closing, and for so long as the Corporation continues to hold, or in the event that following distribution of Buyer Shares by the Corporation to the Stockholders the Stockholders continue to hold, in the aggregate, Buyer Shares in an amount equal to 7.1% of the outstanding capital stock of Buyer, the Representative shall be entitled to designate one individual (the “Observer”) to attend and observe any regular or special meeting of the board of directors of the Buyer and shall be entitled to receive all information distributed to the board of directors of the Buyer at the time of the original distribution of such information; provided, however, that the Observer shall agree to hold in confidence and trust and to act in a fiduciary manner with respect to all information so provided and to be bound by the Buyer’s code of ethics, policies and procedures; and provided further, that the Buyer reserves the right to withhold any information and to exclude the Observer from any meeting or portion thereof for any reason if access to such information or attendance at such meeting could affect any evidentiary privilege between Buyer and its advisors or otherwise adversely affects Buyer. The initial Observer will be Craig Gomulka.

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    17.        Piggyback Registration Rights. At any time after the Buyer Shares issued to the Corporation pursuant to this Agreement have been distributed to the Stockholders by the Corporation, and/or the Employees Shares have been vested and distributed to the Employees or their designees, if Buyer at any time proposes to register any of its securities under the Securities Act for sale to the public (except with respect to registration statements on Forms S-4, F-4 or S-8 or another form not available for registering the Buyer Shares to be issued under this Agreement for sale to the public), each such time it will give written notice of its intention to do so to the Representative who will provide notice of the same to all persons who received Buyer Shares hereunder. Upon the written request of any of such holders made to the Representative within fifteen (15) days after receipt of such notice, and forwarded to Buyer within five (5) days thereafter, Buyer will, subject to the limits contained in this Section 17, use its best efforts to cause all such Buyer Shares then held by such holders which are sought to be registered hereunder, to be registered under the Securities Act and qualified for sale under any state blue sky law, all to the extent requisite to permit such sale or other disposition by such holders of the Buyer Shares so registered; provided, however, that if Buyer is advised in writing in good faith by any managing underwriter of the Buyer’s securities being offered in a public offering pursuant to such registration statement that the amount to be sold by Persons other than the Buyer (collectively, “Selling Security Holders”) is greater than the amount which can be offered without adversely affecting the offering, Buyer may reduce the amount offered for the accounts of all Selling Security Holders (including the Stockholders and other holders of Buyer Shares hereunder) who have a contractual, incidental “piggy back” right to include such securities in a registration statement to a number deemed satisfactory by such managing underwriter; provided, however, that no reduction shall be made in the amount of Buyer Shares offered for the accounts of the Stockholders and other holders hereunder unless such reduction is imposed pro rata with respect to all securities whose holders have or may hereafter acquire a contractual, incidental “piggy back” right to include such securities in the registration statement as to which inclusion has been requested pursuant to such right. Notwithstanding the foregoing, Buyer’s obligation to register the Buyer Shares under this Section 17 shall terminate at such time when the holders thereof may sell all of such Buyer Shares, without limitation or restriction, as to timing and amount, pursuant to Rule 144 of the Securities Act.

    18.       Further Assurances. Buyer, the Corporation and Stockholders agree to execute and deliver all such other instruments and take all such other action as any party may reasonably request from time to time, after the date hereof and without payment of further consideration, in order to effectuate the transactions provided for herein. The parties shall cooperate fully with each other and with their respective counsel and accountants in connection with any steps required to be taken as part of their respective obligations under this Agreement, including, without limitation, the preparation of financial statements and preparation and filing of Tax Returns.

- 35 -

    19.       Dispute Resolution.

    (a)       In the event of a dispute between the parties, including indemnification claims pursuant to Section 15, the parties shall first promptly attempt in good faith to resolve such dispute for a period of not less than thirty (30) calendar days. If such good faith efforts are not successful within such 30-day period, at any time thereafter, any party may give the other written notice of a dispute (a “Dispute Notice”), the parties shall attempt in good faith to agree to the appointment of an independent mediator (a “Mediator”) to assist the parties in resolving the dispute. Should the parties agree to a Mediator, the matter shall be referred to such Mediator for resolution in accordance with the usual practices and procedures of such Mediator; provided, however, that no party shall have an obligation to participate in any mediation after a date which is thirty (30) calendar days after the applicable Dispute Notice was served. The parties shall cooperate with the Mediator and shall provide any relevant information requested by the Mediator. If the parties cannot agree on the selection of a Mediator within twenty (20) calendar days after delivery of the Dispute Notice, or if the dispute is not resolved by the Mediator as provided herein, then the dispute shall be determined by arbitration in accordance with the provisions of subsection 19(b) hereunder.

    (b)       Any dispute which is not settled or otherwise resolved through the provisions of subsection 19(a) above shall be determined by arbitration in Philadelphia, Pennsylvania by a single arbitrator in accordance with the rules of the American Arbitration Association (“AAA”) or any other rules agreed upon by the parties, except that (i) every person named on any list of potential arbitrators shall be a neutral and impartial lawyer with excellent academic and professional credentials who has practiced law for at least fifteen (15) years, specializing in either general commercial litigation or general corporate and commercial matters, and who has had experience, and is generally available to serve, as an arbitrator, and (ii) each party shall be entitled to strike on a peremptory basis, for any reason or no reason, any or all of the names of potential arbitrators on any list submitted to the party by the AAA as well as any person selected by the AAA to serve as an arbitrator by administrative appointment. In the event the parties cannot agree on the selection of the arbitrator from the one or more lists submitted by the AAA within thirty (30) calendar days after the AAA transmits to the parties its first list of potential arbitrators, AAA shall nominate three Persons who meet the criteria set forth herein. Each party shall be entitled to strike one of such three nominees on a peremptory basis within five (5) calendar days after its receipt of such list of nominees, indicating its order of preference with respect to the remaining nominees. If two of such nominees have been stricken by the parties to the dispute, the unstricken nominee shall be the arbitrator. Otherwise, the selection of the arbitrator shall be made by the AAA from the remaining nominees in accordance with the parties’ mutual order of preference, or by random selection in the absence of a mutual order of preference. The arbitrator shall base his or her award on the terms of this Agreement, on applicable law and judicial precedent, shall include in such award the findings of fact and conclusions of law upon which the award is based and shall not grant any remedy or relief that a court could not grant under applicable law. The arbitration shall be governed by the substantive laws of the Commonwealth of Pennsylvania applicable to contracts made and to be performed therein, without regard to conflicts of laws rules. Judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

    (c)       If any party to a dispute fails to proceed with the dispute resolution procedures set forth in this Section 19 or unsuccessfully seeks to stay such proceedings, or fails to comply with any arbitration award, or is unsuccessful in vacation or modifying the award pursuant to a petition or application for judicial review, the other party shall be entitled to be awarded costs, including reasonable attorneys’ fees, paid or incurred by such other party in successfully compelling such proceedings or defending against the attempt to stay, vacate or modify such arbitration award and/or successfully defending or enforcing the award.

- 36 -

    20.       Representative.

    (a)       For purposes of this Agreement, the “Representative” shall meanDon Jones. All actions of the Representative shall be made personally by the Representative, and no Representative shall be permitted to assign or delegate its rights or duties, whether by operation of law or otherwise. In the event of the death, incapacity, incompetency, disability or resignation of the Representative, the Corporation, or if dissolved at such time, the remaining Stockholders shall elect a new Representative who shall have full authority to take all actions required or permitted to be taken by the Representative under this Agreement. Prompt written notice of the election of a substitute Representative shall be provided to Buyer by the substitute Representative so elected, and Buyer shall be entitled to rely on the authority of any substitute Representative elected pursuant to the procedures set forth in this subsection 20(a).

    (b)       In addition to, and not in substitution of, the provisions set forth in subsection 20(a), the Corporation and each of the Stockholders hereby authorizes the Representative to take any and all actions (or not to take any or all actions), and/or to prepare, determine, calculate, negotiate, execute and deliver any and all agreements, notices, consents, determinations, documents and other instruments, which the Corporation or any such Stockholder (or the Representative on behalf of the Corporation of any such Stockholder) is required or permitted to take, prepare, determine, calculate, negotiate, execute and/or deliver under or pursuant to this Agreement and/or as contemplated by this Agreement, all in the name of and on the behalf of the Corporation or any such Stockholder, including, but not limited to, the making and execution of any amendments to this Agreement, the giving and receipt of any notices or consents pursuant hereto, the execution of any and all documents required to be executed in order to complete Closing hereunder or appropriate or incidental to so complete Closing hereunder, to calculate, determine, negotiate and give notice of or otherwise with respect to any adjustment to any issuance of Buyer Shares to be made pursuant to this Agreement, to accept service of process in connection with any claim related to this Agreement and to prosecute, defend or settle in the Representative’s discretion all indemnification disputes (including hiring of counsel and other litigation assistance). From and after the Closing, Buyer shall be entitled to deal exclusively with the Representative with respect to any matter arising under this Agreement. Such appointment shall, to the fullest extent permitted by law, survive the dissolution or liquidation of the Corporation, the death, disability, incapacity, or incompetency of any Stockholder.

    21.       Miscellaneous.

    (a)       Indulgences, Etc. Neither the failure nor any delay on the part of any party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver.

- 37 -

    (b)       Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement (including, without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, notwithstanding any conflict-of-laws doctrines of such state or other jurisdiction to the contrary, and without the aid of any canon, custom or rule of law requiring construction against the draftsman.

    (c)       Confidentiality; Public Announcements. From and after the Closing, the Corporation and the Stockholders will treat and hold as such all of the Confidential Information, refrain from using any of the Confidential Information except in connection with this Agreement, and deliver promptly to the Buyer or destroy, at the request and option of the Buyer, all tangible embodiments (and all copies) of the Confidential Information which are within the Corporation or the Stockholders’ possession. In the event that the Corporation or any of the Stockholders, as the case may be, is requested or required (by oral question or request for information or documents in any legal proceeding, interrogatory, subpoena, civil investigative demand, or similar process) to disclose any Confidential Information, the Corporation or any such Stockholder shall notify the Buyer promptly of the request or requirement so that the Buyer may seek an appropriate protective order or waive compliance with the provisions of this subsection 20(c). If, in the absence of a protective order or the receipt of a waiver hereunder, the Corporation or any such Stockholder, as the case may be, is, on the advice of counsel, compelled to disclose any Confidential Information to any tribunal or else stand liable for contempt, the Corporation or any such Stockholder may disclose the Confidential Information to the tribunal; provided, however, that such Stockholder shall use reasonable best efforts to obtain, at the request of the Buyer at its sole expense, an order or other assurance that confidential treatment will be accorded to such portion of the Confidential Information required to be disclosed as the Buyer shall designate. “Confidential Information” shall mean confidential information and trade secrets of the Corporation, including without limitation, (i) the identity, lists or descriptions of any customers, referral sources or organizations; (ii) financial statements, cost reports or other financial information; (iii) contracts proposals, or bidding information; (iv) business plans, product roadmaps and training operations, methods and manuals; (v) personnel records; and (vi) fee structure and management systems, policies or procedures, including related forms and manuals and (vii) any data, software, reports, formulae, drawings, sketches and other information disclosed by the Corporation to any Stockholder and was identified as confidential or proprietary in connection with such disclosure. The Representative shall consult with Buyer and Buyer shall consult with the Representative before issuing any press release or otherwise making any public statements with respect to this Agreement, the transactions contemplated hereby and any negotiations in connection therewith and, except as may be required under applicable law, as provided above, shall not issue any such press release or make any such public statement prior to such consultation.

    (d)       No Fractional Shares. No fractional shares may be issued in connection with this Agreement. Any number of Buyer Shares which may be issued pursuant to any provision of this Agreement shall be rounded to the nearest whole number.

    (e)       Expenses. Except as otherwise provided herein, each party shall pay the fees and expenses of its own advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Asset Purchase Agreement and any documents or instrument contemplated in connection therewith.

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    (f)       Notices. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received only when delivered (personally, by courier service such as Federal Express, or by other messenger), when sent by electronic facsimile, addressed as set forth below:

(i) If to Buyer:

Nova Measuring Instruments Ltd.
P. O. Box 266
Rehovoth 76100
Israel
Attention: Dror David
Fax: 972-8-9407776

with a copy, given in the manner prescribed above, to:

David Gitlin, Esquire
Wolf, Block, Schorr and Solis-Cohen LLP
1650 Arch Street
Philadelphia, PA 19103
Telephone: 215-977-2284
Fax: 215-405-3884

(ii) If to Stockholder(s):

to their respective addresses as set forth on Schedule 4(a)

(iii) If to the Corporation:

HyperNex, Inc.
3006 Research Drive
State College, PA 16803
Telephone: 814-235-0606
Fax: 814-235-0605

with a copy, given in a matter prescribed above, to:

Michael L. Hund, Esquire
Buchanan Ingersoll PC
213 Market Street, 3rd Floor
Harrisburg, PA 17101
Telephone: 717-237-4866
Fax: 717-233-0852

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(iii) If to the Representative:

Don Jones
c/o Draper Triangle Ventures L.P.
Two Gateway Center, 20^th Floor
Pittsburgh, PA 15222
Telephone:412-288-9800

        Any party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this subsection for the giving of notice.

    (g)        Exhibits and Schedules. All Exhibits and Schedules attached hereto are hereby incorporated by reference into, and made a part of, this Agreement.

    (h)        Binding Nature of Agreement. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Corporation and the Stockholders may not assign or transfer their rights or obligations under this Agreement other than by operation of law without the prior written consent of Buyer (which consent shall not be unreasonably delayed, conditioned or withheld).

    (i)        Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument.

    (j)        Provisions Separable. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. However, in the event any provision of this Agreement shall be held or declared invalid or unenforceable in whole or in part by any court of competent jurisdiction, such court shall (to the full extent permitted by applicable law) revise or reform the Agreement, and/or take such other action as may be necessary or appropriate, with respect to such invalid or unenforceable provision so as to carry out the intent of the parties as expressed in this Agreement in a manner that is not so invalid or unenforceable.

    (k)        Entire Agreement. This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written.

    (l)        Section Headings. The Section headings in this Agreement are for convenience only; they form no part of this Agreement and shall not affect its interpretation.

    (m)        Gender and Number. Words used herein, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context indicates is appropriate.

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    (n)        Number of Days. In computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and Holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or Holiday; then the final day shall be deemed to be the next day which is not a Saturday, Sunday or such Holiday. For purposes of this Section, “Holiday” shall mean a day, other than a Saturday or Sunday, on which national banks are or may elect to be closed.

[Intentionally left blank]

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        IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their proper and duly authorized officers, effective on the date first above written.

NOVA MEASURING INSTRUMENTS, LTD.

By: /s/ Giora Dishon

Name: Giora Dishon

Title: President and Chief Executive Officer

HYPERNEX, INC.

By: /s/ David S. Kurtz

Name: David Kurtz

Title: President

        STOCKHOLDERS:

        (numbers next to each Stockholder’s Name reflect such Stockholder’s holding of the capital stock of the Corporation)

80,093 - A
49,050 - A2 DRAPER TRIANGLE VENTURES L.P.
By: Draper Triangle Partners, LLC, its
       General Partner

By: ________________________________________
Name: ______________________________________
Title: _______________________________________
Date: _______________________________________

402 - A
                
                
                

                
                
                
                

10,556 - Common
1,548 - A
                

45,000 - Common
1,548 - A
                

1,548 - A
                
                

1,548 - A
613 - A2

                
                
                
                 DRAPER TRIANGLE VENTURES
CO-INVESTMENT FUND, L.P.
By: Draper Triangle Partners, LLC, its
       General Partner

By: ________________________________________
Name: ______________________________________
Title: _______________________________________
Date: _______________________________________

___________________________________________
Robert Anderson
Date: _______________________________________

___________________________________________
David S. Kurtz
Date: _______________________________________

___________________________________________
Gary Hillman
Date: _______________________________________

SONHENDER PARTNERSHIP L.P.
By: Sonhender, Inc., its General Partner

By: ________________________________________
Name: ______________________________________
Title: _______________________________________
Date: _______________________________________

1,548 - A
613 - A2
                

1,548 - A
                
                

3,096 - A
1,226 - A2
                


4,644 - A
1,839 - A2
                
                
                
                


12,384 - A
4,906 - A2
                
                
                
                


28,008 - A
3,065 - A2

                
                
                

26,000 - Common
                
                

20,624 - Common
                
                 ___________________________________________
Brian M. McInerney
Date: _______________________________________

___________________________________________
William F. Stotz
Date: _______________________________________

___________________________________________
James D. Roberge
Date: _______________________________________


H. L. PAC PARTNERSHIP

By: ________________________________________
Name: ______________________________________
Title: _______________________________________
Date: _______________________________________


GLEN ARDEN ASSOCIATES

By: ________________________________________
Name: ______________________________________
Title: _______________________________________
Date: _______________________________________


ADVANCED TECHNOLOGY MATERIALS,
INC.

By: ________________________________________
       Daniel P. Sharkey, Chief Financial Officer
Date: _______________________________________

___________________________________________
Krzysztof J. Kozaczek
Date: _______________________________________

___________________________________________
Paul Moran
Date: _______________________________________

10,556 - Common

                
                
                


42,765 - A2
                
                

                
                
                
                


1,196 - A2
                

                
                
                
                


2,023 - A2
                

                
                
                
                


45,984 - A2
                
                

                
                
                
                 CREATIVE DESIGN CORPORATION

By: ________________________________________
       Gary Hillman, President
Date: _______________________________________


DRAPER FISHER JURVETSON FUND VI, L.P.
By: Draper Fisher Jurvetson Management
       Company VI, LLC, its General Partner

By: ________________________________________
Name: ______________________________________
Title: _______________________________________
Date: _______________________________________


DRAPER FISHER JURVETSON PARTNERS
VI, LLC

By: ________________________________________
Name: ______________________________________
Title: _______________________________________
Date: _______________________________________


DRAPER ASSOCIATES, L.P.
By: ___________________, its General Partner

By: ________________________________________
Name: ______________________________________
Title: _______________________________________
Date: _______________________________________


CID SEED FUND, L.P.
By: CID Seed Fund Partners I, its General
       Partner

By: ________________________________________
Name: ______________________________________
Title: _______________________________________
Date: _______________________________________

8,124 - A2
            

            
            
            
             BEN FRANKLIN TECHNOLOGY PARTNERS,
CENTRAL AND NORTHERN PENNSYLVANIA

By: ________________________________________
Name: ______________________________________
Title: _______________________________________
Date: _______________________________________

EX-4.19

Exhibit 4.19

SHARE PURCHASE AGREEMENT

        THIS SHARE PURCHASE AGREEMENT (the “Agreement”) is made as of February 28, 2007 (the “Effective Date”), by and between Nova Measuring Instruments Ltd., an Israeli company (“Nova” or the “Company”) and the investors identified on the signature pages hereto (each, an “Investor” and collectively, the “Investors”).

        WHEREAS, the Investors desire to invest in the share capital of the Company, by purchasing ordinary shares of the Company, NIS 0.01 par value per share (“Ordinary Shares”) and warrants to purchase Ordinary Shares in the form of Exhibit A (the “Warrants”), upon the terms and subject to the conditions set forth in this Agreement;

        NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the parties hereto agree as follows:

1. Purchase and Sale of Shares and Warrants

        Upon the terms and subject to the conditions set forth in this Agreement, each of the Investors, severally and not jointly, agrees to purchase, and the Company agrees to sell and issue to such Investor, at the Closing (as defined in Section 2.1) Ordinary Shares and Warrants representing the Investment Amount indicated on such Investor’s signature page (the “Investment Amount”).

2. Closing of Issue and Purchase

        2.1     The Closing. The parties shall hold the closing (the “Closing”) at offices of Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co., One Azrieli Center, Tel Aviv, Israel, on the first business day following the day on which all of the conditions set forth in Sections 6.1 and 6.2 hereof are satisfied, or such other date as the parties may agree (the “Closing Date”).

        2.2     Company’s Deliveries. At the Closing, the Company shall deliver or cause to be delivered to each Investor the following: (i) a transfer agent confirmation evidencing the issuance of a number of Ordinary Shares equal to such Investor’s Investment Amount divided by $2.58, registered in the name of such Investor; (ii) a Warrant, registered in the name of such Investor, pursuant to which such Investor shall have the right to acquire the number of Ordinary Shares equal to 75% of the number of Ordinary Shares issuable to such Investor pursuant to clause (i); and (iii) an opinion of Company’s counsel addressed to the Investors.

        2.3     Payment of Investment Amount. At the Closing, each of the Investors shall deliver, or cause to be delivered to the Company, its Investment Amount, in United States dollars and in immediately available funds, by wire transfer to the following account: The Bank of New York (ABA # 021-000-018); Beneficiary: Pershing LLC (Credit Suisse), Acc. No.: 890-051238-5, for the further credit of Nova Measuring Instruments Ltd. (Customer Acc. No.: 22C-001223).

3. Representations and Warranties of the Company

        The Company hereby represents and warrants to the Investor, and acknowledges that the Investor is entering into this Agreement in reliance thereon, as follows:

        3.1     Organization. The Company is a corporation duly organized and validly existing under the laws of the State of Israel. The Company is duly qualified to conduct its business in each jurisdiction where the character of its properties owned, operated or leased or the nature of its activities makes such qualification necessary, except for such failures which would not reasonably be likely to have a Material Adverse Effect (as defined below). The Company has the requisite corporate power and authority and the necessary governmental authority, franchise, license or permit to own, operate, lease and otherwise to hold and operate its assets and properties and to carry on its businesses as now being conducted, except for such failures which would not reasonably be likely to have a Material Adverse Effect. As used herein, the term “Material Adverse Effect” means any material adverse effect on the business, assets, financial condition, liabilities or operations of, the Company and its subsidiaries taken as a whole.

        3.2     Organizational Documents. Set forth in Schedule 3.2 is a complete and correct copy of the Articles of Association of Nova, as amended to date. Such Articles of Association are in full force and effect.

        3.3     Capitalization.

        (a) The registered share capital of the Company immediately prior to the Closing shall be NIS 400,000 divided into 40,000,000 Ordinary Shares, of which 17,120,923 Ordinary Shares are issued and outstanding.

        (b) Except as specified in Nova SEC Reports (as defined below) and for the transactions contemplated by this Agreement, there are no other shares, convertible or other securities, outstanding warrants, options, or other rights to subscribe for, purchase, or acquire from the Company any securities of the Company, and there are no binding contracts or commitments providing for the issuance of, or the granting of rights to acquire from the Company, any securities of the Company or under which the Company is obligated to issue any of its securities.

        (c) All of the Ordinary Shares issuable in accordance with this Agreement will be, when paid for and issued at the Closing as provided in this Agreement, duly authorized, validly issued, fully paid and nonassessable, shall not be subject to call, forfeiture or preemptive rights, and shall be delivered free and clear of all Encumbrances. The term “Encumbrance” means and includes any interest or equity of any person (including any right to acquire, option, or right of preemption) or any mortgage, charge, pledge, lien, or assignment, or any other encumbrance or security interest over or in the relevant property.

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        3.4     Authority. The Company has the necessary corporate power and authority to enter into this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby at the Closing Date have been duly and validly authorized by all necessary corporate action. This Agreement has been duly executed and delivered by the Company and, assuming the due authorization, execution and delivery by the Investors, constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws of general applicability relating to or affecting creditors’ rights generally and by the application of general principles of equity.

        3.5     No Conflict; Required Filings and Consents.

        (a) The execution and delivery of this Agreement by the Company do not, and the performance by the Company of its obligations under this Agreement will not, with or without the giving of notice or the lapse of time or both, (i) conflict with or violate the organizational documents of the Company, (ii) conflict with or violate any law, statute, ordinance, rule, regulation, order, judgment or decree applicable to the Company or by which any of its material properties or assets is bound or affected, or (iii) result in any breach of or constitute a default under, or give to others any rights of termination, amendment, acceleration or cancellation of any agreement to which the Company is a party, or result in the creation of any Encumbrance on the material properties or assets of the Company pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company is a party or by which the Company is bound, except for such breaches, defaults or third party rights which would not have a Material Adverse Effect.

        (b) The execution and delivery of this Agreement by the Company do not, and the performance of this Agreement will not, require any consent, approval, authorization or permit of or filing with or notification to, any Governmental Entity (as defined below), by or with respect to the Company, except (i) for applicable requirements, if any, of the consents, approvals, authorizations, permits or notifications described in Schedule 3.5, and (ii) where failure to obtain the required consents, approvals, authorizations or permits, or to make such filings or notifications, (A) would not prevent or delay consummation of any of the transactions contemplated by this Agreement in any material respect, or otherwise prevent the Company from performing its obligations under this Agreement in any material respect, and (B) would not reasonably be likely to have a Material Adverse Effect. As used herein the term “Governmental Entity” means any Israeli or U.S. entity exercising executive, legislative, judicial, regulatory or administrative function of or pertaining to government.

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        3.6     SEC Filings; Financial Statements.

        (a) The Company has filed all forms, reports and other documents required to be filed with the Securities and Exchange Commission (“SEC”) under United States Securities Exchange Act of 1934, as amended (the “Exchange Act”), for the two years preceding the date hereof and has heretofore made available to the Investors, in the form filed with the SEC during such period, together with any amendments thereto, (i) the Annual Report on Form 20-F for the year ended December 31, 2005 and (ii) all proxy statements relating to meetings of shareholders (whether annual or special) (items (i) and (ii) collectively, the “Nova SEC Reports”). In addition, it has published as a press release the financial statements for the year ended December 31, 2006 (the “2006 Financials”). As of their respective filing or publication dates, the Nova SEC Reports complied as to form in all material respects with the requirements of the Exchange Act and the United States Securities Act of 1933, as amended (the “Securities Act”) applicable to the Company. The Nova SEC Reports and the 2006 Financials did not at the time they were filed or published, respectively, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

        (b) The audited consolidated financial statements of the Company included in the Nova SEC Reports comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto as in effect at the time of filing. The financial statements, including all related notes and schedules, contained in the Nova SEC Reports and in the 2006 Financials present fairly in all material respects the consolidated financial position of the Company at the respective dates thereof and the consolidated results of operations and cash flows of the Company for the periods indicated, in accordance with United States generally accepted accounting principles (GAAP).

        3.7     Operations in the Ordinary Course. Between December 31, 2006 and the date of this Agreement, the Company has operated its business in the usual and ordinary course consistent with past practices and there has been no event which has resulted in or is likely to result in a Material Adverse Effect.

        3.8     Brokers. No person or firm has, or will have, as a result of any act or omission by the Company or anyone acting on behalf of the Company, any right, interest or valid claim against the Company or each of the Investors for any commission, fee or other compensation as a finder or broker or in any similar capacity with respect to the transactions contemplated under this Agreement.

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4. Representations and Warranties of the Investor

        Each of the Investors hereby, for itself and for no other Investors, represents and warrants to the Company, and acknowledges that the Company is entering into this Agreement in reliance thereon, as follows:

        4.1     Organization. Such Investor is an entity duly organized, and validly existing and in good standing under the laws of the jurisdiction of its organization, and has all requisite power and authority to carry out the transactions contemplated hereby. The execution and delivery of this Agreement by such Investor and the consummation by the Investor of the transactions contemplated hereby at the Closing Date have been duly and validly authorized by all necessary corporate action.

        4.2     Authority. Such Investor has the necessary corporate power and authority to enter into this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by such Investor and, assuming the due authorization, execution and delivery by the Company, constitutes a legal, valid and binding obligation of such Investor, enforceable against such Investor in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws of general applicability relating to or affecting creditors’ rights generally and by the application of general principles of equity.

        4.3     No Conflict. The execution and delivery of this Agreement by such Investor, and the performance by such Investor of its obligations under this Agreement will not, with or without the giving of notice or lapse of time or both, (i) conflict with or violate the organizational documents of such Investor, (ii) result in any breach of or constitute a default under, or give to others any rights of termination, amendment, acceleration or cancellation of any material agreement, permit or other instrument or obligation to which the Investor is a party or is bound, or (iii) violate any law or regulation, or any order, injunction, or judgment of any court or any governmental bureau or agency, domestic or foreign applicable to such Investor. No consent or approval by any governmental authority or any third party is required in connection with the execution by such Investor of this Agreement or the consummation by such Investor of the transactions contemplated hereby.

        4.4     Regulation D. Such Investor acknowledges its understanding that the offering and sale of the Ordinary Shares is intended to be exempt from registration under the Securities Act, including by virtue of Section 4(2) of the Securities Act and the provisions of Regulation D thereunder. Such Investor represents and warrants that it is an “Accredited Investor”, as that term is defined under Regulation D, and that such entity is a sophisticated investor that has knowledge and experience in business and financial matters so as to be capable of evaluating the merits and risks relevant to the Company and to the transaction contemplated by this Agreement. Such Investor is able to bear the economic risk of an investment in Ordinary Shares. Such Investor is acquiring Ordinary Shares for its own account for investment purposes only and not with a view to or for distributing or reselling the Ordinary Shares. Such Investor is not purchasing the Ordinary Shares pursuant to this Agreement as a result of, and such Investor is not aware of, any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or presented at any seminar relating to the sale of the Ordinary Shares pursuant to this Agreement.

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        4.5     Shares Not Registered. Such Investor understands, acknowledges and agrees that the Ordinary Shares issuable to such Investor pursuant to this Agreement have not been registered under the securities laws of any jurisdiction, and may not be transferred without such registration or an exemption therefrom. Until registered under the Securities Act or otherwise permitted under the Securities Act, all certificates evidencing any of such Ordinary Shares shall bear a legend, prominently stamped or printed thereon, reading substantially as follows:

“The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the “Securities Act”) or applicable State securities laws. These securities have been acquired for investment and not with a view to distribution or resale, and may not be sold or otherwise transferred without an effective registration statement for such securities under the Securities Act and applicable State securities laws, or the availability of an exemption from, or in a transaction not subject to, the registration provisions of the Securities Act and applicable State securities laws”.

        4.6     Access to Information. Without derogating from the representations and warranties set forth in Section 3 above, the right of the Investor to rely thereon and without derogating from the liability of the Company with respect to the representations and warranties made by the Company, such Investor has been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Ordinary Shares, and the merits and risks of investing in the Ordinary Shares and (ii) access to information about the Company, filed with the SEC and transmitted via EDGAR. In addition, the Company provided to such Investor the Company’s business plan for years 2007-2009. Such Investor represents that information requested by such Investor was provided to it by the Company.

        4.7     No Finders Fee. No person or firm has, or will have, as a result of any act or omission by such Investor or anyone acting on its behalf, any right, interest or valid claim against the Company for any commission, fee or other compensation as a finder or broker or in any similar capacity, with respect to any of the transactions contemplated under this Agreement.

5. Confidentiality

        5.1     Each of the Investors agrees that any Confidential Information (defined below) obtained pursuant to this Agreement, or provided to such Investor prior to the Closing, will not be disclosed or used by such Investor without the prior written consent of the Company, unless such disclosure is required by law, in which case such Investor will provide the Company reasonable advance notice in writing prior to such disclosure.

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        5.2     For the purposes of this Section 5, Confidential Information shall mean all information, including, but not limited to, financial information, business plans, budgets, customer lists, computer software, source codes, plans, drawings, technical specifications, patents, copyrights, and other intellectual property rights, in any form (paper, disk, or other), relating to the Company or its business. However, Confidential Information shall not include information which, as demonstrated by documentary evidence: (a) was in the possession of such Investor prior to its disclosure; (b) is or becomes available to the public through no fault of such Investor; (c) was disclosed to the public by operation of law; or (d) is rightfully received by such Investor from a third party without a duty of confidentiality.

        5.3     Each of the Investors acknowledges and agrees that in the event of any breach of this Section 5, the Company would be irreparably and immediately harmed and monetary damages would be inadequate compensation. It is, therefore, agreed that the Company, in addition to any other remedy to which it may be entitled by law or in equity, shall be entitled to an injunction or injunctions to prevent breaches of this Section 5 and to compel specific performance of this Section 5.

6. Conditions to Closing

        6.1     Conditions Precedent to the Obligation of the Investors to Close. The obligation hereunder of each of the Investors to purchase Ordinary Shares at the Closing and deliver its Investment Amount is subject to the satisfaction or waiver by such Investor, at or before the Closing, of each of the following Conditions:

        (a) each of the representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects as of the date when made and as of the Closing, as though made at that time, provided, that the condition set forth in this clause (a) shall be deemed satisfied if the actual number of Ordinary Shares outstanding at the Closing is greater than the number represented in Section 3.3 by no more than 5%;

        (b) if applicable, the Nasdaq Stock Market shall have waived application of the 15 day prior notice contained in the NASD Marketplace Rule 4310(c)(17)(D) or such timeframe shall have expired without objections; and

        (c) The Tel Aviv Stock Exchange has approved the listing of the Ordinary Shares issuable pursuant to this Agreement and the Ordinary Shares underlying the Warrants.

        6.2.     Conditions Precedent to the Obligation of the Company to Close. The obligation hereunder of the Company to issue and sell Ordinary Shares at the Closing is subject to the satisfaction or waiver by the Company, at or before the Closing, of each of the following Conditions:

        (a) each of the representations and warranties of each Investor contained in this Agreement shall be true and correct in all material respects as of the date when made and as of the Closing, as though made at that time;

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        (b) if applicable, the Nasdaq Stock Market shall have waived application of the 15 day prior notice contained in the NASD Marketplace Rule 4310(c)(17)(D) or such timeframe shall have expired without objections; and

        (c) The Tel Aviv Stock Exchange has approved the listing of the Ordinary Shares issuable pursuant to this Agreement and the Ordinary Shares underlying the Warrants.

7. Registration Rights

        7.1     F-3 Registration Rights. On or prior to the 60th day following the Closing Date, the Company shall prepare and file with the U.S. Securities and Exchange Commission a “shelf” registration statement covering all of the Ordinary Shares issued pursuant to Section 2.2(i) and all of the Ordinary Shares underlying the Warrants issued pursuant to Section 2.2(ii) (the “Registrable Shares”) for an offering to be made on a continuous basis pursuant to Rule 415 under the Securities Act. The Registration Statement shall be on Form F-3 promulgated under the Securities Act or, if the Company is not then permitted to register the resale on Form F-3, on such other appropriate form (the “Registration Statement”). The Company shall use commercially reasonable efforts to cause the Registration Statement to be declared effective under the Securities Act on or prior to the 120th day following the Closing Date (or the 180th day following the Closing Date, if the SEC reviews and has written comments to the filed Registration Statement) (the “Effectiveness Deadline”). The Company shall use commercially reasonable efforts to keep the Registration Statement effective under the Securities Act until two years after the Closing Date or such earlier date when all the Registrable Shares covered by the Registration Statement have been sold or all of the remaining Registrable Shares may be sold within a three-month period under Rule 144 promulgated under the Securities Act. In the event the Registration Statement is not declared effective under the Securities Act on or prior to the Effectiveness Deadline, then, on each monthly anniversary of the Effectiveness Deadline until the Registration Statement is declared effective under the Securities Act, the Company shall pay to each Investor an amount in cash, equal to 1% of the Investment Amount paid by such Investor at the Closing. The parties agree that in no event the maximum aggregate liquidated damages payable to an Investor under this agreement shall be greater than five percent (5%) of the Investment Amount paid by such Investor pursuant to this Agreement.

        The Investors acknowledge that the filing of the Registration Statement would trigger piggy-back registration rights, granted in connection with a recent acquisition, pursuant to which the Company is obligated to cause the Registration Statement to cover in addition the sale of additional 1,600,000 Ordinary Shares.

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        7.2     Blackout Period. If at any time or from time to time after the date of effectiveness of the Registration Statement, the Company notifies in writing the Investors of the existence of a Potential Material Event (“Blackout Notice”), the registration of the Registrable Shares on the Registration Statement shall be suspended from the time of the giving of notice with respect to a Potential Material Event until the Investors receives written notice from the Company that such Potential Material Event either has been disclosed to the public or no longer constitutes a Potential Material Event; provided, however, that the Company may not so suspend such registration for more than ninety (90) days in the aggregate during any 12-month period (“Blackout Period”) during the periods the Registration Statement is required to be in effect. For purposes of this Section, “Potential Material Event” means any of the following: (a) the possession by the Company of material information not ripe for disclosure in a Registration Statement, which shall be evidenced by a good faith determination by the Board of Directors of the Company that disclosure of such information in the Registration Statement would be detrimental to the business and affairs of the Company, or (b) any material engagement or activity by the Company which would, in the good faith determination of the Board of Directors of the Company, be adversely affected by disclosure in a Registration Statement at such time, which determination shall be accompanied by a good faith determination by the Board of Directors of the Company that the Registration Statement would be materially misleading absent the inclusion of such information.

        7.3     Registration Expenses. All registration, filing fees, printers’ and accounting fees and fees and disbursements of counsel for the Company, but excluding underwriting discounts and commissions, stock transfer taxes and fees, incurred in connection with the registration pursuant to this Section 7 shall be borne by the Company. Underwriting discounts and commissions, and stock transfer taxes and fees shall be paid in their entirety by the Investors.

        7.4     Indemnification.

        (a) The Company shall indemnify and hold harmless each Investor that is a selling holder of Registrable Shares and its directors, officers and employees and each other person, if any, who controls (within the meaning of the Securities Act) such Investor (individually and collectively, the “Indemnified Person”) against any losses, claims, damages or liabilities (collectively, the “Liability”) to which such Indemnified Person may become subject under the Securities Act, insofar as such Liability (or action in respect thereof) arises out of or is based upon (i) any untrue statement of a material fact contained, on the effective date thereof, in any registration statement under which such securities were registered under the Securities Act, any prospectus contained therein, or any amendment or supplement thereto, or (ii) any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company shall not be liable to any Indemnified Person in any such case to the extent that any such Liability arises out of or is based upon any untrue statement or omission made in such registration statement, prospectus, or amendment or supplement thereto in reliance upon and in conformity with information furnished in writing to the Company by such person specifically for use therein; and provided further, that the Company shall not be required to indemnify any person against any Liability arising from any untrue or misleading statement or omission contained in any preliminary prospectus if such deficiency is corrected in the final prospectus or for any liability which arises out of the failure of any person to deliver a prospectus as required by the Securities Act.

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        (b) Each Investor holding of any securities included in such registration being effected shall indemnify and hold harmless each other selling holder of any securities, the Company, its directors, officers and employees, and each other person, if any, who controls (within the meaning of the Securities Act) the Company (individually and collectively also the “Indemnified Person”), against any Liability to which any such Indemnified Person may become subject under the Securities Act, insofar as such Liability (or actions in respect thereof) arises out of or is based upon (i) any untrue statement of a material fact contained, on the effective date thereof, in any registration statement under which securities were registered under the Securities Act at the request of such selling Investor, any prospectus contained therein, or any amendment or supplement thereto, or (ii) any omission by such selling Investor to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in the case of (i) and (ii) to the extent, but only to the extent, that such untrue statement or omission was made in such registration statement, prospectus, amendment or supplement thereto in reliance upon and in conformity with information furnished in writing to the Company by such selling Investor specifically for use therein. Such selling Investor shall reimburse any Indemnified Person for any legal fees incurred in investigating or defending any such liability; provided, however, that in no event shall the liability of any Investor for indemnification under this Section 7.4(b) in its capacity as a seller of Registrable Securities exceed the greater of (i) that proportion of the total of such losses, claims, damages, expenses or liabilities indemnified against equal to the proportion of the total securities sold under such registration statement which is being held by such Investor, or (ii) the amount equal to the proceeds to such Investor of the securities sold in any such registration; and provided further, however, that no selling Investor shall be required to indemnify any Person against any Liability arising from any untrue or misleading statement or omission contained in any preliminary prospectus if such deficiency is corrected in the final prospectus or for any Liability which arises out of the failure of any Person to deliver a prospectus as required by the Securities Act.

        (c) In the event the Company, any selling holder or other Person receives a complaint, claim or other notice of any liability or action, giving rise to a claim for indemnification under Sections 7.4(a), (b) above, the person claiming indemnification under such paragraphs shall promptly notify the person against whom indemnification is sought of such complaint, notice, claim or action, and such indemnifying person shall have the right to investigate and defend any such loss, claim, damage, liability or action.

        (d) The amount paid by an indemnifying party or payable to an Indemnified Person as a result of the losses, claims, damages, expenses and liabilities referred to in this Section 7.4 shall be deemed to include, subject to limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim, payable as the same are incurred. No indemnifying party, in the defense of any such claim or litigation, shall enter into a consent or entry of any judgment or enter into a settlement without the consent of the Indemnified Person, which consent will not be unreasonably withheld or delayed.

8. Survival of Representations and Warranties

        All representations and warranties made by any party in this Agreement shall survive the Closing and be in effect until the 240th day following the filing of Form 20-F with respect to the year ended December 31, 2006, on which date they shall expire and be of no further force or effect.

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9. Miscellaneous

        9.1     Further Assurances. Each of the parties hereto shall perform such further acts and execute such further documents as may reasonably be necessary to carry out and give full effect to the provisions of this Agreement and the intentions of the parties as reflected thereby.

        9.2     Governing Law; Dispute Resolution. This Agreement shall be governed by and construed according to the laws of the State of Israel, without regard to the conflict of laws provision thereof; provided, however, that all provisions relating to the registration of the Registrable Shares with the SEC shall be interpreted in accordance with United States federal securities laws. Any claim arising under or in connection with this Agreement shall be resolved exclusively in the appropriate court in Tel-Aviv, Israel. Each of the parties hereby irrevocably consents to the exclusive jurisdiction of such courts and waives and agrees not to assert any objection to the jurisdiction or convenience thereof.

        9.3     Successors and Assigns; Assignment. Except as otherwise expressly stated to the contrary herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns under law, heirs, executors, and administrators of the parties. Except as otherwise expressly stated to the contrary herein, none of the parties hereto shall assign or transfer any of its rights or obligations hereunder absent the consent of all other parties, which consent shall not be unreasonably withheld.

        9.4     Entire Agreement; Amendment and Waiver. This Agreement and the Exhibit and Schedules hereto constitute the full and entire understanding and agreement between the parties with regard to the subject matters hereof. All prior understandings and agreements among the parties (or anyone on their behalf) are void and of no further effect. Any term of this Agreement may be amended, waived, or discharged (either prospectively or retroactively, and either generally or in a particular instance), by a written instrument signed by all the parties to this Agreement.

        9.5     Notices, etc. All notices and other communications required or permitted hereunder to be given to a party to this Agreement shall be in writing and shall be telecopied or mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand or by messenger, addressed to such party’s address as set forth below or at such other address in Israel as the party shall have furnished to each other party in writing in accordance with this provision:

If to the Investor:

To the address set forth under such Investor's name of the signature page hereof;

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If to the Company:

Nova Measuring Instruments Ltd.
Building 22, Weitzmann Science Park
Rehovoth
Attention: Company Secretary
Facsimile: +972-8-940-7776

With a copy to:

Heather Stone, Adv.
Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co.
One Azrieli Center
Tel Aviv, Israel 67021
Facsimile: +972-3-607-4411

All such notices shall be deemed to have been duly given to the addressee thereof (i) if hand delivered, on the day of delivery, (ii) if given by facsimile transmission, on the business day on which such transmission is sent and confirmed, and (iii) if mailed by registered mail, return receipt requested, five business days following the date it was mailed, to such party’s address.

        9.6     Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable under applicable law, then such provision shall be excluded from this Agreement and the remainder of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms; provided, however, that in such event this Agreement shall be interpreted so as to give effect, to the greatest extent consistent with and permitted by applicable law, to the meaning and intention of the excluded provision as determined by such court of competent jurisdiction.

        9.7     Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and enforceable against the parties actually executing such counterpart, and all of which together shall constitute one and the same instrument.

        9.8     Heading, Preamble, and Exhibits. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. The Preamble, Schedules and the Exhibit are an integral and inseparable part of this Agreement.

        9.9     Expenses. Each party hereto shall pay its own expenses in connection with the negotiation and preparation of this Agreement and the consummation of the transactions contemplated hereby.

        9.10     Limitations on Rights of Third Parties. Nothing expressed or implied in this Agreement is intended or shall be construed to confer upon or give any person, other than the Company and the Investors, any rights or remedies under this Agreement.

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        9.11     Press Releases. The parties hereto agree to cooperate in the publication of this Agreement and the transactions contemplated hereby, and shall not issue any press release or other publication in respect thereof, without the prior consent of the Company (in the case of an publication by any of the Investors) or the Investors holding a majority of the Ordinary Shares issued pursuant to Section 2.2(i) of this Agreement (in the case of an publication by the Company), which consent shall not be unreasonably withheld.

[the remainder of this page intentionally left blank]

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        IN WITNESS WHEREOF, the parties have signed this Agreement as of the date first hereinabove set forth.

NOVA MEASURING INSTRUMENTS LTD.


By: /s/ Gabi Seligsohn
——————————————
Name: Gabi Seligsohn
Title: President & Chief Executive Officer

By: /s/ Dror David
——————————————
Name: Dror David
Title: Chief Financial Officer

[Reminder of page intentionally left blank; signature pages for investors follow]

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        IN WITNESS WHEREOF, the parties have signed this Agreement as of the date first hereinabove set forth.

NAME OF INVESTOR

___________________________________

By: ________________________________
     Name:
     Title:

Investment Amount: $ _________________

ADDRESS FOR NOTICE

c/o: _______________________________

Street: _____________________________

City/State/Zip: _______________________

Attention: __________________________

Tel: _______________________________

Fax: _______________________________

DELIVERY INSTRUCTIONS
(if different from above)

c/o: _______________________________

Street: ____________________________

City/State/Zip: ______________________

Attention: _________________________

Tel: _______________________________

EXHIBIT A

FORM OF WARRANT

EXHIBIT A

NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.

NOVA MEASURING INSTRUMENTS LTD.

WARRANT

Warrant No. Original Issue Date: ______ ___, 2007

        Nova Measuring Instruments Ltd., an Israeli company (the “Company”), hereby certifies that, for value received, _______________ or its registered assigns in accordance herewith (the “Holder”), is entitled to purchase from the Company up to a total of ___________¹ Ordinary Shares (each such share, a “Warrant Share” and all such shares, the “Warrant Shares”), at any time and from time to time from and after the Original Issue Date and through and including February ___, 2011 (the “Expiration Date”), and subject to the following terms and conditions:

        1.     Definitions. As used in this Warrant, the following terms shall have the respective definitions set forth in this Section 1.

        “Business Day” means any day except Saturday, Sunday, Friday (except as modified for purposes of Section 5) and any day that is a federal legal holiday in the United States or a day on which banking institutions in the State of New York or the city of Tel Aviv are authorized or required by law or other government action to close.

        “Exercise Price” means $3.05, subject to adjustment in accordance with Section 9.

¹ A number of shares as equals 75% of the Shares issuable to such investor at Closing under the Purchase Agreement.

        “Fundamental Transaction” means any of the following: (1) the Company effects any merger or consolidation of the Company with or into another entity, (2) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (3) any tender offer or exchange offer (whether by the Company or another person) is completed pursuant to which holders of Ordinary Shares are permitted to tender or exchange their shares for other securities, cash or property, or (4) the Company effects any reclassification of the Ordinary Shares or any compulsory share exchange pursuant to which the Ordinary Shares are effectively converted into or exchanged for other securities, cash or property.

        “Ordinary Shares” means the ordinary shares of the Company, NIS 0.01 par value per share, and any securities into which such ordinary shares may hereafter be reclassified.

        “Original Issue Date” means the Original Issue Date first set forth on the first page of this Warrant.

        “Purchase Agreement” means the Share Purchase Agreement, dated February 28, 2007, to which the Company and the original Holder are parties.

        2.    Registration of Warrant. The Company shall register this Warrant upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

        3.    Registration of Transfers. The Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at its address specified herein. Upon any such registration or transfer, a new Warrant to purchase Ordinary Shares, in substantially the form of this Warrant (any such new Warrant, a “New Warrant”), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations of a holder of a Warrant. No New Warrant shall represent the right to purchase less than 5,000 Ordinary Shares.

        4.    Exercise and Duration of Warrants. This Warrant shall be exercisable by the registered Holder at any time and from time to time from and after the Original Issue Date and through and including the Expiration Date. At 11:30 a.m., New York City time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. The Company may not, and in no even shall be obligated to, call or redeem any portion of this Warrant without the prior written consent of the affected Holder. In no event shall the company be required to net-cash settle this Warrant.

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        5.    Delivery of Warrant Shares. To effect exercises hereunder, the Holder shall not be required to physically surrender this Warrant unless the aggregate Warrant Shares represented by this Warrant is being exercised. Holders shall pay the Exercise Price in immediately available funds to the account designated for this purpose by the Company. Upon delivery of the Exercise Notice (in the form attached hereto) to the Company (with the attached Warrant Shares Exercise Log) at its address for notice set forth herein and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, the Company shall promptly issue and deliver to the Holder, a certificate for the Warrant Shares issuable upon such exercise, which, unless otherwise required by the Purchase Agreement, shall be free of restrictive legends. Upon request of the exercising Holder, the Company shall, if legends are not required to be placed on certificates representing Warrant Shares, credit the aggregate number of Warrant Shares to which such Holder is entitled pursuant to such exercise to the Holder’s or its designee’s balance account with DTC through its Deposit Withdrawal Agent Commission system (or the successor thereto, if any). A “Date of Exercise” means the date on which the Holder shall have delivered to the Company: (i) the Exercise Notice (with the Warrant Exercise Log attached to it), appropriately completed and duly signed (for the purposes of this Section, Friday shall be deemed a Business Day, notwithstanding anything in this Warrant to the contrary) and (ii) if such Holder is not utilizing the cashless exercise provisions set forth in this Warrant, payment of the Exercise Price for the number of Warrant Shares so indicated by the Holder to be purchased.

        6.    Charges, Taxes and Expenses. Issuance and delivery of Warrant Shares upon exercise of this Warrant shall be made without charge to the Holder for any issue or transfer tax, withholding tax, transfer agent fee or other incidental tax or expense in respect of the issuance of such certificates, all of which taxes and expenses shall be paid by the Company; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof.

        7.    Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and customary and reasonable indemnity (which shall not include a surety bond), if requested. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable third-party costs as the Company may prescribe. If a New Warrant is requested as a result of a mutilation of this Warrant, then the Holder shall deliver such mutilated Warrant to the Company as a condition precedent to the Company’s obligation to issue the New Warrant.

        8.    Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued and otherwise unreserved Ordinary Shares, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other contingent purchase rights other than those of Holder (taking into account the adjustments and restrictions of Section 9). The Company covenants that all Warrant Shares so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable.

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        9.    Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 9.

        (a)    Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding, (i) pays a stock dividend on its Ordinary Shares or otherwise makes a distribution on any class of capital stock that is payable in Ordinary Shares, (ii) subdivides outstanding Ordinary Shares into a larger number of shares, or (iii) combines outstanding Ordinary Shares into a smaller number of shares, then in each such case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of Ordinary Shares outstanding immediately before such event and of which the denominator shall be the number of Ordinary Shares outstanding immediately after such event. Any adjustment made pursuant to clause (i) of this paragraph shall become effective immediately after the record date for the determination of shareholders entitled to receive such dividend or distribution, and any adjustment pursuant to clause (ii) or (iii) of this paragraph shall become effective immediately after the effective date of such subdivision or combination.

        (b)    Fundamental Transactions. If, at any time while this Warrant is outstanding there is a Fundamental Transaction, then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the same amount and kind of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of the number of Warrant Shares then issuable upon exercise in full of this Warrant (the “Alternate Consideration”). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one Ordinary Share in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Ordinary Shares are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this paragraph (b) and insuring that the Warrant (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction.

        (c)    Number of Warrant Shares. Simultaneously with any adjustment to the Exercise Price pursuant to this Section 9, the number of Warrant Shares that may be purchased upon exercise of this Warrant shall be increased or decreased proportionately, so that after such adjustment the aggregate Exercise Price payable hereunder for the adjusted number of Warrant Shares shall be the same as the aggregate Exercise Price in effect immediately prior to such adjustment.

        (d)    Calculations. All calculations under this Section 9 shall be made to the nearest cent or the nearest 1/100^th of a share, as applicable. The number of Ordinary Shares outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Ordinary Common Shares.

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        (e)    Notice of Adjustments. Upon the occurrence of each adjustment pursuant to this Section 9, the Company at its expense will promptly compute such adjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment, including a statement of the adjusted Exercise Price and adjusted number or type of Warrant Shares or other securities issuable upon exercise of this Warrant (as applicable), describing the transactions giving rise to such adjustments and showing in detail the facts upon which such adjustment is based. Upon written request, the Company will promptly deliver a copy of each such certificate to the Holder and to the Company’s Transfer Agent.

        (f)    Notice of Corporate Events. If the Company (i) declares a dividend or any other distribution of cash, securities or other property in respect of its Ordinary Shares, including without limitation any granting of rights or warrants to subscribe for or purchase any capital stock of the Company or any of its subsidiaries, (ii) authorizes or approves, enters into any agreement contemplating or solicits shareholder approval for any Fundamental Transaction or (iii) authorizes the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall deliver to the Holder a notice describing the material terms and conditions of such transaction (but only to the extent such disclosure would not result in the dissemination of material, non-public information to the Holder) at least 10 calendar days prior to the applicable record or effective date on which a person would need to hold Ordinary Shares in order to participate in or vote with respect to such transaction, and the Company will take all steps reasonably necessary in order to insure that the Holder is given the practical opportunity to exercise this Warrant prior to such time so as to participate in or vote with respect to such transaction; provided, however, that the failure to deliver such notice or any defect therein shall not affect the validity of the corporate action required to be described in such notice.

        10.    Payment of Exercise Price. The Holder may pay the Exercise Price in one of the following manners:

        (a)    Cash Exercise. The Holder may deliver immediately available funds; or

        (b)    Cashless Exercise. If an Exercise Notice is delivered then the Holder may notify the Company in an Exercise Notice of its election to utilize cashless exercise, in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows:

         X = Y [(A-B)/A]

where:

         X = the number of Warrant Shares to be issued to the Holder.

         Y = the number of Warrant Shares with respect to which this
         Warrant is being exercised.

         A = the Market Price (as defined below).

         B = the Exercise Price.

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        The term “Market Price” shall mean: (i) if the Ordinary Shares are listed on a national securities exchange registered under the U.S. Securities Exchange Act of 1934, as amended, the average of the closing prices on such national exchange for the fourteen (14) trading days immediately prior to (but not including) the Exercise Date; (ii) if the Ordinary Shares are not so listed, the average of the closing prices on the principal trading market for the Ordinary Shares during the same period; or (iii) if the market value cannot be calculated on any of the forgoing bases, the Market Price shall be the fair market value as determined in good faith by an investment banker or other appropriate expert of national reputation selected by the Company and acceptable by the Investors holding a majority of the Ordinary Shares issued pursuant to Section 2.2(i) of the Purchase Agreement, which acceptance shall not be unreasonably withheld.

        11.    No Fractional Shares. No fractional shares of Warrant Shares will be issued in connection with any exercise of this Warrant. In lieu of any fractional shares which would, otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied by the closing price of one Warrant Share as reported by the applicable Trading Market on the date of exercise.

        12.    Notices. Any and all notices or other communications or deliveries hereunder (including, without limitation, any Exercise Notice) shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section prior to 11:30 a.m. (New York City time) on a Business Day, (ii) the next Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section on a day that is not a Business Day or later than 11:30 a.m. (New York City time) on any Business Day, (iii) the third Business Day following the date of mailing, if sent by an internationally recognized courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (i) if to the Company, to Building 22, Weitzmann Science Park, Rehovoth, Israel, Attn: Secretary, or to facsimile no.: 972 (8) 940-7776 (or such other address as the Company shall indicate in writing in accordance with this Section), or (ii) if to the Holder, to the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section.

        13.    Warrant Agent. The Company shall serve as warrant agent under this Warrant. Upon 10 calendar days’ notice to the Holder, the Company may appoint a new warrant agent. Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder’s last address as shown on the Warrant Register.

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        14.    Miscellaneous.

        (a)     This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and assigns. Subject to the preceding sentence, nothing in this Warrant shall be construed to give to any person other than the Company and the Holder any legal or equitable right, remedy or cause of action under this Warrant. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns.

        (b)     This Warrant shall be governed by and construed according to the laws of the State of Israel, without regard to the conflict of laws provision thereof. Any claim arising under or in connection with this Warrant shall be resolved exclusively in the appropriate court in Tel-Aviv, Israel. Each of the parties hereby irrevocably consents to the exclusive jurisdiction of such courts and waives and agrees not to assert any objection to the jurisdiction or convenience thereof.

        (c)     The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof.

        (d)     In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant.

        (e)     Prior to exercise of this Warrant, the Holder hereof shall not, by reason of being a Holder, be entitled to any rights of a shareholder with respect to the Warrant Shares.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]

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        IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above.

NOVA MEASURING INSTRUMENTS LTD.


By:
——————————————
Name:
Title:

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EXERCISE NOTICE
NOVA MEASURING INSTRUMENTS LTD.
WARRANT DATED FEBRUARY __, 2007

        The undersigned Holder hereby irrevocably elects to purchase _____________ Ordinary Shares pursuant to the above referenced Warrant. Capitalized terms used herein and not otherwise defined have the respective meanings set forth in the Warrant.

(1)     The undersigned Holder hereby exercises its right to purchase _________________ Warrant Shares pursuant to the Warrant.

(2)     The Holder intends that payment of the Exercise Price shall be made as (check one):

____ “Cash Exercise” under Section 10

____ “Cashless Exercise” under Section 10

(3)     The undersigned is an “accredited investor” as defined in Regulation D under the Securities Act of 1933, as amended.

(4)     The holder shall pay the sum of $____________ to the Company in accordance with the terms of the Warrant.

(5)     Pursuant to this Exercise Notice, the Company shall deliver to the holder _______________ Warrant Shares in accordance with the terms of the Warrant.

(6)     Ordinary Shares issuable upon this exercise are directed to be delivered electronically to the undersigned’s following share account (this election is only available if this Exercise Notice is delivered at a time when legends are not required to be placed on Warrant Shares certificates pursuant to the Purchase Agreement):

Dated: _______________, ____ Name of Holder:

(Print) ______________________________

By: ________________________________
Name: ______________________________
Title: _______________________________

(Signature must conform in all respects to name of holder as specified on the face of the Warrant)

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Warrant Shares Exercise Log

Date Number of Warrant
Shares Available to be
Exercised Number of Warrant Shares
Exercised Number of
Warrant Shares
Remaining to
be Exercised

10

NOVA MEASURING INSTRUMENTS LTD.
WARRANT ORIGINALLY ISSUED FEBRUARY __, 2006
WARRANT NO.

FORM OF ASSIGNMENT

        [To be completed and signed only upon transfer of Warrant]

        FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the right represented by the above-captioned Warrant to purchase ____________ Ordinary Shares to which such Warrant relates and appoints ________________ attorney to transfer said right on the books of the Company with full power of substitution in the premises.

Dated: _______________, ____

_______________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant)



_______________________________________
Address of Transferee



_______________________________________

_______________________________________

In the presence of:

________________________________

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EX-12.1

Exhibit 12.1

CERTIFICATION

        I, Gabi Seligsohn, certify that:

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

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

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

        4.         The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-115(e) for the company and have:

(a)        Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)        Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)        Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

        5.         The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of company’s board of directors (or persons performing the equivalent function):

(a)        All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

(b)        Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

Date: May 11, 2007

/s/ Gabi Seligsohn
——————————————
Gabi Seligsohn, President and
Chief Executive Officer

EX-12.2

Exhibit 12.2

CERTIFICATION

        I, Dror David, certify that:

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

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

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

        4.         The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-115(e) for the company and have:

(a)        Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)        Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)        Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

        5.         The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of company’s board of directors (or persons performing the equivalent function):

(a)        All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

(b)        Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

Date: May 11, 2007

/s/ Dror David
——————————————
Dror David
Chief Financial Officer

EX-13.1

Exhibit 13.1

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

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

    1.        This Annual Report on Form 20-F of Nova Measuring Instruments Ltd. (the “Company”) for the period ended December 31, 2006 (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: May 11, 2007

/s/ Gabi Seligsohn
——————————————
Gabi Seligsohn
President and Chief Executive Officer

EX-13.2

Exhibit 13.2

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

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

    1.        This Annual Report on Form 20-F of Nova Measuring Instruments Ltd. (the “Company”) for the period ended December 31, 2006 (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: May 11, 2007

/s/ Dror David
——————————————
Dror David
Chief Financial Officer

EX-15.1

Exhibit 15.1

Brightman Almagor & Co.

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference of our report dated February 28, 2007 included in the Annual Report on Form 20-F of Nova Measuring Instruments Ltd. (the “Company”) for the fiscal year ended December 31, 2006 into the Registration Statements on Form S-8 of the Company, filed with the Securities and Exchange Commission on the following dates: September 13, 2000 (File No. 333-12546); March 5, 2002 (File No. 333-83734); December 24, 2002 (File No. 333-102193); March 24, 2003 (File No. 333-103981); May 17, 2004 (three files; File Nos. 333-115554, 333-115555, and 333-115556); March 7, 2005 (File No. 333-123158); December 29, 2005 (File No. 333-130745); January 5, 2006 (two files, File Nos. 333-102193 and 333-115556) and September 21, 2006 (File No. 333-137491).

Brightman Almagor & Co.

Certified Public Accountants

A member of Deloitte Touche Tohmatsu

Tel Aviv, Israel

May 9, 2007