10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 28, 2008

OR

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission file number 0-13470

NANOMETRICS INCORPORATED

(Exact name of registrant as specified in its charter)

Delaware	94-2276314
(State or other jurisdiction of incorporation or organization)	(I. R. S. Employer Identification No.)

1550 Buckeye Drive, Milpitas, CA	95035
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (408) 545-6000

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  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a small reporting company. See definition of “large accelerated filer,” “ accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨	Non-accelerated filer  ¨	Accelerated filer  x	Smaller reporting company  ¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x

As of August 1, 2008, there were 18,661,560 shares of common stock, $0.001 par value, issued and outstanding.

NANOMETRICS INCORPORATED

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR QUARTER ENDED JUNE 28, 2008

			Page
PART I.		FINANCIAL INFORMATION	3
	Item 1.	Financial Statements (Unaudited)	3
		Condensed Consolidated Balance Sheets at June 28, 2008 and December 29, 2007	3
		Condensed Consolidated Statements of Operations for the Three- and Six-Month Periods Ended June 28, 2008 and June 30, 2007	4
		Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 28, 2008 and June 30, 2007	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
	Item 4.	Controls and Procedures	23
PART II.		OTHER INFORMATION	24
	Item 1.	Legal Proceedings	24
	Item 1A.	Risk Factors	24
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
	Item 4.	Submission of Matters to a Vote of Securities Holders	33
	Item 6.	Exhibits	33
Exhibit Index			33
Signatures			34

2

PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

NANOMETRICS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands except share amounts)

(Unaudited)

	June 28, 2008			December 29, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	9,653		$	14,919
Accounts receivable, net of allowances of $320 and $323, respectively		28,663			34,855
Inventories		33,962			33,343
Inventories- delivered systems		230			785
Prepaid expenses and other		3,453			2,598
Total current assets		75,961			86,500
Property, plant and equipment, net		42,631			44,419
Goodwill and indefinite lived intangible asset		54,018			52,532
Intangible assets, net		9,244			21,820
Other assets		1,555			1,805
Total assets	$	183,409		$	207,076
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Revolving line of credit	$	—		$	—
Accounts payable		10,642			13,931
Accrued payroll and related expenses		4,484			4,514
Deferred revenue		1,134			2,501
Other current liabilities		7,911			7,243
Income taxes payable		110			1,101
Current portion of debt obligations		151			148
Total current liabilities		24,432			29,438
Deferred income taxes		382			382
Debt obligations and other long-term liabilities		610			1,412
Total liabilities		25,424			31,232
Commitments and Contingencies
Stockholders’ Equity:
Preferred stock, $0.001 par value; 3,000,000 shares authorized; none issued and outstanding		—			—
Common stock, $0.001 par value, 47,000,000 shares authorized; 18,648,250 and 18,620,682, respectively, issued and outstanding		19			19
Additional paid-in capital		189,281			187,180
Accumulated deficit		(33,555	)		(13,917	)
Accumulated other comprehensive income		2,240			2,562
Total stockholders’ equity		157,985			175,844
Total liabilities and stockholders’ equity	$	183,409		$	207,076

See Notes to Unaudited Condensed Consolidated Financial Statements

3

NANOMETRICS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands except per share amounts)

(Unaudited)

	Three-Months Ended						Six-Months Ended
	June 28, 2008			June 30, 2007			June 28, 2008			June 30, 2007
Net revenues:
Products	$	18,504		$	32,732		$	46,433		$	65,258
Service		5,257			4,603			12,056			9,192
Total net revenues		23,761			37,335			58,489			74,450
Costs of net revenues:
Cost of products		9,162			16,372			22,824			33,855
Cost of service		4,532			4,839			9,770			10,668
Total costs of net revenues		13,694			21,211			32,594			44,523
Gross profit		10,067			16,124			25,895			29,927
Operating expenses:
Research and development		4,422			4,739			8,677			9,325
Selling		4,844			4,668			9,683			10,033
General and administrative		5,302			4,762			10,826			11,755
Amortization of intangible assets		1,330			1,663			2,615			3,212
Asset impairment		13,213			—			13,213			—
Restructuring charge		—			—			870			—
Total operating expenses		29,111			15,832			45,884			34,325
Income (loss) from operations		(19,044	)		292			(19,989	)		(4,398	)
Other income (expense)
Interest income		34			29			132			52
Interest expense		(26	)		(46	)		(103	)		(85	)
Other, net		(32	)		(541	)		422			(422	)
Total other income (expense), net		(24	)		(558	)		451			(455	)
Loss before provision (benefit) for income taxes		(19,068	)		(266	)		(19,538	)		(4,853	)
Provision (benefit) for income taxes		(154	)		(136	)		100			(112	)
Net loss	$	(18,914	)	$	(130	)	$	(19,638	)	$	(4,741	)
Net loss per share:
Basic	$	(1.02	)	$	(0.01	)	$	(1.06	)	$	(0.27	)
Diluted	$	(1.02	)	$	(0.01	)	$	(1.06	)	$	(0.27	)
Shares used in per share calculation:
Basic		18,632			17,857			18,611			17,758
Diluted		18,632			17,857			18, 611			17,758

See Notes to Unaudited Condensed Consolidated Financial Statements.

4

NANOMETRICS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

	Six-Months Ended
	June 28, 2008			June 30, 2007
Cash flows from operating activities:
Net loss	$	(19,638	)	$	(4,741	)
Reconciliation of net loss to net cash provided by operating activities:
Depreciation and amortization		4,625			4,648
Asset impairment		13,213			—
Stock-based compensation		1,999			1,876
Changes in assets and liabilities, net of assets acquired:
Accounts receivable		6,539			(2,503	)
Inventories, net		798			4,386
Inventories-delivered systems		555			1,816
Prepaid expenses and other		(703	)		(557	)
Other assets		162			189
Accounts payable, accrued and other liabilities		(4,090	)		2,216
Deferred revenue		(1,520	)		(1,189	)
Income taxes payable		(974	)		(185	)
Net cash provided by operating activities		966			5,956
Cash flows from investing activities:
Purchase of Tevet’s net assets, net of cash received		(3,316	)		—
Purchases of property, plant and equipment		(2,049	)		(736	)
Net cash used in investing activities		(5,365	)		(736	)
Cash flows from financing activities:
Repayments of debt obligations		(78	)		(261	)
Proceeds from sale of shares under employee stock option plans and purchase plan		638			2,560
Repurchase of common stock		(535	)		—
Net cash provided by financing activities		25			2,299
Effect of exchange rate changes on cash and cash equivalents		(892	)		(89	)
Net increase (decrease) in cash and cash equivalents		(5,266	)		7,430
Cash and cash equivalents, beginning of period		14,919			7,957
Cash and cash equivalents, end of period	$	9,653		$	15,387
Supplemental disclosure of cash flow information:
Cash for interest	$	110		$	64
Cash paid for income taxes	$	673		$	71
Capitalization of inventory as property, plant and equipment	$	—		$	5,775

See Notes to Unaudited Condensed Consolidated Financial Statements.

5

NANOMETRICS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Consolidated Financial Statements

In the opinion of management, the accompanying Unaudited Condensed Consolidated Financial Statements (“financial statements”) of Nanometrics Incorporated and its wholly-owned subsidiaries (collectively, “Nanometrics” or the “Company”) have been prepared on a consistent basis with the December 29, 2007 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly present the information set forth therein. The financial statements have been prepared in accordance with the regulations of the United States Securities and Exchange Commission (“SEC”), and, therefore, omit certain information and footnote disclosure necessary to present the statements in accordance with accounting principles generally accepted in the United States of America. The operating results for interim periods are not necessarily indicative of the operating results that may be expected for the entire year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 29, 2007, which were included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on March 15, 2008 and amended on April 25, 2008.

Fiscal Period – Nanometrics uses a 52/53 week fiscal year ending on the Saturday nearest to December 31. All references to the quarter refer to Nanometrics’ fiscal quarter. The fiscal quarters presented herein include 13 weeks.

Note 2. Recent Accounting Pronouncements

In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of non-governmental entities that are presented in conformity with generally accepted accounting principles in the United States of America. SFAS 162 will be effective 60 days after the Security and Exchange Commission approves the Public Company Accounting Oversight Board’s amendments to AU Section 411. The Company does not anticipate the adoption of SFAS 162 will have an impact on the Company’s consolidated financial position, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133” (“SFAS 161”). The new standard requires additional disclosures regarding a company’s derivative instruments and hedging activities by requiring disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also requires disclosure of derivative features that are credit risk–related as well as cross-referencing within the notes to the financial statements to enable financial statement users to locate important information about derivative instruments, financial performance, and cash flows. The standard is effective for our fiscal year and interim periods within such year, beginning January 1, 2009, with early application encouraged. The Company is evaluating the impact of the adoption of the provisions of SFAS 161.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (SFAS 141R”). SFAS 141R amends SFAS 141 and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any non-controlling interest in the acquiree. It also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. It is effective for fiscal years beginning on or after December 15, 2008 and will be applied prospectively.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 requires that ownership interests in subsidiaries held by parties other than the parent, and the amount of consolidated net income, be clearly identified, labeled, and presented in the consolidated financial statements. It also requires once a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary be initially measured at fair value. Sufficient disclosures are required to clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. It is effective for fiscal years beginning on or after December 15, 2008 and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements shall be applied prospectively. The Company is currently evaluating the impact of adopting SFAS 160 on its consolidated financial statements.

6

In September 2006, the FASB finalized SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements; however, it does not require any new fair value measurements. In February 2008, the FASB issued Final FASB Staff Position, or FSP No. FAS 157-2. The FSP, which was effective upon issuance, delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value at least once a year, to fiscal years beginning after November 15, 2008. The FSP also covers interim periods within the fiscal years for items within its scope. The delay is intended to allow the FASB and its constituents the time to consider the various implementation issues associated with SFAS 157. The Company is currently evaluating the impact of adopting SFAS 157 on its consolidated financial statements.

Note 3. Acquisitions

Tevet Inc.

On May 19, 2008, Nanometrics announced that it had acquired Tevet Process Control Technologies, Ltd., (“Tevet”) an Israel-based privately held corporation. The acquisition of Tevet, an integrated metrology company serving the worldwide semiconductor and solar manufacturing industry, is expected to further Nanometrics’ strategy to offer a breadth of process control metrology solutions that address both advanced technology as well as cost of ownership. Under the terms of the asset purchase agreement, which was an all-cash transaction, the total consideration to purchase all assets and assume specified liabilities of Tevet was $3.8 million, including $0.2 million in transaction fees, which include legal, valuation and accounting fees. The asset purchase has been accounted for under the purchase method of accounting in accordance with SFAS 141, Business Combinations. Under the purchase method of accounting, the total estimated purchase price is allocated to the net tangible and identifiable intangible assets of Tevet acquired in connection with the transaction, based on their respective estimated fair values. The results of operations of Tevet were included in the Company’s condensed consolidated statements of operations from the date of the acquisition.

The preliminary allocation of the Tevet purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed was based on management’s estimates of fair value at the date of acquisition. When estimating fair values of assets acquired and liabilities assumed, management considered a number of factors, including valuations, appraisals and assumptions which are subject to change. The primary areas of the purchase price allocation that are not yet finalized relate to finalization of the valuation report. Management expects the valuation process to be completed during the third quarter of fiscal 2008.

The preliminary allocation of the Tevet purchase price is summarized below (in thousands):

Assets acquired:
Cash	$	446
Accounts receivable		49
Inventories		467
Other assets		70
Property, plant and equipment		169
Total assets acquired		1,201
Liabilities assumed:
Accounts payable		159
Deferred revenue		250
Other accrued liabilities		336
Total liabilities assumed		745
Net assets acquired		456

7

Goodwill and other intangible assets:
Goodwill		1,886
Customer relationships		600
Developed technology		600
Backlog		220
Total goodwill and other intangible assets		3,306
Net estimated purchase price	$	3,762

The patented technology and customer relationships are being amortized over an estimated useful life of seven years and the customer relationships is being amortized on an accelerated basis over an estimated useful life designed to match the amortization to the benefits where applicable. In accordance with SFAS 142, the Company will not amortize the goodwill, but will evaluate it annually for impairment or whenever events or circumstances occur which indicate that it might be impaired.

If the Company had acquired Tevet at the beginning of the periods presented, the Company’s unaudited pro forma net revenues, net loss and net loss per share from operations would have been as follows (in thousands, except per share amounts):

	Three Months Ended						Six Months Ended
	June 28, 2008			June 30, 2007			June 28, 2008			June 30, 2007
Net revenues	$	24,068		$	37,896		$	59,310		$	75,256
Net loss		(18,917	)		(859	)		(20,098	)		(6,521	)
Net loss per share:
Basic	$	(1.02	)	$	(0.05	)	$	(1.08	)	$	(0.37	)
Diluted	$	(1.02	)	$	(0.05	)	$	(1.08	)	$	(0.37	)

Note 4. Long-Lived Asset Impairment

The Company performs an impairment review of its long-lived assets upon a change in business conditions or upon the occurrence of an indicator of impairment. Due to changes in the forecasts relating to specific intangible assets acquired in the 2006 acquisitions caused by management’s decision to focus the Company’s resources on new generation products, and changes in the forecasts relating to the machine shop, the Company performed an analysis in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-lived Assets”, of its long-lived assets including intangible assets and other long-lived assets where cash flows could be identified with a specific group of assets. SFAS No. 144 provides for a two-step approach to determine whether and by how much a long-lived asset has been impaired. The first step requires a comparison of the future undiscounted cash flows of the asset to its net book value. If the future undiscounted cash flows are greater, then no impairment is deemed to have occurred. If the future undiscounted cash flows are less, then the second step must be performed to determine the amount, if any, of actual impairment. The Company performed step one impairment test for certain of its long-lived assets and has determined that at June 28, 2008, the net book value exceeded the future undiscounted cash flows for certain intangible assets as well as assets associated with the Company’s machine shop and plating facility which was subcontracted in the third fiscal quarter of 2007. The initial projected future cash flows from subcontracting this facility have been significantly reduced due to operational limitations. Accordingly, the Company completed step two of the impairment analysis utilizing a present value technique to estimate the fair value of the impaired assets. As a result of this analysis, impairment charges of $11.8 million and $1.5 million, respectively, were recorded in the second quarter of 2008 to reflect certain customer relationship and developed technology intangible assets and machine shop related assets at their fair value.

The process of evaluating the potential impairment of long-lived assets is highly subjective and requires significant judgment. In estimating the fair value of these assets, the Company made estimates and judgments about future revenues and cash flows. The Company’s forecasts were based on assumptions that are consistent with the plans and estimates the Company is using to manage the business. Changes in these estimates could potentially result in additional impairment of the long-lived assets and future non-cash impairment charges for all or a portion of their balance at June 28, 2008. See Note 9 for further discussion of goodwill.

8

Note 5. Restructuring Charge

During the first quarter of 2008, the Company reduced its global work force by approximately 30 employees. This reduction affected employees in each of the Company’s locations worldwide and is aimed at reducing its operating expenses.

	Other Charges			Severance and Other Benefits			Total
Reserve balance at December 29, 2007	$	—		$	—		$	—
Restructuring charges recorded during the first quarter of 2008		84			786			870
Cash paid during the quarter		(84	)		(786	)		(870	)
Reserve balance at March 29, 2008	$	—		$	—		$	—

Note 6. Accounts Receivable

The Company maintains arrangements under which eligible accounts and notes receivable are sold without recourse to unrelated third-party financial institutions. These receivables were not included in the condensed consolidated balance sheets as the criteria for sale treatment established by SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” (“SFAS 140”) had been met. Under SFAS 140, after a transfer of financial assets, an entity stops recognizing the financial assets when the control has been surrendered. The Company’s sale of accounts receivable met the criteria of a true sale of these assets since the acquiring party retained the title to these receivables and had assumed the risk that the receivables will be collectible. The Company pays administrative fees as well as interest at rates ranging from 1.375% to 1.875% based on the anticipated length of time between the date the sale is consummated and the expected collection date of the receivables sold. The Company sold $3.9 million and $10.6 million of receivables, respectively, during the three- and six-month periods ended June 28, 2008, and sold $5.6 million and $9.5 million of receivables, respectively, during the three- and six-month periods ended June 30, 2007. There were no material gains or losses on the sale of such receivables. There were no amounts due from the financial institutions at June 28, 2008 and December 29, 2007.

Note 7. Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following (in thousands):

	June 28, 2008		December 29, 2007
Raw materials and sub-assemblies	$	21,596	$	19,685
Work in process		5,867		7,134
Finished goods		6,499		6,524
Total inventories	$	33,962	$	33,343

We reflect the cost of systems that were invoiced upon shipment but deferred for revenue recognition purposes separate from our inventory held for sale as “Inventories—delivered systems.”

Note 8. Property, Plant and Equipment

Property, plant and equipment consists of the following (in thousands):

	June 28, 2008			December 29, 2007
Land	$	15,590		$	15,597
Building and improvements		18,430			18,188
Machinery and equipment		19,700			18,753
Furniture and fixtures		2,227			2,185
		55,947			54,723
Accumulated depreciation and amortization		(13,316	)		(10,304	)
Total property, plant and equipment, net	$	42,631		$	44,419

9

Note 9. Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price paid over the fair value of tangible and identifiable intangible net assets acquired in a business combination. In accordance with SFAS No. 142, “Goodwill and Other intangible Assets”, (“SFAS 142”) goodwill is reviewed annually or whenever events or circumstances occur which indicate that goodwill might be impaired. SFAS 142 provides for a two-step approach to determining whether and by how much goodwill has been impaired. The first step requires a comparison of the fair value of the Company (reporting unit) to its net book value. If the fair value is greater, then no impairment is deemed to have occurred. If the fair value is less, then the second step must be performed to determine the amount, if any, of actual impairment. The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. In estimating the fair value of the Company, the Company made estimates and judgments about future revenues and cash flows. Changes in these estimates could change the Company’s conclusion regarding impairment of goodwill and potentially result in a future non-cash goodwill impairment charge for all or a portion of the goodwill balance. To determine the fair value, the Company’s review process uses the income method and is based on a discounted future cash flow approach that uses estimates including the following for each segment: revenue, based on assumed market growth rates and its assumed market share; estimated costs; and appropriate discount rates based on the particular business’s weighted average cost of capital. The Company’s estimates of market segment growth, market segment share and costs are based on historical data, various internal estimates and certain external sources, and are based on assumptions that are consistent with the plans and estimates the Company is using to manage the underlying businesses. The Company’s business consists of both established and emerging technologies and its forecasts for emerging technologies are based upon internal estimates and external sources rather than historical information. If future forecasts are revised, they may indicate or require future impairment charges. The Company also considered its market capitalization on the dates of its impairment tests in determining the fair value of the respective businesses. The Company completed the first step and has determined that its fair value of each reporting unit at June 28, 2008 exceeded its allocated net book value on that date.

Intangible assets with an indefinite life are evaluated annually for impairment or whenever events or circumstances occur which indicate that those assets might be impaired. On March 15, 2006, as a result of the Company’s acquisition of Soluris Inc., the Company acquired a trademark with a value of $0.4 million with an indefinite life. During the first quarter of 2008, the Company determined the trademark no longer had an indefinite life. Accordingly, a remaining life of five years was assigned and the Company began amortization of the finite-lived intangible asset. For impairment of certain long-lived assets including assets acquired in 2006, see Note 4.

During the second quarter of 2008, the Company added $1.4 million of finite-lived assets through its acquisition of Tevet (See Note 3). Finite-lived intangible assets are recorded at cost, less accumulated amortization. Finite-lived intangible assets as of June 28, 2008 and December 29, 2007 consist of the following (in thousands):

	Original Cost		Impairment*			Accumulated Amortization			Net Intangible Assets
June 28, 2008
Developed technology acquired in business combinations	$	10,400	$	(2,753	)	$	(2,707	)	$	4,940
Customer relationships		16,300		(7,441	)		(6,137	)		2,722
Brand names		3,600		(1,247	)		(993	)		1,360
Patented technology		1,790		—			(1,790	)		—
Trade Mark		400		(320	)		(40	)		40
Backlog		3,351		—			(3,169	)		182
Non-compete agreement		50		—			(50	)		—
Other		250		—			(250	)		—
Total	$	36,141	$	(11,761	)	$	(15,136	)	$	9,244
December 29, 2007
Developed technology acquired in business combinations	$	9,800	$	—		$	(2,037	)	$	7,763
Customer relationships		15,700		—			(4,638	)		11,062
Brand names		3,600		—			(749	)		2,851
Patented technology		1,790		—			(1,646	)		144
Backlog		3,131		—			(3,131	)		—
Non-compete agreement		50		—			(50	)		—
Other		250		—			(250	)		—
Total	$	34,321	$	—		$	(12,501	)	$	21,820

* Impairment charges reduce the original cost basis of the respective intangible assets.

10

The amortization of finite-lived intangibles is computed using the straight-line method except for customer relationships which is computed using an accelerated method. Estimated lives of finite-lived intangibles range from five to ten years, except for the non-compete agreement and backlog which were amortized over one year. Total amortization expense for the three-month periods ended June 28, 2008 and June 30, 2007 was $1.3 million and $1.7 million, respectively, and for the six-month periods ended June 28, 2008 and June 30, 2007 was $2.6 million and $3.2 million, respectively.

The estimated future amortization expense as of June 28, 2008 is as follows (in thousands):

Fiscal Years
2008 (remaining six months)	$	1,002
2009		1,817
2010		1,624
2011		1,320
2012		1,045
2013 and thereafter		2,436
Total amortization	$	9,244

Note 10. Other Current Liabilities

Other current liabilities consist of the following (in thousands):

	June 28, 2008		December 29, 2007
Accrued warranty	$	3,262	$	4,545
Accrued professional services		1,042		529
Other		3,607		2,169
Total other current liabilities	$	7,911	$	7,243

Note 11. Stockholders’ Equity

Net Income (Loss) Per Share—Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income per share gives effect to all potentially dilutive common shares outstanding during the period, including contingently issuable shares and certain stock options, calculated using the treasury stock method. A reconciliation of the share denominator of the basic and diluted net income (loss) per share computations is as follows (in thousands):

	Three-Months Ended		Six-Months Ended
	June 28, 2008	June 30, 2007	June 28, 2008	June 30, 2007
Weighted average common shares outstanding used in basic net loss per share computation	18,632	17,857	18,611	17,758
Potential dilutive common stock equivalents, using treasury stock method	—	—	—	—
Shares used in diluted net loss per share computation	18,632	17,857	18,611	17,758

For the three- and six-month periods ended June 28, 2008 and June 30, 2007, the Company had securities outstanding which could potentially dilute basic earnings per share in the future, which were excluded from the computation of diluted net loss per share in the periods presented as their impact would have been anti-dilutive. Weighted average common share equivalents, consisting of stock options excluded from the calculation of diluted net loss per share were 2.7 million for each of the three- and six-month periods ended June 28, 2008 and June 30, 2007, respectively.

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During the third fiscal quarter of 2007, the Company’s Board of Directors authorized a stock repurchase program pursuant to which the Company may repurchase up to $4.0 million of shares of its common stock. The Company repurchased 75,550 common shares at an average price of $7.09 per share during the first half of 2008.

Note 12. Stock-Based Compensation

Stock-based compensation expense for all share-based payment awards made to the Company’s employees and directors pursuant to the employee stock option and employee stock purchase plans under SFAS No. 123 (revised 2004), “Share-Based Payment”, (“SFAS 123(R)”) is as follows (in thousands):

	Three-Months Ended				Six-Months Ended
	June 28, 2008		June 30, 2007		June 28, 2008		June 30, 2007
Cost of products	$	99	$	37	$	136	$	113
Cost of service		131		87		185		165
Research and development		174		310		311		531
Selling		250		158		406		437
General and administrative		427		50		961		630
Total stock-based compensation expense related to employee stock options and employee stock purchases	$	1,081	$	642	$	1,999	$	1,876

The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model and the assumptions noted in the following table. The expected term of options granted was calculated using the simplified method allowed by Staff Accounting Bulletin 107. The risk-free rate is based on the U.S. Treasury rates in effect during the corresponding period of grant. The expected volatility is based on the historical volatility of Nanometrics’ stock price. The dividend yield reflects that the Company has not paid any cash dividends since inception and does not intend to pay any cash dividends in the foreseeable future.

	Three-Months Ended				Six-Months Ended
	June 28, 2008		June 30 2007		June 28, 2008		June 30, 2007
Stock Options
Expected life	4.4 years		4.4 years		4.4 years		4.4 years
Volatility	52.98	%	55.20	%	53.99	%	56.50	%
Risk free interest rate	3.00	%	5.14	%	2.98	%	5.10	%
Dividends	—		—		—		—
Employee Stock Purchase Plan
Expected life	0.5 years		0.5 years		0.5 years		0.5 years
Volatility	72.93	%	46.50	%	72.93	%	46.50	%
Risk free interest rate	1.64	%	2.25	%	1.64	%	2.25	%
Dividends	—		—		—		—

The weighted average fair value per share of the stock options awarded in the three- and six-month periods ended June 28, 2008 was $3.29 and $3.16, respectively, based on the fair market value of the Company’s common stock on the grant dates.

A summary of activity under the Company’s stock option plans during the quarter ended June 28, 2008 is as follows:

	Shares Available		Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in Thousands)
Options
Outstanding at December 29, 2007	1,607,911		3,120,467		$	9.94	4.6	$	4,381
Shares added through 2005 Option Plan	558,620		—
Exercised	—		(35,978	)
Granted	(337,966	)	337,966
RSU Allocation	(20,000	)	—
Cancelled	416,172		(416,671	)
Outstanding at June 28, 2008	2,224,737		3,005,784		$	9.56	4.87	$	158
Exercisable at June 28, 2008			1,501,157		$	10.78	3.8	$	137

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During the second quarter of 2008, the Company granted 10,000 Restricted Stock Units (“RSUs”) with vesting periods of three years. As of June 28, 2008, there were 110,000 RSUs granted and outstanding.

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $5.97 as of June 28, 2008, which would have been received by the option holders had all option holders exercised their options as of that date. The total intrinsic value of options exercised during the three- and six-month periods ended June 28, 2008 was $0.1 million and for the three- and six-month periods ended June 30, 2007 was $0.3 million. The fair value of options vested for the three- and six-month periods ended June 28, 2008 was $1.7 million and $3.4 million, respectively, and for the three- and six-month periods ended June 30, 2007 was $1.6 million and $3.2 million, respectively.

Note 13. Comprehensive Income (Loss)

The Company’s comprehensive income (loss) was as follows (in thousands):

	Three-Months Ended						Six-Months Ended
	June 28, 2008			June 30, 2007			June 28, 2008			June 30, 2007
Net loss	$	(18,914	)	$	(130	)	$	(19,638	)	$	(4,741	)
Foreign currency translation adjustments, net of tax		(1,180	)		141			322			90
Total comprehensive income (loss)	$	(20,094	)	$	11		$	(19,316	)	$	(4,651	)

Substantially all of the accumulated other comprehensive income reflected as a separate component of stockholders’ equity consists of accumulated foreign currency translation adjustment for all periods presented.

Note 14. Warranties

Product Warranty – The Company sells the majority of its products with a 12-month repair or replacement warranty from the date of acceptance which generally represents the date of shipment. The Company provides an accrual for estimated future warranty costs based upon the historical relationship of warranty costs to the cost of products sold. The estimated future warranty obligations related to product sales are recorded in the period in which the related revenue is recognized. The estimated future warranty obligations are affected by the warranty periods, sales volumes, product failure rates, material usage, and labor and replacement costs incurred in correcting a product failure. If actual product failure rates, material usage, labor or replacement costs differ from the Company’s estimates, revisions to the estimated warranty obligations would be required. For new product introductions where limited or no historical information exists, the Company may use warranty information from other previous product introductions to guide it in estimating its warranty accrual. The warranty accrual represents the best estimate of the amount necessary to settle future and existing claims on products sold as of the balance sheet date. The Company periodically assesses the adequacy of its reported warranty reserve and adjusts the amounts in accordance with changes in these factors. Components of the warranty accrual, which was included in the accompanying condensed consolidated balance sheets with other current liabilities, were as follows (in thousands):

	Six-Months Ended
	June 28, 2008			June 30, 2007
Balance as of beginning of period	$	4,545		$	4,349
Actual warranty cost		(3,009	)		(1,412	)
Provision for warranty		1,726			2,015
Balance as of end of period	$	3,262		$	4,952

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Intellectual Property Indemnification Obligations – In addition to product warranties, the Company will, from time to time, in the normal course of business, agree to indemnify certain customers with whom it enters into contractual relationships. The Company has agreed to hold these customers harmless against third party claims that Nanometrics’ products, when used for their intended purpose(s), infringe the intellectual property rights of such third parties or other claims made against the customer. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim. Historically, the Company has not made payments under these obligations and believes that the estimated fair value of these agreements is minimal. Accordingly, no liabilities have been recorded for these obligations in the accompanying unaudited condensed consolidated balance sheets as of June 28, 2008 and December 29, 2007.

Note 15. Income Taxes

For the three-month period ended June 28, 2008 the income taxes benefit of $0.2 million was the result of $0.1 million of tax benefit in a certain foreign jurisdiction where sufficient deferred tax liabilities exist to allow for benefiting the operating loss and $0.1 million for reduction of a tax contingency due to the expiration of local statues. For the six-month period ended June 28, 2008 the income taxes provision of $0.1 million relates to the aggregate charges for potential tax exposure of certain foreign jurisdictions.

The income taxes benefit of $0.1 million for both the three- and six-month periods ended June 30, 2007 was the result of foreign taxes of $0.2 million and $0.4 million, respectively, offset by $0.3 million and $0.5 million, respectively, of tax benefit in a certain foreign jurisdiction where sufficient deferred tax liabilities exist to allow for benefiting the operating loss.

Note 16. Contingencies

In August 2005, KLA-Tencor Corporation (“KLA”) filed a complaint against the Company in the United States District Court for the Northern District of California. The complaint alleges that certain of the Company’s products infringe two of KLA’s patents. On January 30, 2006, KLA added a third patent to their claim. The complaint seeks a preliminary and permanent injunction against the sale of these products as well as the recovery of monetary damages and attorneys’ fees. As part of its defense, the Company has filed a request for re-examination of two of the allegedly infringed KLA patents with the U.S. Patent & Trademark Office (“PTO”). These requests for re-examination were recently accepted for review by the PTO. In March 2006, the Company filed a motion for and was granted a stay in the patent litigation case until such re-examination is completed. The PTO issued Office Actions for two of the re-examination proceedings on March 26, 2006, and an Office Action in the third re-examination proceeding on February 5, 2008. In the various Office Actions, the PTO rejected numerous claims of the three asserted KLA patents.

Note 17. Geographic and Significant Customer Information

The Company has one operating segment, as defined in SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information”. The Company’s operating segment is the sale, design, manufacture, marketing and support of thin film, optical critical dimension and overlay dimension metrology systems. The following table summarizes total net revenues and long-lived assets (excluding intangible assets) attributed to significant countries (in thousands):

	Three-Months Ended				Six-Months Ended
	June 28, 2008		June 30, 2007		June 28, 2008		June 30, 2007
Total net revenues:
United States	$	4,081	$	8,304	$	15,918	$	24,665
Japan		9,051		13,160		17,914		18,748
South Korea		4,594		6,366		9,995		10,131
Taiwan		1,650		4,538		2,809		6,702
China		2,538		2,531		6,983		4,350
Europe		560		2,176		1,657		9,477
All other		1,287		260		3,213		377
Total net revenues*	$	23,761	$	37,335	$	58,489	$	74,450

* Net revenues are attributed to countries based on the deployment and service locations of systems.

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	June 28, 2008		December 29, 2007
Long lived assets
United States	$	35,552	$	37,767
Japan		1,127		1,165
South Korea		5,185		5,589
Taiwan		154		158
Europe		2,168		1,545
Total long lived assets**	$	44,186	$	46,224

** Long-lived assets include tangible assets only.

The following customers accounted for 10% or more of total accounts receivable:

	Six-Months Ended
	June 28, 2008		June 30, 2007
Hynix	*	**	12.7	%
Wuhan Semiconductor	10.6	%	*	**
Promos	*	**	17.5	%

*** The customer accounted for less than 10% of total accounts receivable during the period.

The following customers accounted for 10% or more of total revenue:

	Three-Months Ended				Six-Months Ended
	June 28, 2008		June 30, 2007		June 28, 2008		June 30, 2007
Samsung Electronics Co. Ltd.	11.7	%	*	**	17	%	18.4	%
Hynix	*	**	17.1	%	*	**	15.5	%
Toshiba	*	**	15.6	%	*	**	*	**
Promos	*	**	10.4	%	*	**	*	**
Renesas Technology	10.2	%	*	**	*	**	*	**
Applied Materials Inc.	*	**	10.1	%	*	**	*	**

*** The customer accounted for less than 10% of revenue during the period.

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Note 18. Subsequent Event

In July 2008, the Company entered into a lending facility in the principal amount of $13.5 million maturing in July 2018. All borrowings under this facility bear a fixed interest for five years at a per annum rate equal to 7.18% whereupon the interest rate will be reset to a fixed rate for the following five years equal to the weekly average yield of five year U.S. dollar interest rate swaps in effect plus 3.03%. The loan is collateralized by a lien on the building and land comprising the Company’s principal offices in Milpitas, California. The Company will use the proceeds of these borrowings for general corporate purposes or for future acquisitions or expansion of our business.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The statements contained in this document that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding our business in future periods. We may identify these statements by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and other similar expressions. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements, except as may otherwise be required by law.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain risk factors, including those set forth in Part II Item 1A “Risk Factors” and elsewhere in this document. In evaluating our business, current and prospective investors should carefully consider these factors in addition to the other information set forth in this document. We believe that it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to predict accurately or over which we have no control. You should be aware that the occurrence of the events described in such risk factors and elsewhere in this report could materially and adversely affect our business, operating results and financial condition. While management believes that the discussion and analysis in this report is adequate for a fair presentation of the information presented, we recommend that you read this discussion and analysis in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 29, 2007, which were included in our 2007 Annual Report on Form 10-K filed with the Securities Exchange Commission on March 13, 2008 and amended on April 25, 2008.

Overview

We are an innovator in the field of metrology systems for the semiconductor industry. Our systems are designed to precisely monitor film thickness and critical dimensions that are necessary to control the manufacturing process and provide increased production yields and performance.

Capital expenditures by manufacturers of semiconductors and their suppliers are critical to our success. The demand by these manufacturers and suppliers is driven by the expected market demand for new products and new applications. The increasing complexity of the 300mm manufacturing processes for semiconductors is an important factor in the demand for our innovative metrology systems. The incorporation of smaller features sizes, copper interconnects technology and optical critical dimension technology is expected to result in increased demand. Our strategy is to continue to innovate organically and to evaluate strategic acquisitions in order to address business challenges and opportunities.

Our revenues are primarily derived from product sales, which include sales of accessories, but are also derived from customer service for the installed base of our products. In the year ended December 29, 2007, we derived 86.2% of our total net revenues from product sales and 13.8% of our total net revenues from services.

Important Themes and Significant Trends

The semiconductor equipment industry is characterized by cyclical growth. Changing trends in the semiconductor industry are increasing the need for metrology as a major component of manufacturing systems. These trends include:

• Incorporation of Optical Critical Dimension Metrology in the Patterning Process. Our customers use photolithographic processes to create patterns on wafers. Critical dimensions must be carefully controlled during this process. Our proprietary optical critical dimension systems can provide the critical process control of these circuit dimensions that is necessary for successful manufacturing of these state of the art devices.

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• Copper Interconnect Technology. The need for ever increasing device circuit speed coupled with lower power consumption has pushed semiconductor device manufacturers to begin the replacement of the subtractive aluminum interconnect process with copper damascene technology. This new copper processing technology has driven the need for new metrology techniques such as non-destructive laser profiling and the use of optical critical dimension (OCD) technology for control of the copper process.

• Incorporation of 65nm and 45nm Feature Sizes. In an effort to reduce costs and increase device performance, semiconductor manufacturers are decreasing both the die size and feature size. Monitoring the increased tolerance requirements on smaller features sizes requires increased use of metrology systems. Our thin film and critical dimension metrology systems are well suited and are being adopted for these next generation processes.

• Reduced Number of Customers. Because of the escalating cost of 300mm manufacturing facilities, fewer semiconductor manufacturers can afford the significant investment in these next generation facilities. Therefore, fewer opportunities for semiconductor equipment companies exist. Given that the available number of potential customers is decreasing, previous customer relationships, product positioning and critical mass take on greater importance.

• Adoption of New Types of Thin Film Materials. Manufacturers are adopting new processes and technologies that increase the importance and utilization of thin film metrology systems. To achieve greater semiconductor device speed, manufacturers are utilizing copper and new, low dielectric constant (low k) insulating materials. Our advanced metrology solutions are required in the manufacturing process to characterize these materials.

• Need for Improved Process Control to Drive Process Efficiencies. Competitive forces influencing semiconductor device manufacturers, such as price-cutting and shorter product life cycles, place pressure on manufacturers to rapidly achieve production efficiency. Device manufacturers are using our integrated and standalone metrology systems throughout the fab to ensure that manufacturing processes scale rapidly, are accurate and can be repeated on a consistent basis.

Critical Accounting Policies

The preparation of our financial statements conforms to accounting principles generally accepted in the United States of America, which requires management to make estimates and judgments in applying our accounting policies that have an important impact on our reported amounts of assets, liabilities, revenue, expenses and related disclosures at the date of our financial statements. On an on-going basis, management evaluates its estimates including those related to bad debts, inventory valuations, warranty obligations and income taxes. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from management’s estimates. We believe that the application of the following accounting policies requires significant judgments and estimates on the part of management. For a summary of all of our accounting policies, including those discussed below, see Note 1 to The Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2007 filed with the SEC on March 13, 2008.

Revenue Recognition – We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectibility is reasonably assured. Product revenue includes hardware and also software that is incidental to the products. For product sales to existing customers, revenue recognition generally occurs at the time of shipment, as our terms are FOB shipping point, if we have met defined customer acceptance experience levels with both the customer and the specific type of equipment. All other product revenue is recognized upon customer acceptance including deemed acceptances. In Japan, where risk of loss and title transfers to the customer upon customer technical acceptance, our policy is that revenue is recognized upon customer technical acceptance.

All of our products are assembled prior to shipment to our customers. We often perform limited installation for our customers; however such installation is inconsequential and perfunctory as it may also be performed by third parties. Revenue related to spare parts sales is recognized generally upon shipment and is included as part of service revenue. Service revenue also includes service contracts and non-warranty, billable repairs of systems. Whereas service revenue related to service contracts is recognized ratably over the period under contract, service revenue related to billable repairs of systems is recognized as services are performed. On occasion, customers request a warranty period longer than our standard 12 month warranty. In those instances where extended warranty services are separately quoted to the customer, we follow the guidance of Financial Accounting Standards Board Technical Bulletin 90-1, “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts,” associated revenue is deferred and recognized to income ratably over the term of the contract. Unearned maintenance and service contract revenue is included in deferred revenue. Furthermore, generally we do not provide our customers with any return rights. Service contracts may be purchased by the customer when the warranty period expires.

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In limited situations we have multiple deliverables in our customer arrangements. Those situations arise with the sale of repair services and parts together. Revenues on such sales are recognized when both the services and parts have been delivered. We also provide technical support to our customers as part of our warranty program. Upon recognition of product revenue, a liability is recorded for anticipated warranty costs.

Allowance for Doubtful Accounts – We maintain allowances for estimated losses resulting from the inability of our customers to make required payments. Credit limits are established through a process of reviewing the financial history and stability of our customers. Where appropriate and available, we obtain credit rating reports and financial statements of customers when determining or modifying their credit limits. We regularly evaluate the collectibility of our trade receivable balances based on a combination of factors such as the length of time the receivables are past due, customary payment practices in the respective geographies and our historical collection experience with customers. We believe that our allowance for doubtful accounts reflects our risk associated with smaller rather than larger customers and that our reported allowances are adequate. If however, the financial conditions of customers were to deteriorate, resulting in their inability to make payments, we would assess the necessity to record additional allowances which would result in additional general and administrative expenses being recorded for the period in which such determination was made.

Inventories – We are exposed to a number of economic and industry factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated usage, or saleable only for amounts that are less than their carrying amounts. These factors include, but are not limited to, technological changes in our market, our ability to meet changing customer requirements, competitive pressures in products and prices, and the availability of key components from our suppliers. We have established inventory reserves when conditions exist that suggest that our inventory may be in excess of anticipated demand or is obsolete based upon our assumptions about future demand for our products and market conditions. We regularly evaluate our ability to realize the value of our inventory based on a combination of factors including the following: historical usage rates, forecasted sales of usage, product end-of-life dates, estimated current and future market values and new product introductions. For demonstration inventory, we also consider the age of the inventory and potential cost to refurbish the inventory prior to sale. When recorded, our reserves are intended to reduce the carrying value of our inventory to its net realizable value. If actual demand for our products deteriorates, or market conditions are less favorable than those that we project, additional reserves may be required. Inventories are stated at the lower of cost, using the first-in, first-out method, or market value.

Inventories – delivered systems –We reflect the cost of systems that were invoiced upon shipment but deferred for revenue recognition purposes separate from our inventory held for sale as “Inventories – delivered systems”.

Product Warranties – We sell the majority of our products with a twelve-month repair or replacement warranty from the date of acceptance which generally represents the date of shipment. We provide an accrual for estimated future warranty costs based upon the historical relationship of warranty costs to the cost of products sold. The estimated future warranty obligations related to product sales are reported in the period in which the related revenue is recognized. The estimated future warranty obligations are affected by the warranty periods, sales volumes, product failure rates, material usage, labor and replacement costs incurred in correcting a product failure. If actual product failure rates, material usage, labor or replacement costs differ from our estimates, revisions to the estimated warranty obligations would be required. For new product introductions where limited or no historical information exists, we may use warranty information from other previous product introductions to guide us in estimating our warranty accrual. The warranty accrual represents the best estimate of the amount necessary to settle future and existing claims on products sold as of the balance sheet date. We periodically assess the adequacy of our recorded warranty reserve and adjust the amounts in accordance with changes in these factors.

Goodwill and Intangible Assets – Goodwill is initially recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Under Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), intangible assets with finite lives are amortized over their useful lives while goodwill and indefinite lived assets are not amortized but tested annually for impairment. Our impairment review process is completed as of the last day of November of each year or whenever events or circumstances occur which indicate that an impairment might have occurred. SFAS 142 provides for a two-step approach to determining whether and by how much goodwill has been impaired. The first step requires a comparison of the fair value of Nanometrics (reporting unit) to its net book value. If the fair value is greater, then no impairment is deemed to have occurred. If the fair value is less, then the second step must be performed to determine the amount, if any, of actual impairment. The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. In

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estimating the fair value of Nanometrics, we made estimates and judgments about future revenues and cash flows. Changes in these estimates could change our conclusion regarding impairment of goodwill and potentially result in a future non-cash goodwill impairment charge for all or a portion of the goodwill balance. To determine the fair value, our review process uses the income method and is based on a discounted future cash flow approach that uses estimates including the following for each segment: revenue, based on assumed market growth rates and our assumed market share; estimated costs; and appropriate discount rates based on the particular business’s weighted average cost of capital. Our estimates of market segment growth, our market segment share and costs are based on historical data, various internal estimates and certain external sources, and are based on assumptions that are consistent with the plans and estimates we are using to manage the underlying businesses. Our business consists of both established and emerging technologies and our forecasts for emerging technologies are based upon internal estimates and external sources rather than historical information. If future forecasts are revised, they may indicate or require future impairment charges. We also considered our market capitalization on the dates of our impairment tests in determining the fair value of the respective businesses. We completed the first step and have determined that our fair value at June 28, 2008 exceeded our net book value on that date.

Income Tax Assets and Liabilities – We account for income taxes based on SFAS 109, “Accounting for Income Taxes”, whereby deferred tax assets and liabilities must be recognized using enacted tax rates for the effect of temporary differences between the book and tax accounting for assets and liabilities. Also, deferred tax assets must be reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized in the future. We evaluate the deferred tax assets on a quarterly basis to determine whether or not a valuation allowance is appropriate. Factors used in this determination include future expected income and the underlying asset or liability which generated the temporary tax difference. Our income tax provision is primarily impacted by federal statutory rates, state and foreign income taxes and changes in our valuation allowance.

Stock-Based Compensation – Upon adoption of SFAS 123(R) on January 1, 2007, we began estimating the value of employee stock options on the date of grant using the Black-Scholes model. Prior to the adoption of SFAS 123(R), the value of each employee stock option was estimated on the date of grant using the Black-Scholes model for the purpose of the pro forma financial disclosure in accordance with SFAS 123. The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The expected term of options granted is calculated based on the simplified method allowed by Staff Accounting Bulletin 107. The expected volatility is based on the historical volatility of our stock price.

Restructuring Charge - During the three-month period ended March 28, 2008, we implemented a restructuring program based on our business strategy and recorded a significant accrual in connection with the restructuring program. In connection with the plan we have recorded estimated expenses for severance and other costs. In accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities”, generally costs associated with restructuring activities have been recognized when they are incurred rather than the date of a commitment to an exit or disposal plan. In addition post-employment benefits accrued for workforce reductions related to restructuring activities are accounted for under SFAS112, “Employer’s Accounting Post-Employment Benefits”. A liability for post-employment benefits is recorded when payment is probable, the amount is reasonably estimable, and the obligation relates to rights that have vested or accumulated. Given the significance and complexity of restructuring activities, and the timing of the execution of such activities, the restructuring process involves periodic reassessments of the estimates made at the time the original decisions were made, including evaluating market conditions for expected disposals of assets and vacancy of space. Although we believe that these estimates accurately reflect the costs of the restructuring programs, actual results may vary or differ, thereby requiring us to record additional provisions or reverse a portion of such provisions.

Recent Accounting Pronouncements

See Note 2 of the Unaudited Condensed Consolidated Financial Statements for a description of recent accounting pronouncements, including the respective dates of adoption and effects on results of operations and financial condition.

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Results of Operations

Periods ended June 28, 2008 and June 30, 2007

Total net revenues. Our net revenues were comprised of the following categories:

	Three-Months Ended				Percentage Change		Six-Months Ended				Percentage Change
	June 28, 2008		June 30, 2007				June 30, 2007		June 30, 2007
Automated systems	$	15,453	$	20,413	(24.3	)%	$	38,491	$	49,413	(22.1	)%
Integrated systems		3,051		12,319	(75.2	)%		7,942		15,845	(49.9	)%
Total product revenue		18,504		32,732	(43.5	)%		46,433		65,258	(28.8	)%
Service		5,257		4,603	14.2	%		12,056		9,192	31.2	%
Total net revenues	$	23,761	$	37,335	(36.4	)%	$	58,489	$	74,450	(21.4	)%

For the three- and six-month periods ended June 28, 2008, net revenues from automated systems decreased by $5.0 million and $10.9 million, respectively, from the comparable periods of 2007 and net revenues from our integrated systems decreased $9.3 million and $7.9 million, respectively, from the comparable periods of 2007. The overall decrease in product revenue of 43.5% and 28.8%, respectively, is reflective of the ongoing general economic environment in the semiconductor equipment manufacturing sector.

Service revenue increased by $0.7 million and $2.9 million, respectively, during the three- and six-month periods ended June 28, 2008 over the comparable periods of 2007 due to a significant increase of in-the-field tool upgrades and an increased focus on billable service and spare parts.

Gross margins. Our gross margin breakdown was as follows (in percent):

	Three-Months Ended				Six-Months Ended
	June 28, 2008		June 30, 2007		June 28, 2008		June 30, 2007
Products	50.5	%	50.0	%	50.8	%	48.1	%
Services	13.8	%	(5.1	)%	19.0	%	(16.1	)%

The product gross margin for the three- and six-month periods ended June 28, 2008 increased slightly from the comparable periods of 2007. Reductions in our cost structure such as higher product reliability, reduction of manufacturing costs from the completion of the integration of our 2006 acquisitions of Accent and Soluris including the closure of a facility in Concord, Massachusetts and out-sourcing the manufacturing of several of our products to contract manufacturers were substantially offset in 2008 by lower utilization of our manufacturing facilities due to lower revenues. In addition the Company reduced its estimate of integration fees on certain products sold to a customer in Japan by $0.4 million during the second quarter of 2008.

The gross margin for our services line of business increased to 13.8% and 19.0%, respectively, for the three- and six-month periods ended June 28, 2008 as compared to negative gross margins of 5.1% and 16.1% for the comparable periods of 2007. The increase in gross margin reflects a higher level of in-the-field tool upgrades which provide favorable margins, increased efforts on billable service and spare parts sales and our focus on controlling expenses including personnel, personnel related expenses and material costs as compared to 2007.

Operating expenses. Our operating expenses were comprised of the following (in thousands):

	Three-Months Ended				Change					Six-Months Ended				Change
	June 28, 2008		June 30, 2007							June 28, 2008		June 30, 2007
Research and development	$	4,422	$	4,739	$	(317	)	(6.7	)%	$	8,677	$	9,325	$	(648	)	(6.9	)%
Selling		4,844		4,668		176		3.8	%		9,683		10,033		(350	)	(3.5	)%
General and administrative		5,302		4,762		540		11.3	%		10,826		11,755		(929	)	(7.9	)%
Amortization of intangible assets		1,330		1,663		(333	)	(20.0	)%		2,615		3,212		(597	)	(18.6	)%
Asset impairment		13,213		—		13,213		100.0	%		13,213		—		13,213		100.0	%
Restructuring charge		—		—		—		—			870		—		870		100.0	%
Total operating expenses	$	29,111	$	15,832	$	13,279		83.9	%	$	45,884	$	34,325	$	11,559		33.7	%

Research and development. Research and development expenses decreased by $0.3 million and $0.6 million for the three- and six-month periods ended June 28, 2008, respectively, over the comparable periods in 2007 due to lower materials development costs and stock-based compensation expenses.

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Selling. Selling expenses increased by $0.2 million for the three-month period ended June 28, 2008 as compared to the corresponding period of 2007 due primarily to severance and termination charges or $0.3 million during the current quarter. Selling expenses decreased by $0.4 million for the six-month period ended June 28, 2008 as compared to the corresponding period of 2007 due primarily to reductions of personnel and personnel related expenses and depreciation of $0.3 million and $0.2 million, respectively, offset by severance and termination charges of $0.3 million.

General and administrative. General and administrative expenses increased by $0.5 million, or 11.3%, for the three-month period ended June 28, 2008 over the comparable period in 2007. The increase was primarily due to outside professional fees, stock-based compensation, facilities and various general expenses. For the six-month period ended June 28, 2008 general and administrative expenses decreased $0.9 million, or 7.9%, from the comparable period in 2007. The decrease was primarily due to lower legal expenses of $1.1 million as we settled the patent litigation with Nova Measuring Instruments Ltd (“Nova”) in April 2007 and to termination charges of $0.8 million of certain senior executives incurred in the first half of 2007 offset by higher stock-based compensation charges of $0.3 million and various general expenses of $0.7 million.

Amortization of intangible assets. For the three- and six-month periods ended June 28, 2008 the decrease in amortization of intangible assets of $0.3 million and $0.6 million over the comparable periods of 2007 reflects the write-off of $0.3 million of intangible assets associated with the sale of our Diva product line in June 2007 and to the backlog intangible asset acquired with the Accent acquisition, which was fully amortized by the second quarter of 2007.

Asset impairment. We perform an impairment review of our long-lived assets upon a change in business conditions or upon the occurrence of an indicator of impairment. Due to changes in the forecasts relating to specific intangible assets acquired in the 2006 acquisitions caused by management’s decision to focus our resources on new generation products, and changes in the forecasts relating to the machine shop, we performed an impairment analysis in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-lived Assets”, of our long-lived assets including intangible assets and other long-lived assets where cash flows could be identified with a specific group of assets. SFAS No. 144 provides for a two-step approach to determining whether and by how much a long-lived asset has been impaired. The first step requires a comparison of the future undiscounted cash flows of the asset to its net book value. If future undiscounted cash flows are greater, then no impairment is deemed to have occurred. If the future undiscounted cash flows are less, then the second step must be performed to determine the amount, if any, of actual impairment. We performed step one impairment test for certain of the long-lived asset and have determined that at June 28, 2008, the net book value exceeded the future undiscounted cash flows for certain intangible assets as well as for assets associated with our machine shop and plating facility which was subcontracted in the third fiscal quarter of 2007. The initial projected future cash flows from subcontracting this facility have been significantly reduced due to operational limitations. Accordingly, we completed step two of the impairment analysis utilizing a present value technique to estimate the fair value of the impaired assets. As a result of this analysis, impairment charges of $11.8 million and $1.5 million, respectively, were recorded in the second quarter of 2008 to reflect certain customer relationship and developed technology intangible assets and machine shop related assets at their fair value.

Restructuring charge. During the first quarter of 2008, we reduced our global work force by approximately 30 employees. This reduction affected employees in each of our locations worldwide and is aimed at reducing our operating expenses.

Other income (expense). Our net other income (expense) consisted of the following categories (in thousands):

	Three-Months Ended						Change				Six-Months Ended						Change
	June 28, 2008			June 30, 2007							June 28, 2008			June 30, 2007
Interest income	$	34		$	29		$	5	17.2	%	$	132		$	52		$	80		153.8	%
Interest expense		(26	)		(46	)		20	43.5	%		(103	)		(85	)		(18	)	(21.2	)%
Other income (loss)		(32	)		(541	)		509	94.1	%		422			(422	)		844		200.0	%
Total operating income (expenses)	$	(24	)	$	(558	)	$	534	95.7	%	$	451		$	(455	)	$	906		199.1	%

For the three- and six-month periods ended June 28, 2008, we incurred more favorable foreign exchange gains and losses due to exchange rate fluctuations associated with our extensive inter-company balances between our various global entities over the comparable periods of 2007.

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Provision for income taxes. For the three-month period ended June 28, 2008, the income taxes benefit of $0.2 million was the result of $0.1 million of tax benefit in a certain foreign jurisdiction where sufficient deferred tax liabilities exist to allow for benefiting the operating loss and $0.1 million for reduction of a tax contingency due to the expiration of local statues. For the six-month period ended June 28, 2008 the income taxes provision of $0.1 million relates to the aggregate charges for potential tax exposure of certain foreign jurisdictions. The benefit for income taxes for both the three- and six-month periods ended June 30, 2007 of $0.1 million was the result of foreign taxes of $0.2 million and $0.4 million, respectively, offset by $0.3 million and $0.5 million, respectively, of tax benefit in a certain foreign jurisdiction where sufficient deferred tax liabilities exist to allow for benefiting the operating loss.

Liquidity and Capital Resources

At June 28, 2008, our cash and cash equivalents totaled $9.7 million compared to $14.9 million as of December 29, 2007. At June 28, 2008, we had working capital of $51.5 million compared to $57.1 million at December 29, 2007. The current ratio at June 28, 2008 was 3.1 to 1.

Operating activities provided cash of $1.0 million for the six-month period ended June 28, 2008 resulting from certain non-cash charges including $13.2 million of impairment charges for long-lived assets, $4.6 million associated with amortization and depreciation, $2.0 million in stock-based compensation, and increases in net working capital of $0.8 million partially offset by our net loss of $19.6 million. Operating activities provided cash of $6.0 million for the six-month period ended June 30, 2007 resulting from decreases in net working capital of $4.2 million and certain non-cash charges including $4.6 million associated with amortization and depreciation and, $1.9 million in stock-based compensation offset by our net loss of $4.7 million. For the six-months ended June 30, 2007, cash provided from the reduction of working capital were primarily driven by reduction of inventory levels of $4.4 million and increases in accounts payable and accrued liabilities of $4.0 million offset by increases in accounts receivable of $2.5 million due to higher revenue.

Investing activities for the six-month period ended June 28, 2008 used cash of $5.4 million related to cash outlays of $3.3 million of our acquisition of Tevet Process Control Technologies, Ltd. (“Tevet”) and capital equipment acquisitions of $2.0 million. Investing activities for the six-month period ended June 30, 2007 used $0.7 million for capital equipment acquisitions.

For the six-month period ended June 28, 2008, financing activities provided cash of less than $0.1 million. Proceeds from the sale of stock from employee stock plans and purchase plan of $0.6 million were offset by $0.5 million used for the repurchase of our common stock and $0.1 million for debt payments. For the six-month period ended June 30, 2007, financing activities provided cash of $2.3 million from the sale of stock from employee stock plans and purchase plan of $2.6 million offset by the repayment of debt of $0.3 million.

In July 2008, the Company entered into a lending facility in the principal amount of $13.5 million maturing in July 2018. All borrowings under this facility bear a fixed interest for five years at a per annum rate equal to 7.18% whereupon the interest rate will be reset to a fixed rate for the following five years equal to the weekly average yield of five year U.S. dollar interest rate swaps in effect plus 3.03%. The loan is collateralized by a lien on the building and land comprising our principal offices in Milpitas, California. We will use the proceeds of these borrowing for general corporate purposes or for future acquisitions or expansion of our business.

In February 2007, the Company entered into a two-year agreement for a revolving line of credit facility in a maximum principal amount of up to $15 million. The instrument governing the facility includes certain financial covenants regarding net tangible worth. All borrowings under this credit line bear interest, at our election, at a per annum rate equal to the bank’s prime rate or at the Libor rate plus 2.25%. The revolving line of credit agreement includes a provision for the issuance of commercial or standby letters of credit by the bank on our behalf. The value of all letters of credit outstanding reduces the total line of credit available. The revolving line of credit is collateralized by a blanket lien on all of our domestic assets excluding intellectual property and real estate. We may use the proceeds of any future borrowing under this credit facility for general corporate purposes or for future acquisitions or expansion of our business.

We have evaluated and will continue to evaluate the acquisition of products, technologies or businesses that are complementary to our business. These activities may result in product and business investments, which may affect our cash position and working capital balances. Some of these activities might require significant cash outlays. For example, recently our Board of Directors authorized a stock repurchase program of up to $4 million. However, we believe working capital including cash and cash equivalents and funds available to us under our line of credit; will be sufficient to meet our needs

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through at least the next twelve months. However, we may require additional cash to fund acquisitions or investment opportunities or other events that may arise in the future. In these instances, we may seek to raise such additional funds through public or private equity or debt financings or from other sources. We may not be able to obtain adequate or favorable financing at that time. Any financing we obtain may dilute ownership interests and any debt financing could contain covenants that impose limitations on the conduct of our business.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk does not differ materially from that discussed in our Annual Report on Form 10-K for the fiscal year ended December 29, 2007 filed with the SEC on March 13, 2008 and amended on April 25, 2008. However, we cannot give any assurance as to the effect that future changes in interest rates or foreign currency rates will have on our consolidated financial position, results of operations or cash flows.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. As of June 28, 2008 our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, concluded that our disclosure controls and procedures were effective to ensure that information that we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 were recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control over Financial Reporting

As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 29, 2007 filed with the SEC on March 13, 2008 and amended on April 25, 2008, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 29, 2007. As a result of such evaluation, management identified a material weakness in our internal control over financial reporting as of December 29, 2007 related to our controls over international income tax accounting. Specifically, the Company’s process and procedures surrounding its accounting for international taxes were not effective as of December 29, 2007 in both design and operation, as the existing process and procedures failed to adequately and timely manage the international tax accounting process.

During our most recent fiscal quarter, we have taken the following steps to remediate the material weakness described above which we believe are necessary to address the issues associated with our material weakness over international income tax accounting, including implementing changes that are both organizational and process-focused to improve the design and operation of the controls. Such planned changes include:

• Initiation of a global transfer pricing study,

• Increased oversight and monitoring of accounting procedures and review of our international tax accounting and,

• Rationalizing and simplifying the tax structures of our foreign entities.

We expect the above mentioned changes in internal controls to be fully implemented by the quarter ended September 27, 2008, and testing of our internal controls subsequent to this date we believe will determine that the enhanced controls are operating effectively.

Other than as noted above, there were no changes in our internal control over financial reporting during the three-month period ended June 28, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In August 2005, KLA-Tencor Corporation, or KLA, filed a complaint against us in the United States District Court for the Northern District of California. The complaint alleges that certain of our products infringe two of KLA’s patents. On January 30, 2007, KLA added a third patent to their claim. The complaint seeks a preliminary and permanent injunction against the sale of these products as well as the recovery of monetary damages and attorneys’ fees. We do not believe that any of our products infringe the intellectual property of any third party and we intend to vigorously and aggressively defend ourselves in the litigation. As part of such defense, we have filed a request for re-examination of the three allegedly infringed KLA patents with the U.S. Patent & Trademark Office, or PTO. These requests for re-examination were accepted for review by the PTO. In March 2007, we filed a motion for and were granted a stay in the patent litigation case until such re-examination is completed. The PTO issued Office Actions for two of the re-examinations proceedings on March 26, 2008 and an Office Action in the third re-examination proceeding on February 5, 2008. In the various Office Actions the PTO rejected numerous claims of the three asserted KLA patents.

ITEM 1A.  RISK FACTORS

A restated description of the risk factors associated with our business is set forth below. This description includes any material changes to and supersedes the description of the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2007 filed with the SEC on March 13, 2008 and amended on April 25, 2008. The risks and uncertainties described below are not the only ones that we face. If any of the following risks actually occurs, our business, financial condition or operating results could be harmed. In such case, the trading price of our common stock could decline, and you could lose all or part of your investment.

Customer demand for our products is inelastic and has led to fluctuations in revenue from period to period and is expected to continue to do so.

Our operating results have varied significantly from period to period due to the inelastic nature of our products. The majority of our business depends upon the capital expenditures of semiconductor device and equipment manufacturers. These manufacturers’ capital expenditures, in turn, depend upon the current and anticipated market demand for semiconductors and products using semiconductors. The semiconductor industry has historically experienced periodic downturns. These downturns have often resulted in substantial decreases in the demand for semiconductor manufacturing equipment, including metrology systems. We have found that the resulting decrease in capital expenditures has typically been more pronounced than the downturn in semiconductor device industry revenues. We expect the inelastic nature of demand for our products, and therefore, our business, to continue in the foreseeable future.

We depend on OEM suppliers for sales of our integrated metrology systems, and the loss of our OEM suppliers as a customer could harm our business.

We believe that sales of integrated metrology systems will continue to be an important source of our revenues. Sales of our integrated metrology systems depend upon the ability of OEMs to sell semiconductor equipment products that include our metrology systems as components. If our OEMs are unable to sell such products, or if they choose to focus their attention on products that do not integrate our systems, our business could suffer. If we were to lose our OEMs as a customer for any reason, our ability to realize sales from integrated metrology systems would be significantly diminished, which would harm our business.

Efforts to restructure our operations and align our resources with market opportunities could disrupt our business and affect our results of operations.

Since 2007, we have taken steps, including reductions in force, facility closures, and internal reorganizations to reduce the size and cost of our operations and to better match our resources with our market opportunities. We may take similar steps in the future to improve efficiency and match our resources with market opportunities. Any such changes could be disruptive to our business and may result in the recording of accounting charges. These include inventory and technology-related write-offs, workforce reduction costs and charges relating to consolidation of excess facilities. If we are required to take a substantial charge related to any future restructuring activities, our results of operations would be adversely affected in the period in which we take such a charge.

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If any of our systems fail to meet or exceed our internal quality specifications, we do not 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 properly. Various problems occasionally arise during the manufacturing process that may cause delays and/or impair product quality. We must 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 and reputation in the industry.

If we deliver systems with defects, our credibility will be harmed, revenue from, and market acceptance of, our systems will decrease and we could expend significant capital and resources as a result of such defects.

Notwithstanding our internal quality specifications, our systems have sometimes contained errors, defects and bugs when introduced. If we deliver systems with errors, defects or bugs, our credibility and the market acceptance and sales of our systems would be harmed. Further, if our systems contain errors, defects or bugs, we may be required to expend significant capital and resources to alleviate such problems. Defects could also lead to product liability as a result of product liability lawsuits against us or against our customers. We have agreed to indemnify our customers in some circumstances against liability arising from defects in our systems. In the event of a successful product liability claim, we could be obligated to pay damages significantly in excess of our product liability insurance limits.

Our largest customers account for a substantial portion of our revenue, and our revenue would materially decline if one or more of these customers were to purchase significantly fewer of our systems or if they delayed or cancelled a large order.

Historically, a significant portion of our revenues in each quarter and each year has been derived from sales to a relatively few customers, and we expect this trend to continue. There are only a limited number of large companies operating in the semiconductor industry. Accordingly, we expect that we will continue to depend on a small number of large customers for a significant portion of our revenues for the foreseeable future. If any of our key customers were to purchase significantly fewer systems, or if a large order were delayed or cancelled, our revenues could significantly decline.

The success of our product development efforts depends on our ability to anticipate market trends and the price, performance and functionality requirements of semiconductor device manufacturers. In order to anticipate these trends and ensure that critical development projects proceed in a coordinated manner, we must continue to collaborate closely with our customers. Our relationships with our customers provide us with access to valuable information regarding industry trends, which enables us to better plan our product development activities. If our current relationships with our large customers are impaired, or if we are unable to develop similar collaborative relationships with important customers in the future, our long-term ability to produce commercially successful systems could be adversely affected.

We have had significant management changes since the end of the last fiscal year and these changes may impact our ability to execute our business strategy in the near term. In general, our success depends to a significant extent on the performance of our senior management and on our ability to identify, hire and retain key management personnel.

In August 2007, our Chief Executive Officer joined the Company. In November 2007, our Chief Financial Officer joined the Company. While we are confident in the officers’ abilities to manage the Company, our business may be affected. Furthermore, we must be able to identify, hire and retain key personnel. Although we have employment agreements with certain key members of our senior management team, including Messrs. Stultz, Schaefer and Crawford, these individuals or other key employees may still leave us. We do not have key person life insurance on any of our executives. In addition, to support our future growth, we will need to attract and retain additional qualified employees. Competition for such personnel in our industry is intense, and we may not be successful in attracting and retaining qualified employees. If we fail to attract, motivate and retain qualified senior management personnel, our business could be harmed and our ability to implement our strategy could be compromised.

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Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material effect on our business.

As a publicly traded company, we are subject to rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires us to include an internal control report from management in our Annual Report on Form 10-K filed with the SEC on March 13, 2008 and amended April 25, 2008. The internal control report must include the following: (1) a statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting, (2) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control over financial reporting, (3) management’s assessment of the effectiveness of our internal control over financial reporting as of the end of each fiscal year, including a statement as to whether or not internal control over financial reporting is effective, and (4) a statement that our independent registered public accounting firm has issued an attestation report on management’s internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Our assessment as of December 29, 2007 identified a material weakness in our internal controls over financial reporting, which also adversely impacted our disclosure controls and procedures. A material weakness results in a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Since discovery of the material weakness, we have performed extensive additional work to obtain reasonable assurance regarding the reliability of our financial statements. Even with this additional work, however, there is a risk of errors not being prevented or detected. For additional information refer to Item 9A. Controls and Procedures in our Annual Report.

Because of the material weakness referenced in the preceding paragraph, management has concluded that, as of December 29, 2007, our internal controls over financial reporting were not effective based on those criteria. This failure and any failure in the future to achieve and maintain effective internal controls over financial reporting and otherwise comply with the requirements of Section 404 could have a material adverse effect on our business. Such noncompliance could result in perceptions of our business among customers, suppliers, lenders, investors, securities analysts and others being adversely affected. We may not be able to complete our remediation plans designed to address the identified material weakness in our internal controls over financial reporting and continue to attract additional qualified accountants, and auditing and compliance professionals to assist in completing such plans and maintaining compliance programs.

Restructuring of our operations may adversely affect our financial condition and operating results.

We have incurred expenses related to restructuring of our operations in the past, and we anticipate incurring additional restructuring expenses in the future. For example, in the first quarter of 2008, we undertook a restructuring that involved a reduction of our global workforce by approximately 30 employees and that caused us to record restructuring and reorganization charges of approximately $870,000.

Several factors could cause a restructuring to adversely affect our business, financial condition and results of operations. These include potential disruption of our operations, the development of our technology, our supply chain and other aspects of our business. Employee morale and productivity could also suffer and result in unintended employee attrition. Loss of sales, service and engineering talent, in particular, could damage our business. Any restructuring would require substantial management time and attention and may divert management from other important work. If we undertake further employee reductions or other restructuring activities, we will likely record restructuring and related expenses. Moreover, we could encounter delays in executing any restructuring plans, which could cause further disruption and additional unanticipated expense.

Our current and potential competitors have significantly greater resources than we do, and increased competition could impair sales of our products.

We operate in the highly competitive semiconductor industry and face competition from a number of companies, many of which have greater financial, engineering, manufacturing, marketing and customer support resources than we do. As a result, our competitors may be able to respond more quickly to new or emerging technologies or market developments by devoting greater resources to the development, promotion and sale of products, which could impair sales of our products. Moreover, there has been merger and acquisition activity among our competitors and potential competitors. These transactions by our competitors and potential competitors may provide them with a competitive advantage over us by enabling them to rapidly expand their product offerings and service capabilities to meet a broader range of customer needs. Many of our customers and potential customers in the semiconductor industry are large companies that require global support and service for their metrology systems. Some of our larger or more geographically diverse competitors might be better equipped to provide this global support.

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Successful infringement claims by third parties could result in substantial damages, lost product sales and the loss of important intellectual property rights by us.

Our commercial success depends, in part, on our ability to avoid infringing or misappropriating patents or other proprietary rights owned by third parties. From time to time we may receive communications from third parties asserting that our metrology systems may contain design features which are claimed to infringe on their proprietary rights. For example, in August 2005, we were served with a complaint by KLA alleging that certain of our products infringe two of KLA’s patents, Patent No. 6,483,580 and Patent No. 6,590,656. In January 2006, KLA added Patent No. 6,611,330 to its claim. For additional information, refer to Item 3. Legal Proceedings. There can be no assurance that Nanometrics’ new or current products do not infringe any valid intellectual property rights. Even if our products do not infringe, we may be required to expend significant sums of money to defend against infringement claims, as in the KLA lawsuit described above, or to actively protect our intellectual property rights through litigation.

We obtain some of the components and subassemblies included in our systems from a single source or a limited group of suppliers, and the partial or complete loss of one of these suppliers could cause production delays and significant loss of revenue.

We rely on outside vendors to manufacture many components and subassemblies. Certain components, subassemblies and services necessary for the manufacture of our systems are obtained from a sole supplier or limited group of suppliers. We do not maintain any long-term supply agreements with any of our suppliers. We have entered into arrangements with J.A.Woollam Company for the purchase of the spectroscopic ellipsometer component incorporated in our advanced measurement systems. Our reliance on a sole or a limited group of suppliers involves several risks, including the following:

• we may be unable to obtain an adequate supply of required components;

• we have reduced control over pricing and the timely delivery of components and subassemblies; and

• our suppliers may be unable to develop technologically advanced products to support our growth and development of new systems.

Some of our suppliers have relatively limited financial and other resources. Because the manufacturing of certain of these components and subassemblies involves extremely complex processes and requires long lead times, we may experience delays or shortages caused by our suppliers. If we were forced to seek alternative sources of supply or to manufacture such components or subassemblies internally, we could be forced to redesign our systems, which could cause production delays and prevent us from shipping our systems to customers on a timely basis. Any inability to obtain adequate deliveries from our suppliers, or any other circumstance that would restrict our ability to ship our products, could damage relationships with current and prospective customers, harm our business and result in significant loss of revenue.

Variations in the amount of time it takes for us to sell our systems may cause fluctuations in our operating results, which could cause our stock price to decline.

Variations in the length of our sales cycles could cause our revenues to fluctuate widely from period to period. Our customers generally take long periods of time to evaluate our metrology systems. We expend significant resources educating and providing information to our prospective customers regarding the uses and benefits of our systems. The length of time that it takes for us to complete a sale depends upon many factors, including:

• the efforts of our sales force and our independent sales representatives;

• the complexity of the customer’s metrology needs;

• the internal technical capabilities and sophistication of the customer;

• the customer’s budgetary constraints; and

• the quality and sophistication of the customer’s current processing equipment.

Because of the number of factors influencing the sales process, the period between our initial contact with a customer and the time at which we recognize revenue from that customer, if at all, varies widely. Our sales cycles, including the time it takes for us to build a product to customer specifications after receiving an order, typically range from three to nine months. Occasionally our sales cycles can be much longer, particularly with customers in Asia who may require longer evaluation periods. During the sales cycles, we commit substantial resources to our sales efforts in advance of receiving any revenue, and we may never receive any revenue from a customer despite our sales efforts.

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If we do complete a sale, customers often purchase only one of our systems and then evaluate its performance for a lengthy period of time before purchasing additional systems. The purchases are generally made through purchase orders rather than through long-term contracts. The number of additional products that a customer purchases, if any, depends on many factors, including a customer’s capacity requirements. The period between a customer’s initial purchase and any subsequent purchases is unpredictable and can vary from three months to a year or longer. Variations in the length of this period could cause fluctuations in our operating results, which could adversely affect our stock price.

Relatively small fluctuations in our system sales volume may cause our operating results to vary significantly each quarter.

During any quarter, a significant portion of our revenue is derived from the sale of a relatively small number of systems. Our automated metrology systems range in price from approximately $200,000 to over $1,000,000 per system, our integrated metrology systems range in price from approximately $80,000 to $400,000 per system. Accordingly, a small change in the number or mix of systems that we sell could cause significant changes in our operating results.

We depend on orders that are received and shipped in the same quarter, and therefore our results of operations may be subject to significant variability from quarter to quarter.

Our net sales in any given quarter depend upon a combination of orders received in that quarter for shipment in that quarter and shipments from backlog. Our backlog at the beginning of each quarter does not include all systems sales needed to achieve expected revenues for that quarter. Consequently, we are dependent on obtaining orders for systems to be shipped in the same quarter that the order is received. Moreover, customers may reschedule shipments, and production difficulties could delay shipments. Accordingly, we have limited visibility into future product shipments, and our results of operations may be subject to significant variability from quarter to quarter.

Because of the high cost of switching equipment vendors in our markets, it may be difficult for us to attract customers from our competitors even if our metrology systems are superior to theirs.

We believe that once a semiconductor customer has selected one vendor’s metrology system, the customer generally relies upon that system and, to the extent possible, subsequent generations of the same vendor’s system, for the life of the application. Once a vendor’s metrology system has been installed, a customer must often make substantial technical modifications and may experience downtime in order to switch to another vendor’s metrology system. 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.

If we fail to develop new and enhanced metrology systems we will likely lose market share to our competitors.

We operate in an industry that is subject to technological changes, changes in customer demands and the introduction of new, higher performance systems with short product life cycles. To be competitive, we must continually design, develop and introduce in a timely manner new metrology systems that meet the performance and price demands of semiconductor manufacturers and suppliers. We must also continue to refine our current systems so that they remain competitive. We may experience difficulties or delays in our development efforts with respect to new systems, and we may not ultimately be successful in developing them. Any significant delay in releasing new systems could adversely affect our reputation, give a competitor a first-to-market advantage or cause a competitor to achieve greater market share.

Lack of market acceptance for our new products may affect our ability to generate revenue and may harm our business.

We have recently introduced several products to the market including the Nano CD suite, Nano Station, VerteX Rapid Photoluminescence Mapping System for Compound Semiconductors and Atlas-M. We have invested substantial time and resources into the development of these products. However, we cannot accurately predict the future level of acceptance of our new products by our customers. As a result, we may not be able to generate anticipated revenue from sales of these products. While we anticipate that our new products will become an increasingly larger component of our business, their failure to gain acceptance with our customers could materially harm our business. Additionally, if our new products do gain market acceptance, our ability to sell our existing products may be impeded. As a result, there can be no assurance that the introduction of these products will be commercially successful or that these products will result in significant additional revenues or improved operating margins in future periods.

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Our intellectual property may be infringed upon by third parties despite our efforts to protect it, which could threaten our future success and competitive position and harm our operating results.

Our future success and competitive position depend in part upon our ability to obtain and maintain proprietary technology for our principal product families, and we rely, in part, on patent, trade secret and trademark law to protect that technology. If we fail to adequately protect our intellectual property, it will be easier for our competitors to sell competing products. We own or may license patents relating to our metrology systems, and have filed applications for additional patents. Any of our pending patent applications may be rejected, and we may not in the future be able to develop additional proprietary technology that is patentable. In addition, the patents we own, have been issued, or may license may not provide us with competitive advantages and may be challenged by third parties. Third parties may also design around these patents.

In addition to patent protection, we rely upon trade secret protection for our confidential and proprietary information and technology. We routinely enter into confidentiality agreements with our employees. However, in the event that these agreements may be breached, we may not have adequate remedies. Our confidential and proprietary information and technology might also be independently developed by or become otherwise known to third parties. We may be required to initiate litigation in order to enforce any patents issued to or licensed by us, or to determine the scope or validity of a third party’s patent or other proprietary rights. Any such litigation, regardless of outcome, could be expensive and time consuming, and could subject us to significant liabilities or require us to re-engineer our product or obtain expensive licenses from third parties, any of which would adversely affect our business and operating results. In March 2006, we filed a complaint against Nova for infringing our Patent Nos. Re 34,783. In October 2006, we filed a new complaint against Nova for infringement of Patent No. 5,867,276 and 7,115,858. In April 2007, we and Nova agreed to dismiss, without prejudice, all pending patent litigation and have entered into a covenant not to sue one another for any patent for a period of one year.

If we choose to acquire new and complementary businesses, products or technologies instead of developing them ourselves, we may be unable to complete these acquisitions or may not be able to successfully integrate an acquired business in a cost-effective and non-disruptive manner.

Our success depends on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures. To achieve this, from time to time we have acquired complementary businesses, products, or technologies instead of developing them ourselves and may choose to do so in the future. For example, in May 2008, we consummated our acquisition of Tevet Process Control Technologies, Ltd., an integrated metrology company serving the worldwide semiconductor and solar manufacturing industry. At the outset, we do not know if we will be able to complete any acquisitions, or whether we will be able to successfully integrate any acquired business, operate them profitably or retain their key employees. Integrating any business, product or technology that we acquire could be expensive and time consuming, disrupt our ongoing business and distract our management. In addition, in order to finance any acquisitions, we may be required to raise additional funds through public or private equity or debt financings. In that event, we could be forced to obtain financing on terms that are not favorable to us and, in the case of an equity or convertible debt financing which may result in dilution to our stockholders. If we are unable to integrate any acquired entities, products or technologies effectively, our business will suffer.

We manufacture all of our systems at a limited number of facilities, and any prolonged disruption in the operations of those facilities could reduce our revenues.

We produce all of our systems in our manufacturing facilities located in Milpitas, California and to a lesser extent, we also manufacture through our subsidiary in South Korea and contract manufacturers in Japan and China. In addition, we perform limited subassembly for certain products at our York England facility. Our manufacturing processes are highly complex and require sophisticated, costly equipment and specially designed facilities. As a result, any prolonged disruption in the operations of our manufacturing facilities, such as those resulting from a severe fire or earthquake, could seriously harm our ability to satisfy our customer order deadlines.

Our efforts to protect our intellectual property may be less effective in some foreign countries where intellectual property rights are not as well protected as in the United States.

In 2007, 2006 and 2005, 68.2%, 65.0% and 66.8%, respectively, of our total net revenues were derived from sales to customers in foreign countries, including certain countries in Asia, such as Japan, South Korea, China and Taiwan. The laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States, and many U.S. companies have encountered substantial problems in protecting their proprietary rights against infringement in such countries. If we fail to adequately protect our intellectual property in these countries, it would be easier for our competitors to sell competing products.

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Our results of operations could vary as a result of the methods, estimates and judgments we use in applying our accounting policies.

The methods, estimates and judgments we use in applying our accounting policies have a significant impact on our results of operations, see “Significant Accounting Policies” in Part II, Item 8, Note I of our Form 10-K filed with the SEC on March 13, 2008 and amended on April 25, 2008. Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that leads us to change our methods, estimates and judgments. Changes in those methods, estimates and judgments could significantly affect our results of operations. In particular, the calculation of share-based compensation expense under SFAS No. 123(R) requires us to use valuation methodologies (which were not developed for use in valuing employee stock options) and a number of assumptions, estimates and conclusions regarding matters such as expected forfeitures, expected volatility of our share price, the expected dividend rate with respect to our common stock and the exercise behavior of our employees. Furthermore, there are no means, under applicable accounting principles, to compare and adjust our expense if and when we learn of additional information that may affect the estimates that we previously made, with the exception of changes in expected forfeitures of share-based awards. Factors may arise over time that leads us to change our estimates and assumptions with respect to future share-based compensation arrangements, resulting in variability in our share-based compensation expense over time. Changes in forecasted share-based compensation expense could impact our gross margin percentage; research and development expenses; marketing, general and administrative expenses; and our tax rate.

Our quarterly operating results have varied in the past and probably will continue to vary significantly in the future, which will cause volatility in our stock price.

Our quarterly operating results have varied significantly in the past and are likely to vary in the future, which volatility could cause our stock price to decline. Some of the factors that may influence our operating results and subject our stock to extreme price and volume fluctuations include:

• changes in customer demand for our systems;

• economic conditions in the semiconductor industries;

• the timing, cancellation or delay of customer orders and shipments;

• market acceptance of our products and our customers’ products;

• our ability to recover the higher costs associated with meeting our customers’ increasing service demands;

• competitive pressures on product prices and changes in pricing by our customers or suppliers;

• the timing of new product announcements and product releases by us or our competitors and our ability to design, introduce and manufacture new products on a timely and cost-effective basis;

• the timing of acquisitions of businesses, products or technologies;

• the levels of our fixed expenses, including research and development costs associated with product development, relative to our revenue levels; and

• fluctuations in foreign currency exchange rates, particularly the Japanese yen and the Great British Pound.

If our operating results in any period fall below the expectations of securities analysts and investors, the market price of our common stock would likely decline.

We incur increased costs as a result of changes in laws and regulations affecting public companies.

Compliance with changes in laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, has resulted in and, we expect, will continue to result in substantial accounting, legal and administrative costs. In particular, Section 404 of the Sarbanes-Oxley Act of 2002 and the rules of the SEC and the Public Company Accounting Oversight Board impose requirements with respect to the evaluation of the effectiveness of our internal controls. The cost of complying with these requirements is substantial.

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We are highly dependent on international sales and operations, which exposes us to foreign political and economic risks.

We maintain facilities in Japan, Taiwan, United Kingdom, South Korea, China and the European Union. We anticipate that international sales will continue to account for a significant portion of our revenues. International sales and operations carry inherent risks such as: regulatory limitations imposed by foreign governments, obstacles to the protection of our intellectual property, political, military and terrorism risks, disruptions or delays in shipments caused by customs brokers or other government agencies, unexpected changes in regulatory requirements, tariffs, customs, duties and other trade barriers, difficulties in staffing and managing foreign operations, and potentially adverse tax consequences resulting from changes in tax laws. If any of these risks materialize and we are unable to manage them, our international sales and operations would suffer.

We are exposed to fluctuations in the exchange rates of foreign currency.

As a global concern, we face exposure to adverse movements in foreign currency exchange rates. With our operations in Japan, South Korea, United Kingdom, Taiwan, the European Union and China, a significant percentage of our cash flows are exposed to foreign currency risk. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results and cash flow.

We are subject to various environmental laws and regulations that could impose substantial costs upon us and may harm our business, operating results and financial condition.

Some of our operations use substances regulated under various federal, state, local, and international laws governing the environment, including those relating to the storage, use, discharge, disposal, labeling, and human exposure to hazardous and toxic materials. We could incur costs, fines and civil or criminal sanctions, third-party property damage or personal injury claims, or could be required to incur substantial investigation or remediation costs, if we were to violate or become liable under environmental laws. Liability under environmental laws can be joint and several and without regard to comparative fault. Compliance with current or future environmental laws and regulations could restrict our ability to expand our facilities or require us to acquire additional expensive equipment, modify our manufacturing processes, or incur other significant expenses. There can be no assurance that violations of environmental laws or regulations will not occur in the future as a result of the inability to obtain permits, human error, equipment failure or other causes.

Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock.

In September 2006, we changed our state of incorporation from California to Delaware. The anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our certificate of incorporation and bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our certificate of incorporation and bylaws:

• authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to thwart a takeover attempt;

• establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election;

• limit who may call special meetings of stockholders; and

• prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders.

Significant amounts of goodwill and intangible assets after the completion of the acquisitions of Accent and Tevet transactions could make our reported results more volatile.

Goodwill is tested for impairment annually or when an event occurs indicating the potential for impairment. The evaluation is prepared based on our current and projected performance for the identified reporting units. The fair value of our reporting units is determined using a combination of the cash flow and market comparable approaches. If we conclude at any

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time that the carrying value of our goodwill and other intangible assets for any of our reporting units exceeds its implied fair value, we will be required to recognize an impairment, which could materially reduce operating income and net income in the period in which such impairment is recognized.

In the application of these methodologies, we were required to make estimates of future operating trends and judgments on discount rates and other variables. Actual future results and other assumed variables could differ from these estimates, including changes in the economy, the business environment in which we operate, and/or our own relative performance. Any differences in actual results compared to our estimates could result in further future impairments. Accordingly, our future earnings may be subject to significant volatility, particularly on a period-to-period basis.

Any future acquisitions we make, or attempt to make, could disrupt our business and harm our financial condition if we are not able to timely and successfully close the acquisition or successfully integrate acquired businesses and technologies.

We have made and may continue to make acquisitions of business and technologies to enhance our business. Acquisitions involve numerous risks, including problems combining the purchased operations and key employees, technologies or products, unanticipated costs, diversion of management’s attention from our core business, adverse effects on existing business relationships with suppliers and customers, risks associated with entering markets in which we have no or limited prior experience and potential loss of key employees. The integration of businesses that we have acquired or that we may acquire in the future into our business has been and will continue to be a complex, time consuming and expensive process. Failure to operate as a combined organization utilizing common information and communication systems, operating procedures, financial controls and human resources practices could adversely impact the success of any business combination.

Continuing economic and political instability could affect our business and results of operations.

The ongoing threat of terrorism targeted at the United States or other regions where we conduct business increases the uncertainty in our markets and the economy in general. This uncertainty is likely to result in economic stagnation, which would harm our business. In addition, increased international political instability may hinder our ability to do business by increasing our costs of operations. For example, our transportation costs, insurance costs and sales efforts may become more expensive as a result of geopolitical tension. These tensions may also negatively affect our suppliers and customers. If this international economic and political instability continues or increases, our business and results of operations could be harmed.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

We repurchased the following shares of our common stock during the first half of 2008:

Issuer Purchase of Equity Securities

Period	Total Number of Shares (or Units) Purchased	Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
Beginning Balance- December 29, 2007	91,455	$	8.08	91,455
Month Ending February 29, 2008	43,650	$	6.45	135,105
Month Ending May 24, 2008	31,900	$	7.97	167,005
Month Ending June 28, 2008	167,005	$	7.63	167,005	$	2,725,261

(1) On July 26, 2007, our Board of Directors approved the repurchase of up to $4.0 million of our common stock. Share repurchases under this program may be made through open market and privately negotiated transactions, at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements and other market conditions. The stock repurchase program may be limited or terminated at any time without prior notice. As of June 28, 2008, $2.7 million remained available for the future purchase of shares of our common stock.

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ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

The following actions were taken at our annual meeting of stockholders, which was held on June 26, 2008:

1. The stockholders elected the three nominees for Class I director to our Board of Directors. The three directors elected along with the voting results were as follows:

Name	Class & Expiration of Term	No. of Shares Voting For	No. of Shares Withheld Voting
William G. Oldham	2011 (Class I)	12,672,636	1,023,914
Stephen J Smith	2011 (Class I)	12,670,201	1,026,349
Howard A. Bain III	2011 (Class I)	13,339,613	356,937

2. The stockholders ratified the appointment of BDO Siedman, LLP as our independent registered public accounting firm for fiscal year 2008. The voting results were as follows:

No. of Shares Voting For	No. of Shares Withheld Voting	No. of Shares Abstained
13,629,575	38,632	28,343

ITEM 6. EXHIBITS

Exhibit Index

The following exhibits are filed or incorporated by reference with this Quarterly Report on Form 10-Q:

Exhibit No.	Description
3.(i)	Certificate of Incorporation
3.1(1)	Certificate of Incorporation of the Registrant
3.(ii)	Bylaws
3.2(2)	Bylaws of the Registrant
10	Material Contracts Management Contracts, Compensatory Plans, Contracts or Arrangements
10.1	Asset Purchase Agreement by and between Tevet Process Control Technologies, Ltd., and Nanometrics-Israel Ltd., dated May 7, 2008
31	Rule 13a-14(a)/15d-14(a) Certifications
31.1	Certification of Timothy J. Stultz, principal executive officer of the Registrant, pursuant to rule 13a-14(a) or rule 15a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Gary C. Schaefer, principal financial officer of the Registrant, pursuant to rule 13a-14(a) or rule 15a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Section 1350 Certifications
32.1	Certification of Timothy J. Stultz, principal executive officer of the Registrant, and Gary C. Schaefer, principal financial officer of the Registrant, pursuant to rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1) Incorporated by reference to exhibits filed with the Registrant’s Current Report on Form 8-K filed October 5, 2007.

(2) Incorporated by reference to Exhibit 3.2 filed with the Registrant’s Current Report on Form 8-K filed May 9, 2008.

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SIGNATURES

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

NANOMETRICS INCORPORATED (Registrant)
By:	/s/ Gary C. Schaefer
	Gary C. Schaefer Chief Financial Officer

Dated: August 7, 2008

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EX-10.1

Exhibit 10.1

ASSET PURCHASE AGREEMENT

by and between

TEVET PROCESS CONTROL TECHNOLOGIES LTD.

and

NANOMETRICS-ISRAEL LTD.

(a wholly owned subsidiary of Nanometrics Incorporated)

DATED AS OF: MAY 7, 2008

TABLE OF CONTENTS

		Page
ARTICLE I	DEFINITIONS	1
SECTION 1.01	Specific Definitions	1
SECTION 1.02	Additional Definitions	6
SECTION 1.03	Other Definitional Provisions; Interpretation	7
ARTICLE II	PURCHASE AND SALE OF ASSETS	7
SECTION 2.01	Purchased Assets	7
SECTION 2.02	Retained Assets	8
SECTION 2.03	Assumed Liabilities; Retained Liabilities	8
SECTION 2.04	Purchase Price; Payment	10
SECTION 2.05	Taxes	12
SECTION 2.06	Purchase Price Allocation	13
SECTION 2.07	Closing	13
SECTION 2.08	Alternative Arrangements	13
ARTICLE III	REPRESENTATIONS AND WARRANTIES OF SELLER	14
SECTION 3.01	Listing of Certain Assets and Data	14
SECTION 3.02	Organization	16
SECTION 3.03	Subsidiaries	16
SECTION 3.04	Authority	16
SECTION 3.05	Financial Statements	16
SECTION 3.06	Absence of Undisclosed Liabilities	17
SECTION 3.07	Absence of Certain Changes and Events	17
SECTION 3.08	Litigation	18
SECTION 3.09	Compliance with Law	19
SECTION 3.10	Taxes	19
SECTION 3.11	Consents	19
SECTION 3.12	Title to and Condition of the Purchased Assets	19
SECTION 3.13	Contracts	20
SECTION 3.14	Manufacturing Processes/Inventories	20
SECTION 3.15	Warranties	20
SECTION 3.16	Intellectual Property	20
SECTION 3.17	Labor Law and Employees	25
SECTION 3.18	No Finders	28
SECTION 3.19	Product Liability Claims	28
SECTION 3.20	Relations with Suppliers and Customers	28
SECTION 3.21	Environmental Matters	28
SECTION 3.22	Contracts with Related Parties	29
SECTION 3.23	Government Grants	29
ARTICLE IV	REPRESENTATIONS AND WARRANTIES OF BUYER	30
SECTION 4.01	Organization of Buyer	30
SECTION 4.02	Authority	30
SECTION 4.03	No Finders	30
ARTICLE V	CERTAIN COVENANTS AND AGREEMENTS	30
SECTION 5.01	Approvals and Consents	30
SECTION 5.02	Conduct of Business	31

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SECTION 5.03	No Solicitation of Other Offers	32
SECTION 5.04	Access to Information and Records	33
SECTION 5.05	Non-competition	33
SECTION 5.06	Further Assurances; Seller Access to Records	33
SECTION 5.07	Israeli Approvals	34
SECTION 5.08	Transfer of Approved Enterprise Status	34
SECTION 5.09	Fees and Expenses	35
SECTION 5.10	Notification	35
SECTION 5.11	Change of Name	35
ARTICLE VI	EMPLOYEE MATTERS	36
SECTION 6.01	Offer to Employees	36
SECTION 6.02	Pension Plans	36
SECTION 6.03	Other Benefits	36
SECTION 6.04	Severance	36
ARTICLE VII	CONDITIONS TO BUYER’S OBLIGATIONS	37
SECTION 7.01	Representations, Warranties and Covenants	37
SECTION 7.02	Opinion of Counsel for Seller	37
SECTION 7.03	Corporate Approvals	37
SECTION 7.04	Approvals; Consents; Releases	37
SECTION 7.05	Litigation Affecting Closing	37
SECTION 7.06	Legislation	37
SECTION 7.07	Other Agreements	37
SECTION 7.08	Transfer Documents	38
SECTION 7.09	Employees	38
SECTION 7.10	OCS Approvals	38
SECTION 7.11	No Material Adverse Effect	38
SECTION 7.12	Transfer of Purchase Agreements	38
ARTICLE VIII	CONDITIONS TO SELLER’S OBLIGATIONS	38
SECTION 8.01	Representations, Warranties and Covenants	38
SECTION 8.02	Legislation	38
SECTION 8.03	Litigation Affecting Closing	38
SECTION 8.04	Corporate Authorization	39
ARTICLE IX	INDEMNIFICATION	39
SECTION 9.01	Indemnification of Buyer	39
SECTION 9.02	Indemnification of Seller	39
SECTION 9.03	Procedures	40
SECTION 9.04	Termination of Indemnification	40
SECTION 9.05	Exclusive Remedy Against Seller	41
SECTION 9.06	Limitation of Indemnification	41
SECTION 9.07	Cooperation as to Indemnified Liability	41
SECTION 9.08	Nature of Indemnification	41
ARTICLE X	TERMINATION	42
SECTION 10.01	Termination Prior to Closing	42
SECTION 10.02	Effect of Termination	42

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ARTICLE XI	MISCELLANEOUS	43
SECTION 11.01	Complete Agreement	43
SECTION 11.02	Waiver, Discharge, Amendment, Etc	43
SECTION 11.03	Notices	43
SECTION 11.04	Public Announcement	44
SECTION 11.05	Expenses	44
SECTION 11.06	Governing Law; Forum Selection	44
SECTION 11.07	Successors and Assigns	44
SECTION 11.08	Severability	45
SECTION 11.09	Benefit	45
SECTION 11.10	Counterparts	45

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ASSET PURCHASE AGREEMENT

This ASSET PURCHASE AGREEMENT is entered into as of May 7, 2008, by and between NANOMETRICS-ISRAEL LTD. (“Buyer”), a company formed under the laws of Israel and a wholly-owned subsidiary of Nanometrics Incorporated, and TEVET PROCESS CONTROL TECHNOLOGIES LTD., a company formed under the laws of Israel (“Seller”).

RECITAL

The parties hereto desire that Seller sell, transfer and assign to Buyer, and that Buyer purchase from Seller, substantially all of the assets and business of Seller, excluding only the Retained Assets (as defined below), and assume certain liabilities, all on the terms and subject to the conditions set forth in this Agreement.

In order to induce Buyer to enter into this Agreement and cause the transactions contemplated hereunder to be consummated, concurrently with the execution and delivery of this Agreement the shareholders of the Seller listed on Schedule A and the Seller are executing a Shareholder Support and Voting Agreement in the form set out in Exhibit A in favor of Parent and granting an irrevocable proxy to a mutually-agreed-upon proxy holder, pursuant to which each such shareholder is undertaking certain obligations and irrevocably directing the proxy holder to vote all securities of the Seller directly or beneficially owned by it in favor of the approval of this Agreement and the transactions contemplated hereunder.

In consideration of the respective representations, warranties, covenants and agreements contained herein, and subject to the terms and conditions set forth herein, the parties hereto, intending to be legally bound, agree as follows:

ARTICLE I

DEFINITIONS

SECTION 1.01 Specific Definitions. As used in this Agreement, the following terms shall have the meanings set forth below:

“Affiliate” of a specified person (natural or juridical) means a person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the person specified. “Control” in this context means (i) ownership of more than fifty percent (50%) of the shares of stock entitled to vote for the election of directors in the case of a corporation, and more than fifty percent (50%) of the voting power in the case of a business entity other than a corporation, or (ii) the possession, directly or indirectly, of the power to affirmatively direct, or affirmatively cause the direction of, the management and policies of a specified person, whether through the ownership of voting securities, by contract or otherwise.

“Assets” means all the assets, properties, rights, interests, claims and business as of the Closing of Seller of every kind, nature and description, wherever located, whether now owned or hereafter acquired, whether tangible or intangible, real, personal or mixed, absolute or contingent, known or unknown, including, but not limited to:

(i) all business, financial, legal, regulatory, tax and other books, records (computer or otherwise), files, lists and data (including customer and supplier lists, files related to Business Intellectual Property and personnel records regarding employees other than Terminated Employees), reports, plans, drawings and operating records, customer service histories, warehouse and other Inventories;

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(ii) all rights under Contracts;

(iii) all manufacturing-related assets, benches, molding, machinery, equipment, fixtures, office furniture, tools, automobiles, other vehicles, computers, printers, copiers, telecopy machines and other tangible property held, owned or leased;

(iv) all Inventories, spare parts, service tools, instruments and supplies;

(v) all causes of action, judgments, settlements, claims, indemnity, or other rights, including all rights to all claims or other causes of action, whether known or unknown, accrued or to accrue for past or present infringement or unauthorized use of Intellectual Property or otherwise with respect to monies or rights accruing to Seller, except for any causes of action, claims or other rights pertaining to the Retained Liabilities;

(vi) all Intellectual Property, all Intellectual Property licenses (granted to or by Seller or its Affiliates) required to make, have made, use, modify, sell or offer to sell any products currently commercialized by or being developed by Seller including, but not limited to, the Intellectual Property listed on Part 3.16 of the Disclosure Schedule;

(vii) all other intangible assets, including goodwill;

(viii) all Authorizations, registrations, licenses, approvals, certifications, permits and other similar requirements used in connection with the Business;

(ix) all available product brochures primarily related to products currently commercialized by Seller;

(x) any security interests, Liens or rights to repossess products or equipment sold by Seller; and

(xi) all accounts receivable and notes receivable; and

(xii) all unrestricted cash and cash equivalent assets of Seller in Seller’s banks or on hand.

Notwithstanding the foregoing, “Assets” shall not include any items included in the definition of “Retained Assets” in Section 2.02 below.

“Business” means all of the business and operations of Seller as currently conducted and as currently contemplated to be conducted by Seller.

“Contract” means any contract, note, evidence of indebtedness purchase or sale order, lease, license, instrument, commitment or other agreement to which Seller is a party or an assignee or other beneficiary thereof or by which the Seller is bound, whether written or oral.

“Current Employees” means all persons who immediately prior to the Closing are employees of Seller, including any such employee who is on short-term or long-term disability or other authorized leave of absence and is so identified in Part 3.18 of the Disclosure Schedule.

“Employee Plans” means any health care plan or arrangement; life insurance or other death benefit plan or arrangement; deferred compensation or other pension or retirement plan or arrangement; stock option, bonus or other incentive plan or arrangement; severance, change of control or early retirement plan or arrangement; or other fringe or employee benefit plan or arrangement; managers’ insurance; education fund [keren hishtalmut]; or any employment or consulting contract or executive compensation agreement; whether the same

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are written or otherwise, formal or informal, voluntary or required by law or by Seller’s policies or practices, for the benefit of or relating to any present or former employees, leased employees, consultants, agents, directors, and/or their dependents, of Seller, including, without limitation, any pension plan or similar plan (whether or not any of the foregoing is funded) (i) to which Seller is a party or by which Seller is bound, (ii) that Seller has at any time established or maintained for the benefit of or relating to any present or former employees, consultants, agents, directors, and/or their dependents, of Seller, or (iii) with respect to which Seller has made any payments or contributions in any of the last seven (7) years, or otherwise has any liability (including any such plan or other arrangement formerly maintained by Seller).

“Environmental Laws” means and includes any one or more of the following: (a) any municipal, local or other statute, law, ordinance or regulation that relates to or deals with Hazardous Substances, human health or the environment, all as they may be amended from time to time; and all regulations promulgated by a regulatory body pursuant to any of the foregoing statutes, laws, regulations, or ordinances; and (b) judgments, orders, decrees, injunctions, permits, concessions, grants, franchises, licenses or agreements, to the extent that either they relate to safety, human health, the environment or emissions, discharges, or releases of Hazardous Substances into the environment including ambient air, surface water, ground water, facilities, structures, or land, or otherwise relate to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, Hazardous Substances, or wastes or the investigation, clean-up, or other remediation thereof.

“EVP Loan” means the line(s) of credit or any other loans made available to the Seller by the European Venture Leasing Company Limited (“EVP”) under the terms of the Agreement for the Provision of a Loan Facility of US$1,500,000, between EVP and the Seller, dated November 16, 2005, and any amendments thereto.

“EVP Liens” means the Liens granted by the Seller or any of its Affiliates for the benefit of EVP pursuant to the terms of the EVP Loan.

“Exclusivity Fee Advances” means all amounts paid to the Seller by Buyer as “Exclusivity Fees” pursuant to Letter of Intent, dated April 6, 2008, entered into between Buyer and Seller.

“Hazardous Substance” means asbestos, urea formaldehyde, polychlorinated biphenyls, nuclear fuel or materials, chemical waste, radioactive materials, explosives, known carcinogens, petroleum products, pesticides, fertilizers, or any other substance that is dangerous, toxic, or hazardous, or that is a pollutant, contaminant, chemical, material or substance defined as hazardous or as a pollutant or contaminant in, or the use, transportation, storage, release or disposal of which is regulated by, any Environmental Laws.

“Intellectual Property” means any or all of the following and all rights in, arising out of, or associated therewith: (a) Israeli, United States, international and other patents and applications therefore and all divisions, continuations, continuations-in-part, renewals, extensions, revisions, reissues and re-examinations relative thereto, and all patents, applications, documents and filings claiming priority to or serving as a basis for priority thereof; (b) copyrights and all works of authorship including all translations, adaptations, combinations, compilations and derivations of each of the foregoing, whether or not registered; (c) registered and unregistered trademarks, trade names, brand names, service marks, service names, trade dress, logos and corporate names including all translations, adaptations, combinations and derivations thereof, together with all common law rights and

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all goodwill associated with each of the foregoing; (d) technology, know-how, methods, processes, systems, trade secrets, inventions (whether or not patentable, copyrightable or susceptible to any other form of legal protection and whether or not reduced to practice), proprietary data, formulae, research and development data, and confidential information (including conceptions, ideas, innovations, manufacturing, development and production techniques, drawings, specifications, designs, proposals, financial and accounting data, business and marketing plans, customer and supplier lists and related information and documentation), in each case irrespective of whether in human or machine readable form; (e) computer software (including both source and object code) and all related program listings and data, systems, user and other documentation; (f) mask works; (g) industrial designs; (h) databases and data collections and all rights therein; (i) Internet addresses, sites and domain names and numbers; (j) all applications, registrations, renewals and extensions for any and each of the foregoing throughout the world; and (k) any similar or equivalent rights to any of the foregoing anywhere in the world, and all other forms of right by which one may effectively exclude another from using or otherwise enjoying any and each of the foregoing.

“Inventories” means finished goods, raw materials and ingredients, work-in-process, consignment goods, wares, merchandise, wrapping, packing materials and similar items.

“Key Employees” means the employees listed on Schedule 7.09.

“knowledge” of Seller means actual knowledge of the officers and directors of the Seller or, with respect to the representations and warranties set forth in Article III, the actual knowledge of any such persons and Pini Alezra and the knowledge that any of such persons would reasonably be expected to have assuming reasonable inquiry of any facts or circumstances actually known to and recognized by such person to create significant doubt concerning the accuracy of any representation, warranty, or statement without regard to any applicable “knowledge” qualifier.

“Liens” means liens, mortgages, charges (including fixed and/or floating charges), security interests, pledges or encumbrances.

“Material Adverse Effect” means any state of facts, change, effect, condition, development, event or occurrence that, individually or in the aggregate with other related effects, is or could reasonably be expected to be materially adverse to the business, results of operation or condition (financial or otherwise) of the Purchased Assets or the Business, considered as a whole, or is or could reasonably be expected to be materially adverse to the ability of Buyer to conduct the Business following the Closing as the Business is presently conducted or presently contemplated to be conducted by Seller, not including (i) changes in economic conditions or financial markets, (ii) changes in any applicable law or GAAP, (iii) changes in any regulatory or political conditions, or (iv) acts of war or terrorism (other than, in the case of (i), (iii) or (iv), any such changes having a disproportionate and adverse effect on the Purchased Assets or the Business.)

“New Buyer Employees” means the Current Employees employed by Buyer from and after the Closing.

“OCS” means Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, a governmental entity established and existing under, inter alia, the Israeli R&D Law.

“OCS Grants” means the grants received by the Seller or its Affiliates in connection with the R&D Law and/or the OCS.

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“Person” means any individual and any corporation (including any non-profit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, cooperative, foundation, society, political party, union, company (including any limited liability company or joint stock company), firm or other enterprise, association, organization or entity.

“Prime Rate” means, for any calendar quarter, the prime commercial lending rate quoted by US Bank National Association as in effect on the first day of such quarter.

“Product Liability” means any liability, claim or expense, including but not limited to attorneys’ fees and medical expenses, arising in whole or in part out of a breach of any express or implied product warranty, strict liability in tort, negligent manufacture of product, negligent provision of services, product recall, or any other allegation of liability arising from the design, testing, manufacture, packaging, labeling (including instructions for use), marketing, distribution or sale of products (whether for clinical trial purposes, commercial use or otherwise).

“R&D Law” means the Israeli Encouragement of Industrial and Development Law, 5744-1984, all related regulations, orders and rules, as well as published OCS policy.

“Real Property Lease” means the lease agreement, dated July 26, 2004, between Seller and Industrial Buildings Company Ltd., for the lease of property located in Yokneam, Israel.

“Registered Intellectual Property” means any or all of the following and all rights in, arising out of, or associated therewith: (a) Israeli, United States, international and other patents and applications therefore and all divisions, continuations, continuations-in-part, renewals, extensions, revisions, reissues and re-examinations relative thereto, and all patents, applications, documents and filings claiming priority to or serving as a basis for priority thereof; (b) registered trademarks, trade names, brand names, service marks, service names, trade dress, logos and corporate names including all translations, adaptations, combinations and derivations thereof (but excluding any common law rights and all goodwill associated with each of the foregoing); and (c) Internet addresses, sites and domain names.

“Securities” means shares, stock, options, phantom stock, warrants, convertible securities or other rights to acquire stock of Seller.

“Specified Off Balance Sheet Liabilities” means the following off balance sheet liabilities: (x) liabilities associated with the payment of salary for the period of advance notice required by law or contract (excluding payments resulting from “change of control” or “acceleration” provisions) or payment in lieu of the period of advance notice with respect to employees terminated by Seller in connection with the transaction contemplated by this Agreement, in the amount of $170,000 (one hundred seventy thousand U.S. dollars) (“Advance Notice Liabilities”); and (y) liabilities in connection with the termination by Seller of the Real Property Lease in the amount of $55,000 (fifty-five thousand U.S. dollars) (“Lease Termination Liabilities”.

“Taxes” (and “Tax”) means all taxes, additions to tax, penalties, interest, linkage differentials [hefreshei hatzmada], fines, duties, withholdings, assessments, and charges assessed or imposed by any governmental authority, including but not limited to all Israeli, U.S. federal, national, state, county, local and foreign income, profits, gross receipts, import, ad valorem, real and personal property, franchise, license, sales, use, value added, stamp, transfer, withholding, payroll, employment, excise, custom, duty, and any other taxes, obligations and assessments of any kind whatsoever; the foregoing shall include, but not be limited to, any liability arising as a result of being (or ceasing to be) a member of any affiliated, consolidated, combined, or unitary group as well as any liability under any Tax allocation, Tax sharing, Tax indemnity or similar agreement.

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“Transfer and Sales Taxes” means all use taxes, stamp duty taxes, conveyance taxes, transfer taxes, filing fees, recording fees, prepayment fees or penalties, reporting fees and other similar duties, taxes and fees, if any, imposed upon, or resulting from, the transfer of the Purchased Assets or the Assumed Liabilities hereunder and the filing of any instruments relating to such transfer, including any sales tax, but not including Value Added Tax (“VAT”).

SECTION 1.02 Additional Definitions. The following table sets forth certain other defined terms and the Section of the Agreement in which the meaning of each such term appears:

Term	Page No.	Defined in Section
Approved Enterprise Status	34	SECTION 5.08
Assumed Liabilities	8	SECTION 2.03(a)
Authorizations	19	SECTION 3.09
Baseline Net Asset Value	10	SECTION 2.04(a)(i)
Business Intellectual Property	22	SECTION 3.16(g)
Claim	41	SECTION 9.04
Closing	13	SECTION 2.07(a)
Closing Date	13	SECTION 2.07(a)
Closing Date Balance Sheet	11	SECTION 2.04(c)
Closing Payment	10	SECTION 2.04(b)(i)
COBRA	9	SECTION 2.03(b)(iv)
Consents	19	SECTION 3.11
Direct Claim	40	SECTION 9.03(b)
Disclosure Schedule	13	ARTICLE III
Dollars	7	SECTION 1.03
Enterprise Value	10	SECTION 2.04(a)(i)
Escrow Agent	10	SECTION 2.04(b)(ii)
Escrow Agreement	10	SECTION 2.04(b)(ii)
Escrow Amount	11	SECTION 2.04(b)(iii)
Estimated Balance Sheet	10	SECTION 2.04(a)(i)
EVP Loan Repayment Amount	11	SECTION 2.04(b)(v)
Final Balance Sheet Adjustment	12	SECTION 2.04(d)
Final Balance Sheet Adjustment Escrow Amount	10	SECTION 2.04(b)(ii)
Government Grants	29	SECTION 3.23(a)
Indemnifiable Losses	39	SECTION 9.01
Indemnity Basket	41	SECTION 9.06
Interim Balance Sheet	16	SECTION 3.05
Interim Financial Statements	17	SECTION 3.05
Interim Income Statement	17	SECTION 3.05
Israeli Employees	27	SECTION 3.17(i)
Manufacturing Documentation	20	SECTION 3.14
Net Asset Value	11	SECTION 2.04(c)
NIS	7	SECTION 1.03
Non-competition Period	33	SECTION 5.05

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Term	Page No.	Defined in Section
Proposed Closing Date Net Assets Calculation	11	SECTION 2.04(c)
Purchase Price	10	SECTION 2.04(a)
Purchased Assets	7	SECTION 2.01
Retained Assets	8	SECTION 2.02
Retained Liabilities	8	SECTION 2.03(b)
Seller Audited Financial Statements	16	SECTION 2.03(b)
Seller Databases	25	SECTION 3.16(p)
Seller Product	20	SECTION 3.16(a)
Seller Software	24	SECTION 3.16(l)
Seller’s Financial Statements	17	SECTION 3.05
Standard Form Agreement	21	SECTION 3.16(f)
Terminated Employees	36	SECTION 6.02
Third Party Claim	40	SECTION 9.03(a)
Total Cash Payment	10	SECTION 2.04(a)(i)
VAT	12	SECTION 2.05(b)
VAT Request	12	SECTION 2.05(b)

SECTION 1.03 Other Definitional Provisions; Interpretation. The words “hereof,” “herein,” and “hereunder” and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provisions of this Agreement. The terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa. References to an “Exhibit” or to a “Schedule” are, unless otherwise specified, to one of the Exhibits or Schedules attached to or referenced in this Agreement, and references to an “Article” or a “Section” are, unless otherwise specified, to one of the Articles or Sections of this Agreement. The term “person” includes any individual, partnership, joint venture, corporation, limited liability company, trust, unincorporated organization or government or any department or agency thereof and will also include its permitted successors and assigns. The term “Dollars” or “$” shall refer to the currency of the United States of America, and the term “NIS” shall refer to the currency of the State of Israel. All references to time shall refer to Tel Aviv, Israel time. Whenever the words “include”, “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation”. The term “or” is not exclusive. The word “extent” in the phrase “to the extent” means the degree to which a subject or other thing extends, and such phrase shall not mean simply “if”. Any agreement or instrument defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement or instrument as from time to time amended, modified or supplemented. This Agreement shall be construed without regard to any presumption or other rule requiring construction hereof against the party causing this Agreement to be drafted. Other terms may be defined elsewhere in the text of this Agreement and shall have the meaning indicated throughout this Agreement

ARTICLE II

PURCHASE AND SALE OF ASSETS

SECTION 2.01 Purchased Assets. Upon the terms and subject to the conditions set forth in this Agreement, effective as of the Closing, Seller hereby sells, transfers, assigns and conveys to Buyer, and Buyer hereby purchases, all of the Assets, other than the Retained Assets (the “Purchased Assets”), free and clear of all Liens.

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SECTION 2.02 Retained Assets. Seller hereby retains all of its respective right, title and interest in and to, and there shall be excluded from sale, assignment or transfer to Buyer hereunder, the following assets of Seller as of the Closing (the “Retained Assets”):

(a) this Agreement and the amounts, including any Exclusivity Fee Advances, to be received by Seller hereunder;

(b) all Contracts not specifically assumed by Buyer pursuant to Section 2.03(a);

(c) the originals of Seller’s minute books, share ledgers, share transfer records and tax returns, which, however, shall remain available for review and copying by Buyer upon reasonable request; and

(d) all rights, awards, insurance proceeds and similar assets or rights.

SECTION 2.03 Assumed Liabilities; Retained Liabilities.

(a) Assumed Liabilities. Upon the terms and subject to the conditions set forth in this Agreement, effective as of the Closing, Seller hereby assigns, transfers, and conveys to Buyer, and Buyer hereby assumes and agrees to pay and perform according to their respective terms those liabilities and obligations of Seller which are related to the Purchased Assets (including the Contracts) and the Business, provided that such liabilities and obligations are set forth (x) on Seller’s Financial Statements (excluding the Specified Off Balance Sheet Liabilities); or (y) in any Contract assumed by Seller or (z) on Schedule 2.03(a) of this Agreement (collectively, the “Assumed Liabilities”). For clarification purposes, the parties (i) confirm that as a result of the mechanism by which Seller will pay the EVP Loan Repayment Amount as set forth in Section 2.04(b)(v) below, the Closing Seller’s Financial Statements and the Assumed Liabilities will not include any amounts payable with respect to the EVP Loans and (ii) agree that the Assumed Liabilities will include:

(i) any amounts that may be due or payable to the OCS or under any OCS Grants; and

(ii) Product Liability or any other Liability with respect to products sold pursuant to Contracts assumed by Buyer (other than as specifically set forth in this Agreement).

(b) Retained Liabilities. The parties agree that Buyer is not, nor shall be considered, the successor to Seller, and that Buyer does not hereby agree to assume or become liable to pay, perform or discharge any obligation or liability whatsoever of Seller or relating to the Assets or any former or present employees of Seller, including those that may be hired by Buyer, except as expressly provided for in Section 2.03(a). Seller shall retain any liability or obligation of, or responsibility for any claim against, Seller or the Business, direct or indirect, known or unknown, absolute or contingent, not included in the Assumed Liabilities (the “Retained Liabilities”), and, notwithstanding anything to the contrary in the Agreement, none of the following shall be Assumed Liabilities (and each shall be included in the definition of “Retained Liabilities”):

(i) the obligations of Seller under this Agreement;

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(ii) any obligation, liability or claim that constitutes or arises from a breach by Seller of any representation, warranty, covenant or agreement contained in this Agreement;

(iii) any obligation, liability or claim that may arise from any lawsuits, actions or proceedings against Seller, except for a claim arising solely from an action carried out by Buyer subsequent to the Closing;

(iv) any obligation, liability or claim that may arise from any employee, or consultant (or any former employee or consultant), for any reason or actions, who is not a New Buyer Employee, including, (i) any claim or demand of a current or former employee relating to or arising as a result of employment, termination by Seller of the employment of such employee or consultants (or former employee or consultant), or an employment agreement, whether or not written, between Seller or its Affiliates and any Person, including, for this purpose, with respect to any Person claiming entitlements or benefits on the basis of a claimed employer-employee relationship between Seller and such Person, (ii) any liability under any Employee Plan at any time maintained, contributed to or required to be contributed to by or with respect to Seller or its Affiliates or under which Seller or its Affiliates may incur liability, or any contributions, benefits or liabilities therefor, or any liability with respect to Seller or its Affiliates’ withdrawal or partial withdrawal from or termination of any Employee Plan, (iii) any liability under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) arising as a result of any act or omission by Seller or its Affiliates, (iv) any liability of Seller or its Affiliates under the WARN Act, and any similar state, local U.S. or non-U.S. law or regulation, (v) any liability of Seller or its Affiliates for severance, accrued vacation and/or paid time and/or mandatory or customary payment and/or benefit and/or entitlement for employees of Seller or its Affiliates with respect to any Current Employees, and (vi) any claim of an unfair labor practice, or any claim under any state unemployment compensation or worker’s compensation law or regulation or under any federal, state or non-U.S. employment discrimination law or regulation, which shall have been asserted prior to the Closing Date or is based on acts or omissions by Seller which occurred prior to the Closing;

(v) any liability with respect to New Buyer Employees with respect to the period of time prior to the Closing Date unless such liability is expressly assumed by Buyer pursuant to this Agreement;

(vi) any and all Third Party Expenses (including, Transaction Expenses, Transaction Bonus Payments and Change in Control Payments) as such terms are defined in Section 5.09 below;

(vii) any other liability or obligation of, or claim against, Seller or the Business, of any kind or nature whatsoever, whether known or unknown, fixed or contingent, determined or determinable, due or not yet due, or otherwise, that is not expressly assumed by Buyer under this Agreement;

(viii) any liability of Seller or its Affiliates with respect to any Tax attributable to the Purchased Assets or the Business with respect to any pre-Closing Tax period, including any liability for the breach of the terms of any “approved enterprise” programs received by the Company which may result from the transactions contemplated by this Agreement;

(ix) any liability to the extent arising from any injury to or death of any person or damage to or destruction of any property, whether based on negligence, strict liability, enterprise liability or any other legal or equitable theory arising from defects in or use or misuse of products sold or from services performed by or on behalf of Seller or any other Person prior to the Closing Date;

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(x) except as expressly provided in this Agreement, any liability of Seller to the extent resulting from entering into, performing its obligations pursuant to or consummating the transactions contemplated by this Agreement;

(xi) any liability of Seller or its Affiliates that arises out of or relates to any Retained Asset;

(xii) any liability of Seller for the payment of fees or expenses of any broker or finder in connection with the origin, negotiation or execution of this Agreement or in connection with any transaction contemplated hereby; and

(xiii) the Specified Off Balance Sheet Liabilities.

SECTION 2.04 Purchase Price; Payment.

(a) Purchase Price. The total consideration for the Purchased Assets (the “Purchase Price”) shall be:

(i) Cash Payment. $3,525,000 (three million five hundred twenty-five thousand U.S. Dollars) (the “Total Cash Payment”) comprised of: (x) $2,856,000 (two million eight hundred fifty-six million U.S. dollars) (the “Enterprise Value”), plus (y) $225,000 (two hundred twenty-five thousand U.S. dollars) (the amount of the Specified Off Balance Sheet Liabilities); plus (z) $444,000 (four hundred forty-four thousand U.S. dollars) (the “Baseline Net Asset Value”), which is based on the Estimated Closing Balance Sheet attached hereto as Schedule 2.04(a)(i) (the “Estimated Balance Sheet”); and

(ii) Assumption of Liabilities. Buyer’s assumption of the Assumed Liabilities pursuant to Section 2.03(a).

(b) Payment of Purchase Price; EVP Loan; Exclusivity Fee Advances. The Purchase Price shall be payable as follows:

(i) Closing Consideration. At the Closing, Buyer shall transfer the Total Cash Payment less (w) the aggregate Exclusivity Fee Advances, (x) the EVP Loan Repayment Amount, (y) the Escrow Amount and (z) the Final Balance Sheet Adjustment Escrow Amount, as defined below (the “Closing Payment”) to a bank account designated by Seller.

(ii) Final Balance Sheet Adjustment Escrow Amount. Contemporaneously with the making of the Closing Payment, Buyer shall deposit $176,250 (one hundred seventy-six thousand two hundred fifty U.S. dollars) (the “Final Balance Sheet Adjustment Escrow Amount”) with ESOP Trust Company or such other escrow agent as shall be mutually agreed upon by the parties (the “Escrow Agent”), to be held by the Escrow Agent on behalf of Seller pursuant to an Escrow Agreement in a form to be agreed as soon as possible after the date of this Agreement and prior to the Closing (the “Escrow Agreement”) in order to secure the obligations of Seller, if any, under Section 2.04(b)(iv) to make payment of the Final Balance Sheet Adjustment (as defined in Section 2.04(d)). The Balance Sheet Adjustment Escrow Amount shall be held by the Escrow Agent and distributed in accordance with the terms of the Escrow Agreement.

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(iii) Escrow Amount. Contemporaneously with the making of the Closing Payment, Buyer shall deposit an additional $352,500 (three hundred fifty-two thousand five hundred U.S. dollars) (the “Escrow Amount”) with the Escrow Agent, to be held by the Escrow Agent on behalf of Seller pursuant to the Escrow Agreement in order to secure the obligations of Seller under Article IX. The Escrow Amount shall be held by the Escrow Agent and distributed in accordance with the terms of the Escrow Agreement.

(iv) Final Balance Sheet Adjustment. On a date determined in accordance with Section 2.04(c), the Escrow Agent shall release to Buyer and/or Seller, as the case may be, such amounts required to be released as a result of the calculation of the Final Balance Sheet Adjustment in accordance with the provisions of Section 2.04(e).

(v) EVP Loan and Liens. Prior to the Closing, Seller shall provide Buyer with a letter from EVP stating that upon payment of the sum stated in the letter (the “EVP Loan Repayment Amount”), the EVP Loan shall be repaid in full and EVP will remove any Liens securing the EVP Loan, including the EVP Liens. At the Closing, Buyer shall pay the EVP Loan Repayment Amount to EVP.

(c) Net Asset Value. Within 60 days after the Closing Date, Buyer shall cause to be prepared, at its expense, and delivered to Seller: (i) an audited balance sheet of the Seller as of the Closing Date (the “Closing Date Balance Sheet”) which sets forth the calculation of Seller’s total assets less the Seller’s total liabilities (the “Net Asset Value”), in each case as of the Closing Date (which, to avoid doubt will assume that the payment of the EVP Loan Repayment Amount has already occurred) and (ii) the opinion of Brukner-Ingbar CPA, or a similar firm of independent accountants selected by Buyer, on the Closing Date Balance Sheet, which opinion shall be unqualified as to the scope of audit. The Closing Date Balance Sheet will be prepared in accordance with Israeli GAAP as previously applied by Seller in the preparation of the Estimated Closing Balance Sheet (it being understood that liabilities to OCS and all other Specified Off Balance Sheet Liabilities and the amount of the aggregate Exclusivity Fee Advances will not be taken into consideration in the preparation of such Estimated Closing Balance Sheet or Closing Date Balance Sheet), which shall take into account any information not available to the parties at the time the Estimated Closing Balance Sheet was delivered, and the former officers of the Company shall provide such assistance in the preparation of the proposed Closing Date Balance Sheet as shall be reasonably requested by Buyer in connection with the delivery of the proposed Closing Date Balance Sheet. Buyer shall also deliver to Seller a worksheet which sets forth Buyer’s revised calculation of the net assets and an explanation of any changes made to Seller’s calculation of such amount. Buyer’s revised calculation of the net assets is referred to herein as the “Proposed Closing Date Net Assets Calculation”. The proposed Closing Date Balance Sheet and the Proposed Closing Date Net Assets Calculation will be deemed final if Seller either (i) agrees in writing by notice to Buyer or (ii) does not express in a written notice to Buyer a disagreement, in either case within 30 days after its receipt of such Closing Date Balance Sheet from Buyer. During the 30-day period following Buyer’s receipt of any such notice of disagreement, Buyer and Seller will negotiate in good faith to resolve their disagreement. Failing such resolution, the issues that remain in dispute will be examined and recalculated by independent accountants other than the firm that has rendered its opinion as described in this Section 2.04(c) provided that such examination and recalculation shall not constitute or entail an audit. The independent accountants shall be instructed to submit the results of their examination within thirty (30) calendar days. Any amounts so recalculated shall be final and binding on the parties. The independent accountants shall make a ratable allocation of their charges for such work as a part of their determination based on the proportion by which the amount in dispute was determined in favor of one party or the other.

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(d) Final Balance Sheet Adjustment. The “Final Balance Sheet Adjustment” shall be an amount equal to the difference between (I) the Baseline Net Asset Value and (II) the Net Asset Value of the Business as reflected on the Closing Date Balance Sheet.

(i) If the amount in clause (I) is less than the amount in clause (II), then (x) Buyer shall, within five business days after the Closing Date Balance Sheet becomes final as provided in Section 2.04(c), pay the Final Balance Sheet Adjustment to Seller and (y) the Escrow Agent shall release the entire amount of the Final Balance Sheet Adjustment Escrow Amount to Seller.

(ii) If the amount in clause (I) is greater than the amount in clause (II), then the Escrow Agent shall (x) release the Final Balance Sheet Adjustment to Buyer and (y) release the balance of the Final Balance Sheet Adjustment Escrow Amount to Seller. If the Final Balance Sheet Adjustment is greater than the Final Balance Sheet Adjustment Escrow Amount, the difference will be released by the Escrow Agent to Buyer out of the Escrow Amount.

(e) Purchase Price Adjustment. Any Final Balance Sheet Adjustment or indemnification payment under Article IX of this Agreement shall be treated for tax purposes as an adjustment of the total consideration paid for the Purchased Assets under this Agreement to the extent such characterization is proper and permissible under relevant Tax law and pursuant to the positions taken by the relevant Tax authorities.

SECTION 2.05 Taxes.

(a) Transfer and Sales Taxes. Seller shall promptly pay all Transfer and Sales Taxes.

(b) Israeli Value Added Tax. The Purchase Price is exclusive of Value Added Tax (“VAT”). Buyer shall be entitled to file a request pursuant to Section 20 of Israeli Value Added Tax Law with respect to the amounts payable buy it pursuant to this Agreement (the “VAT Request”). At Buyer’s request, Seller shall cooperate with Buyer in preparing and filing the VAT Request. If the VAT Request is not approved by the Closing, the applicable VAT, to the extent required to be paid, shall be paid by Buyer to the Seller at any time after the date on which the Purchase Price is payable in accordance with this Agreement, but not later than two (2) business days prior to the date upon which Seller is required to remit the applicable VAT to the Israeli VAT authorities, against receipt by Buyer of a valid VAT invoice from the Seller.

(c) Withholding. Buyer shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to Seller such amounts as the Buyer is required to deduct and withhold under applicable Tax law, with respect to the making of such payment. To the extent that amounts are so withheld by Buyer, such withheld amounts shall be paid by Buyer to the applicable Tax Authority and, upon such payment, shall be treated for all purposes of this Agreement as having been paid to Seller. Buyer will not pay any such withheld amounts to the applicable Tax Authority earlier than one (1) business day prior to the date such amounts are required to be paid. If, prior to or at the Closing, Seller delivers to Buyer a certificate from the Israeli Tax Authority evidencing an exemption from withholding of Taxes, or a reduced rate of withholding, which shall be applicable, valid and in effect as of the Closing, Buyer shall honor such withholding tax exemption or reduction.

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SECTION 2.06 Purchase Price Allocation. Prior to the Closing the parties will attach as Schedule 2.06 an allocation of the Purchase Price among the Purchased Assets. The allocation shall be agreed to by Seller and Buyer after arm’s-length negotiations. Seller and Buyer will, to the extent permitted by applicable law, adopt and utilize the amounts allocated to each asset or class of assets, as such allocations may be adjusted pursuant to this Section 2.06, for purposes of all Israeli and U.S. federal, state, local and other tax returns or reports, in any claim for refund, or otherwise with respect to such tax returns or reports.

SECTION 2.07 Closing.

(a) The consummation of the purchase and sale of the Purchased Assets provided for herein (the “Closing”) shall take place at 10:00 a.m. (local time) within three (3) business days after the conditions to closing set forth in Article VII and Article VIII have been satisfied or waived in writing, or on such other date and/or at such other time as the parties hereto may agree upon (the “Closing Date”). The Closing shall take place (i) at the offices of Yigal Arnon & Co., 22 Rivlin Street, Jerusalem, Israel or (ii) on the mutual agreement of the parties, by delivery via facsimile or email transmission (with originals sent via overnight courier service) of the documents to be delivered at the Closing and wire transfer of the payments to be made in accordance with Sections 2.04(a) and 2.04(b), or (iii) at such other place or in such other manner as the parties hereto may agree.

(b) All proceedings taken and all documents executed and delivered by the parties hereto at the Closing shall be deemed to have been taken and executed simultaneously and no proceedings shall be deemed taken nor any documents executed or delivered until all have been taken, executed and delivered.

SECTION 2.08 Alternative Arrangements. Notwithstanding anything contained herein or in any agreement or certificate executed and delivered in connection with the transactions contemplated hereby to the contrary, neither this Agreement nor any such agreement or certificate shall constitute an agreement to assign any Contract, permit or any claim or right or any benefit arising thereunder or resulting therefrom if an attempted assignment thereof, without the consent of a third party thereto, would constitute a default thereof. If such consent is not obtained, or if an attempted assignment thereof would be ineffective or would affect the rights thereunder so that Buyer would not receive all such rights, Seller shall, at the expense of Buyer, use commercially reasonable efforts to effect alternative arrangements in the form of a license, sublease, or operating agreement in form and substance reasonably satisfactory to Buyer and Seller until such time as such consent or approval has been obtained that results in Buyer receiving substantially all of the benefits under and bearing all the ordinary course costs, liabilities and other obligations with respect to any such Contract or permit. Upon obtaining the requisite third party consent thereto, each such non-assignable Contract or permit shall be transferred and assigned to Buyer.

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ARTICLE III

REPRESENTATIONS AND WARRANTIES OF SELLER

Except as set forth on the disclosure schedule (the “Disclosure Schedule”), Seller represents and warrants to Buyer as set forth in this Article III. Seller will use all reasonable efforts to deliver the Disclosure Schedule to the Buyer at least four (4) Business Days prior to the estimated date of execution of this Agreement. Notwithstanding any other provision of this Agreement or such Disclosure Schedule, each exception set forth in the Disclosure Schedule will be deemed to qualify only each representation and warranty set forth in this Agreement (i) that is specifically identified (by cross-reference or otherwise) in the Disclosure Schedule as being qualified by such exception, or (ii) with respect to which the relevance of such exception is readily apparent on the face of the disclosure of such exception set forth in the Disclosure Schedule.

SECTION 3.01 Listing of Certain Assets and Data. Attached hereto as Schedule 3.01(a) through Schedule 3.01(g) are true and complete lists of the matters set forth in the following subsections of this Section 3.01, including in each case all written or oral agreements or understandings and all amendments and modifications, if any, to each such Contract, document or other instrument referenced or described (including, in the case of oral arrangements, a written description of all material terms thereof).

(a) Real Property. Schedule 3.01(a) sets forth a description of all real property owned, leased or subject to option by Seller or otherwise used by Seller in the conduct of its business. Prior to the date of this Agreement, Seller has delivered to Buyer true and complete copies of all purchase agreements, finance agreements, leases, options, title abstracts, insurance, licenses, permits, and other material documents relating to such real property that it has in its possession or control.

(b) Equipment. Schedule 3.01(b) sets forth a list of all material items of machinery, equipment, molding, benches, tools and dies, furniture, fixtures, spare parts, vehicles and other similar property and assets owned or leased by Seller or used in the conduct of the Business, setting forth with respect to all such listed property a summary description of all Liens relating thereto, specifically identifying and describing those items with remaining total lease or conditional sales payments or other payments due by Seller in excess of $20,000, identifying the parties thereto, the rental or other payment terms, expiration date and cancellation and renewal terms thereof. Prior to the date of this Agreement, Seller has delivered to Buyer true and complete copies of all currently effective leases, conditional and other sales agreements and any other similar documents concerning the items listed in Schedule 3.01(b).

(c) Certain Agreements, etc. Schedule 3.01(c) sets forth a list of each of the following Contracts, written or otherwise, to which Seller is a party or by which it is bound (other than Contracts furnished pursuant to other subsections of this Section 3.01):

(i) any research and development agreement, joint development agreement, OEM, or other supply agreement whereby products or components are developed or made by or for Seller;

(ii) any joint venture or franchise agreement, and any purchase or disposition agreement and related significant agreements involving the acquisition or disposition of any products or process, or business by Seller;

(iii) any Contract for the purchase of any services, raw materials, supplies or equipment or other goods, including outstanding purchase orders, involving remaining payments estimated at more than $20,000;

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(iv) any Contract for the sale of assets, products or services that is in any way not yet performed and involving remaining payments estimated at more than $20,000;

(v) any dealer, distributor, broker, agent, sales representative or similar Contract by Seller for the sale of any products, identifying which Contracts might create any liability to Buyer or Seller if the right to sell or distribute new products is not offered by Seller or Buyer pursuant thereto or which cannot be terminated upon less than 90 days’ notice, without cause, by Seller or Buyer without liability to Seller or Buyer;

(vi) any Contract not made in the ordinary course of business of Seller, or any other Contract that has or could reasonably be expected to have a Material Adverse Effect;

(vii) any Contract (A) restricting Seller from engaging, participating, or competing with any other Person, in any line of business, market or geographic area, or to make use of any Intellectual Property; (B) granting most favored nation pricing, exclusive sales, distribution, marketing or other exclusive rights, rights of first refusal or rights of first negotiation to any other Person; or (C) otherwise limiting the right of Seller to sell, distribute or manufacture any products or services related thereto;

(viii) any Contract of indemnification or warranty, other than (A) under Seller’s unmodified forms of standard customer/distribution agreements, the forms of which have been made available to Buyer or its counsel, or (B) warranties implied by Law;

(ix) any Contract pursuant to which Seller has acquired or divested a business or entity, or all or substantially all of the assets of a business or entity, whether by way of merger, consolidation, purchase of stock, purchase or sale of assets, license or otherwise;

(x) any Contract between Seller and any governmental entity;

Prior to the date of this Agreement, Seller has delivered to Buyer true and complete copies of all Contracts identified in Schedule 3.01(c). Such copies contain all the terms of the agreements, understandings and arrangements between the parties thereto with respect to the subject matter thereof.

(d) Permits, Licenses, Etc. Schedule 3.01(d) sets forth a list of all material Authorizations, permits, licenses, notifications, registrations, approvals or similar permissions. Prior to the date of this Agreement, Seller has delivered to Buyer true and complete copies of all permits, licenses, notifications, registrations, approvals or other documents identified in Schedule 3.01(d).

(e) Loans and Credit Agreements, Etc. Schedule 3.01(e) sets forth a list of all outstanding notes, bonds, debentures, loans or other credit agreements or arrangements, escrow agreements, security agreements, mortgages, deeds of trust, guaranties, pledges, conditional or installment purchase agreements involving remaining payments in excess of $20,000, letters of credit and any other instruments evidencing indebtedness, written or otherwise, to which Seller is a party (as lender, borrower, or guarantor) or which affect or relate to its property or Assets. Prior to the date of this Agreement, Seller has delivered to Buyer true and complete copies of all documents identified in Schedule 3.01(e).

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(f) Insurance Policies and Claims. Schedule 3.01(f) sets forth a list of all policies of insurance maintained by or for the benefit of Seller with respect to Seller and covering its officers, directors, employees, agents, properties, buildings, machinery, equipment, furniture, fixtures or operations and a description of each claim made by or for the benefit of Seller under any such policy of insurance within the past three years, describing such claim and the amount thereof. Prior to the date of this Agreement, Seller has delivered to Buyer true and complete copies of all policies of insurance identified in Schedule 3.01(f), and true and complete copies of all documentation regarding claims made thereunder.

(g) Employee Plans. Schedule 3.01(g) sets forth a list of all Employee Plans and any related insurance or other contracts and trust and custodial agreements. Prior to the date of this Agreement, Seller has delivered to Buyer true and complete copies of all Employee Plans and all employee agreements or policies for the last three years.

SECTION 3.02 Organization. Seller is a limited private company duly organized, and validly existing under the laws of the State of Israel. Seller has all necessary power and authority to own its properties and assets and conduct the business presently being conducted by it.

SECTION 3.03 Subsidiaries. Except as set forth in Schedule 3.03, Seller does not have any interest, direct or indirect, in any other business, corporation, joint venture, partnership, proprietorship or other entity. Except as set forth in Schedule 3.03, none of the business of Seller is conducted through, and none of the Purchased Assets is owned by or through, any direct or indirect subsidiary or Affiliate of Seller.

SECTION 3.04 Authority. Seller has full power and authority to enter into this Agreement and to perform its obligations hereunder. The execution and delivery by Seller of this Agreement and other agreements contemplated hereby to which Seller is a party, and the consummation by Seller of the transactions hereby and thereby, have been duly and validly authorized by Seller’s Board of Directors and shareholders, no other action of Seller’s Board of Directors or shareholders, or corporate proceedings on the part of Seller or its Affiliates, is necessary to authorize this Agreement and no other action of Seller’s Board of Directors or shareholders, or corporate action on the part of Seller or its Affiliates, is necessary to consummate the transactions contemplated hereby except for the execution of documents and instruments and application for consents and approvals contemplated by this Agreement. This Agreement has been duly authorized by Seller and duly executed and delivered by Seller, and constitutes a legal, valid and binding agreement of Seller enforceable against it in accordance with its terms. Except as disclosed in Schedule 3.04 or Schedule 3.11, neither the execution and delivery of this Agreement nor compliance by Seller with its terms and provisions will violate (i) any provision of the articles of association or other governing instruments of Seller, (ii) any Contract to be transferred to Buyer or any permit or license of Seller, or (iii) any law, statute, regulation, or, to the best of Seller’s knowledge, injunction, order or decree of any government agency or authority or court to which Seller or any of the Purchased Assets is subject.

SECTION 3.05 Financial Statements. Attached hereto as Schedule 3.05 are true and complete copies of audited financial statements of Seller, including balance sheets at December 31, 2007 and statements of earnings for the fiscal years then ended (“Seller Audited Financial Statements”); and an unaudited balance sheet (the “Interim Balance Sheet”) at March 31, 2008 and statement of earnings for the three (3) month period then

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ended (the “Interim Income Statement” and together with the Interim Balance Sheet, the “Interim Financial Statements”) (all of the above financial statements collectively referred to as the “Seller’s Financial Statements”). The Seller Audited Financial Statements have been prepared in accordance with generally accepted accounting principles consistently applied. All the Seller’s Financial Statements are true and correct in all material respects and fairly and accurately present the assets, liabilities (including all reserves) and financial position of the Seller as of the dates thereof and the results of operations, shareholders’ equity (deficit) and changes in cash flows of the Seller for the periods then ended, except that the un-audited Interim Financial Statements do not contain footnotes or comparisons to the financial results of prior periods and are subject to normal year-end adjustments. The Seller’s Financial Statements are in accordance with the books and records of Seller. The books and records of the Company are stated in reasonable detail and accurately reflect in all material respects all information relating to the Business, the nature, acquisition, disposition, maintenance, location and collection of its assets and properties, and the nature of all transactions giving rise to its obligations, including accounts payable, and rights, including accounts receivable. There were no changes in the method of application of the Seller’s accounting policies or changes in the method of applying the Seller’s use of estimates in the preparation of the un-audited Interim Financial Statements.

SECTION 3.06 Absence of Undisclosed Liabilities. There are no debts, liabilities, or obligations, of any nature, of Seller, the Business or the Purchased Assets, except: (i) to the extent expressly set forth or reserved against in the Seller’s Financial Statements; or (ii) as specifically set forth in Schedule 3.06 of the Disclosure Schedule. Since the date of the Interim Financial Statements, there has not been any Material Adverse Effect.

SECTION 3.07 Absence of Certain Changes and Events. Except as reflected in the Interim Financial Statements, since the date of the Interim Financial Statements, Seller has not:

(a) made any material change in the accounting methods or practices it follows other than as required by Law or GAAP;

(b) made any capital expenditures or commitments exceeding $20,000 per expenditure or commitment, or $50,000 in the aggregate in respect of the Business;

(c) sold, assigned, transferred or licensed any patents, trademarks, trade names, copyrights, trade secrets or other intangible assets, in each case used in connection with the Business, except nonexclusive licenses in the ordinary course of business consistent with past practice;

(d) sold, leased, licensed, transferred, or otherwise disposed of any of its properties or assets primarily used in the Business, except Inventory sold or transferred in the ordinary course of business consistent with past practice and obsolete or worn out equipment sold or otherwise disposed of in a manner consistent with past practice which was not otherwise material (individually or in the aggregate) to the Business, or canceled any material indebtedness or waived any material claims or rights of material value;

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(e) suffered any damage to or destruction or casualty of (whether or not covered by insurance) any asset individually or in the aggregate material to the operation of the Business;

(f) failed to pay any creditor any amount arising from the operation of the Business owed to such creditor when due, other than good faith disputes and trade payables arising in the ordinary course of business and not past due more than sixty (60) days;

(g) failed to discharge or satisfy any Lien on any of the Purchased Assets, at or prior to the time that the obligation with respect to such Lien became due;

(h) defaulted on any material obligation relating to the conduct or operation of the Business without curing such default;

(i) granted any allowances or discounts with respect to the Business outside the ordinary course of business consistent with past practice or sold Inventory materially in excess of reasonably anticipated consumption for the near term outside the ordinary course of business consistent with past practice;

(j) incurred or assumed any liabilities with respect to the Business other than in the ordinary course of business consistent with past practice and liabilities that are not Assumed Liabilities;

(k) amended, cancelled or terminated any Contract or Authorization that is a Purchased Asset or entered into any Contract or obtained any Authorization primarily related to the Business, other than in the ordinary course of business and consistent with past practices;

(l) failed to carry on the Business in the ordinary course and consistent with past practices so as to preserve the Purchased Assets and the Business and the goodwill of the suppliers, customers, distributors and others having business relations with the Business;

(m) dismissed or provided notice of termination of the employment to any of the Current Employees; or

(n) entered into any agreement or commitment, whether in writing or otherwise, to do any of foregoing.

SECTION 3.08 Litigation. Set forth on Schedule 3.08 is a true and complete list of all actions, suits, proceedings, audits and investigations instituted against or by Seller, or otherwise affecting Seller, the Business or the Purchased Assets. Except as specifically set forth in Schedule 3.08, there are no actions, suits, or proceedings pending or, to the knowledge of Seller, threatened against or by Seller, at law, in equity or otherwise, in, before, or by any court, arbitrator, or governmental agency or authority. Except as specifically set forth on Schedule 3.08, there are no unsatisfied judgments or, to the best of Seller’s knowledge, outstanding orders, injunctions, decrees, stipulations or awards (whether rendered by a court or administrative agency or by arbitration) against or affecting Seller or the Business or against any of the Purchased Assets. Prior to the date of this Agreement, Seller has made available to Buyer for review all complaint and litigation files of Seller.

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SECTION 3.09 Compliance with Law. Except as specifically set forth in Schedule 3.09, the Business has not violated and is not in violation of any applicable law, ordinance or regulation of any governmental entity, including, without limitation, the R&D Law and any legal obligations applicable to Seller in connection with tax benefits approved by the Investment Center at the Ministry of Labor, Industry and Trade. All governmental approvals, registrations, notifications, permits, licenses and other permissions or authorizations (collectively, “Authorizations”) required in connection with the conduct of the Business have been obtained and are in full force and effect and are being complied with. Except as specifically set forth in Schedule 3.09, Seller has not received any written notification of any asserted past or present violation in connection with the conduct of the Business of any applicable law, ordinance or regulation, or any written complaint, inquiry or request for information from any governmental entity relating thereto. Except as specifically set forth in Schedule 3.09, neither Seller nor the Business nor any of the Purchased Assets is the subject of any Israeli or U.S. federal, state or local enforcement action or, to the knowledge of Seller, other investigation, including but not limited to those relating to Environmental Laws.

SECTION 3.10 Taxes. Seller has timely filed all Tax or assessment reports and Tax returns (including any applicable information returns) that may be required by any law or regulation of any jurisdiction to be filed by or on behalf of Seller or any of its Affiliates, and all such reports and returns are true, correct and complete in all material respects. Seller has duly paid, deposited or accrued on its books of account, all Taxes (including estimated Taxes) pursuant to such reports and returns, or assessed against Seller, or which Seller or its Affiliates is obligated to withhold from amounts owing to any employee, service provider, supplier, or any other third party. Seller has no liability for any Taxes in excess of the amounts stated in the Interim Balance Sheet with respect to all time periods or portions thereof ending on or before the date set forth therein. Neither the assessment of any additional Taxes that by law should have been reported or paid or in accordance with generally accepted accounting principles should have been accrued, nor any investigation or audit, is pending or, to the best of Seller’s knowledge, threatened or expected. No Taxing or assessment authority has indicated to Seller any intent to conduct an audit or other investigation or asserted any unresolved deficiencies with respect to Tax liabilities of Seller for any period, and to the knowledge of Seller there are no facts or circumstances that would give rise thereto. Seller has not waived any statute of limitations in respect of Israeli, foreign, federal, state or local Taxes or agreed to any extension of time with respect to an assessment of deficiency with respect to such Taxes.

SECTION 3.11 Consents. With the exception of the matters listed in Schedule 3.11 (collectively, the “Consents”), no consent, approval, waiver or authorization is legally or contractually required on the part of Seller to duly and validly transfer or assign any of the Purchased Assets as contemplated hereby.

SECTION 3.12 Title to and Condition of the Purchased Assets. Seller has full right, title and interest to the Purchased Assets and good and marketable title to the tangible Purchased Assets, free and clear of all Liens, except for the those Liens listed (together with the dollar amount secured by each such Lien) on Schedule 3.12, which (subject to the assumption of the Assumed Liabilities by Buyer) shall be discharged in full by Seller at the Closing. The Purchased Assets include all assets, properties, rights, interests, claims and business necessary for or relating to the conduct of the Business as presently conducted by Seller or as currently proposed to be conducted. The Purchased Assets are suitable for the

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uses for which they are presently used by Seller, in normal operating condition and free from any significant defects, ordinary wear and tear excepted. Except as specifically set forth on Schedule 3.12, all of the Purchased Assets are located at the facilities of Seller. This Section 3.12 does not apply to the Seller’s Intellectual Property; representation and warranties relating to the Seller’s Intellectual Property are set forth in Section 3.16 below.

SECTION 3.13 Contracts. Except as specifically set forth in Schedule 3.13, each Contract required to be listed on any Schedule to this Agreement is valid and subsisting and is and following the consummation of the transactions contemplated by this Agreement, will remain, in full force and effect in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles, and there have been no amendments, modifications, or supplements to any such Contracts. Except as specifically set forth in Schedule 3.13, there is no default or claim of default by Seller under any such Contract and no event has occurred, or will occur as a result of the consummation of the transactions contemplated by this Agreement, that, with the passage of time or the giving of notice or both, could reasonably be expected to constitute a default by Seller or, to the knowledge of Seller, any other party thereto under any such Contract, or could reasonably be expected to permit modification, acceleration, or termination of any such Contract, or result in the creation of any Lien on any of the Purchased Assets. Seller is not a party to any Contract: (i) that restricts Seller’s, or after the closing would restrict Buyer’s, ability to conduct any line of business; or (ii) that the performance of which results in a net loss for Seller, or after Closing, will result in a net loss for Buyer.

SECTION 3.14 Manufacturing Processes/Inventories. Seller has delivered to Buyer complete and accurate written documentation of the processes and procedures used or necessary to manufacture Seller’s products in quantities sufficient for the conduct of the Seller’s business as proposed to be conducted (the “Manufacturing Documentation”). The Business Intellectual Property includes all processes, methods, techniques, procedures, trade secrets and know how used or necessary to manufacture such products. Except as specifically set forth in Schedule 3.14, the quantities of all Inventories, materials and supplies of Seller are not obsolete, damaged, slow-moving, defective or excessive, and are reasonable and balanced in the circumstances of Seller.

SECTION 3.15 Warranties. All products manufactured or sold, and all services provided, by Seller have complied, and are in compliance, with all contractual requirements, warranties or covenants, express or implied, applicable thereto, and with all applicable governmental, trade association or regulatory specifications therefore or applicable thereto.

SECTION 3.16 Intellectual Property.

(a) Products and Services. Schedule 3.16(a) accurately identifies and describes each product currently being designed, developed, manufactured, marketed, distributed, provided, licensed, or sold by Seller (each, a “Seller Product”).

(b) Registered IP. Schedule 3.16(b) accurately identifies: (a) each item of Registered Intellectual Property in which Seller has or purports to have an ownership interest of any nature (whether exclusively, jointly with another Person, or otherwise); (b) the jurisdiction in which such item of Registered Intellectual Property has been registered or filed and the applicable registration or serial number; (c) any other Person that has an ownership interest in such item of Registered Intellectual Property and the nature of such ownership

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interest; and (d) each Seller Product identified in Schedule 3.16(a) that embodies, utilizes, or is based upon or derived from (or, with respect to Seller Products currently under development, that is expected to embody, utilize, or be based upon or derived from) such item of Registered Intellectual Property. Seller has provided or otherwise granted access to Buyer complete and accurate copies of all applications, correspondence with any governmental entity, and other material documents related to each such item of Registered Intellectual Property.

(c) Inbound Licenses. Schedule 3.16(c) accurately identifies: (a) each Contract pursuant to which any Intellectual Property is or has been licensed, sold, assigned, or otherwise conveyed or provided to Seller (other than (i) agreements between the Seller and its employees in Seller’s standard form thereof, (ii) non-exclusive licenses to third-party software that is not incorporated into, or used in the development, manufacturing, testing, distribution, maintenance, or support of, any Seller Product and that is not otherwise material to the Business, (iii) non-exclusive licenses to any generally available hardware that is used in the development, manufacturing, testing, distribution, maintenance or support of any Seller Product and (iv) generally available off-the-shelf software products or tools that are used for the operation of the business); and (b) whether the licenses or rights granted to Seller in each such Contract are exclusive or non-exclusive.

(d) Outbound Licenses. Schedule 3.16(d) accurately identifies each Contract pursuant to which any Person has been granted any license under, or otherwise has received or acquired any right (whether or not currently exercisable) or interest in, any Business Intellectual Property other than a right to use any Seller Product pursuant to any purchase order. Seller is not bound by, and no Business Intellectual Property is subject to, any Contract containing any covenant or other provision that in any way limits or restricts the ability of Seller to use, exploit, assert, or enforce any Business Intellectual Property owned by Seller anywhere in the world.

(e) Royalty Obligations. Schedule 3.16(e) contains a complete and accurate list and summary of all royalties, fees, commissions, and other amounts payable by Seller to any other Person (other than sales commissions paid to employees according to Seller’s standard commissions plan) upon or for the manufacture, sale, or distribution of any Seller Product or the use of any Business Intellectual Property owned by Seller.

(f) Standard Form IP Agreements. Schedule 3.16(f) identifies each standard form of Intellectual Property Contract upon which a Contract that is currently effective in any respect is based, or for which either party under such Contract has any continuing obligation or right, including each standard form of (a) employee agreement containing any assignment or license of Intellectual Property; (b) consulting or independent contractor agreement containing any intellectual property assignment or license of Intellectual Property; and (c) confidentiality or nondisclosure agreement (each such agreement required to be listed, a “Standard Form Agreement”). Seller has provided to Buyer a complete and accurate copy of each Standard Form Agreement. Schedule 3.16(f) accurately identifies each agreement with an employee, consultant, or independent contractor in which the employee, consultant, or independent contractor expressly reserved or retained rights in any Intellectual Property incorporated into or used in connection with any Seller Product or otherwise related to Seller’s business, research, or development.

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(g) Ownership Free and Clear. Seller exclusively owns all right, title and interest to and in all Registered Intellectual Property. Seller owns all right, title and interest to and in all Intellectual Property used in or necessary to conduct the Business as currently conducted or currently contemplated to be conducted (the “Business Intellectual Property”), other than Intellectual Property licensed to Seller, as identified in Schedule 3.16(c), which schedule shall indicate whether such Intellectual Property is exclusive or not) free and clear of any Liens (other than licenses and rights granted pursuant to the Contracts). Without limiting the generality of the foregoing:

(i) Employees and Contractors. Each Person who is or was an employee or contractor of Seller and who is or was involved in the creation or development of any Seller Product or Business Intellectual Property owned by Seller has signed a valid and enforceable agreement containing an assignment of Intellectual Property pertaining to such Seller Product or Business Intellectual Property to Seller and confidentiality provisions protecting the Business Intellectual Property owned by Seller. No current or former shareholder, officer, director, employee or contractor of Seller that has any claim, right, or interest to or in any Business Intellectual Property. Seller has no knowledge of any employee of Seller that is (a) bound by or otherwise subject to any Contract restricting him from performing his duties for Seller or (b) in breach of any Contract with any former employer or other Person concerning Intellectual Property or confidentiality due to his activities as an employee of Seller.

(ii) Government Rights. No funding, facilities, or personnel of any governmental body or any public or private university, college, or other educational or research institution were used, directly or indirectly, to develop or create, in whole or in part, any Business Intellectual Property owned by Seller. Except as set forth under Section 3.16(g)(v) [“Standards Bodies”], Seller has not provided the Business Intellectual Property to any governmental body, under license, contract, or otherwise, in any manner that gives such governmental body any additional or different rights than those contained in Seller’s Standard Form Agreements, and all Contracts in which any governmental body obtains any rights to any Business Intellectual Property have been disclosed in the applicable disclosure schedule as set forth in this Section 3.16.

(iii) Protection of Proprietary Information. Seller has taken all reasonable steps to maintain the confidentiality of and otherwise protect and enforce its rights in all proprietary information pertaining to Seller or any Seller Product. Without limiting the generality of the foregoing, no portion of the source code for any software ever owned or developed by Seller has been disclosed or licensed to any escrow agent or other Person.

(iv) Past IP Dispositions. Seller has not assigned or otherwise transferred ownership of, or agreed to assign or otherwise transfer ownership of, any Intellectual Property that comprises Business Intellectual Property owned by Seller to any other Person.

(v) Standards Bodies. Seller is not and has never been a member or promoter of, or a contributor to, any industry standards body or similar organization that could require or obligate Seller to grant or offer to any other Person any license or right to any Business Intellectual Property.

(h) Valid and Enforceable. The Registered Intellectual Property is valid, subsisting, and, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors’ rights generally, and by laws relating to the availability of specific performance, injunctive relief or other estoppels or equitable remedies, is enforceable. Without limiting the generality of the foregoing:

(i) Misuse and Inequitable Conduct. Seller has not engaged in patent misuse or any fraud or inequitable conduct in connection with any Business Intellectual Property that is Registered Intellectual Property.

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(ii) Trademarks. To the knowledge of Seller, no registered trademark or registered trade name owned, used, or applied for by Seller conflicts or interferes with any registered trademark or registered trade name owned, used, or applied for by any other Person. No event or circumstance (including a failure to exercise adequate quality controls and an assignment in gross without the accompanying goodwill) has occurred or exists that has resulted in, or could reasonably be expected to result in, the abandonment of any registered trademark owned, used, or applied for by Seller.

(iii) Legal Requirements and Deadlines. Each item of Registered Intellectual Property is and at all times has been in compliance with all legal requirements and all filings, payments, and other actions required to be made or taken to maintain such item of Registered Intellectual Property in full force and effect have been made by the applicable deadline. No application for a patent or a copyright, mask work, or trademark registration or any other type of Registered Intellectual Property filed by or on behalf of Seller has been abandoned, allowed to lapse, or rejected. Schedule 3.16(h) accurately identifies and describes as of the date of this Agreement each action, filing, and payment that must be taken or made on or before the date that is 120 days after the date of this Agreement in order to maintain such item of Business Intellectual Property in full force and effect.

(iv) Interference Proceedings and Similar Claims. No interference, opposition, reissue, reexamination, or other proceeding is or has been pending or, to the knowledge of Seller, threatened, in which the scope, validity, or enforceability of any Registered Intellectual Property is being, has been, or could reasonably be expected to be contested or challenged. Seller has no knowledge of any basis for a claim that any Registered Intellectual Property is invalid or unenforceable.

(i) Third-Party Infringement of Business Intellectual Property. To the knowledge of Seller, no Person has infringed, misappropriated, or otherwise violated, and no Person is currently infringing, misappropriating, or otherwise violating, any Business Intellectual Property owned by Seller. Schedule 3.16(i) accurately identifies (and Seller has provided to Buyer a complete and accurate copy of) each letter or other written or electronic communication or correspondence that has been sent or otherwise delivered by or to Seller or any representative of Seller regarding any actual, alleged, or suspected infringement or misappropriation of any Business Intellectual Property owned by Seller, and provides a brief description of the current status of the matter referred to in such letter, communication, or correspondence.

(j) Effects of This Transaction. Neither the execution, delivery, or performance of this Agreement nor the consummation of any of the transactions contemplated by this Agreement will, with or without notice or lapse of time, result in, or give any other Person the right or option to cause or declare, (a) a loss of, or Lien on, any Business Intellectual Property; (b) a breach of or default under any Business Intellectual Property; (c) the release, disclosure, or delivery of any Business Intellectual Property by or to any escrow agent or other Person; or (d) the grant, assignment, or transfer to any other Person of any license or other right or interest under, to, or in any of the Business Intellectual Property.

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(k) No Infringement of Third Party IP Rights. Seller has never infringed (directly, contributorily, by inducement, or otherwise), misappropriated, or otherwise violated or made unlawful use of any Intellectual Property (other than patents), or to Seller’s knowledge, patents, of any other Person or engaged in unfair competition. No Seller Product, and no method or process used in the manufacturing of any Seller Product, infringes, violates, or makes unlawful use of any Intellectual Property (other than patents), or contains any Intellectual Property (other than patents) misappropriated from, any other Person, or, to Seller’s knowledge, infringes, violates, or makes unlawful use of any patent, or contains any patent misappropriated from, any other Person. There is no legitimate basis for a claim that Seller or any Seller Product has infringed or misappropriated any Intellectual Property Right (other than patents), or, to Seller’s knowledge, any patent, of another Person or engaged in unfair competition or that any Seller Product, or any method or process used in the manufacturing of any Seller Product, infringes, violates, or makes unlawful use of any Intellectual Property (other than patents), or contains any Intellectual Property (other than patents) misappropriated from, any other Person, or to Seller’s knowledge, infringes, violates, or makes unlawful use of any patents, or contains any patents misappropriated from, any other Person . Without limiting the generality of the foregoing:

(i) Infringement Claims. No infringement, misappropriation, or similar claim or proceeding is pending or, to the knowledge of Seller, threatened against Seller or, to the knowledge of the Seller, against any other Person who is or may be entitled to be indemnified, defended, held harmless, or reimbursed by Seller with respect to such claim or proceeding. Seller has never received any notice or other communication (in writing or otherwise) relating to any actual, alleged, or suspected infringement, misappropriation, or violation by Seller, any of their employees or agents, or any Seller Product of any Intellectual Property of another Person, including any letter or other communication suggesting or offering that Seller obtain a license to any Intellectual Property of another Person.

(ii) Other Infringement Liability. Seller is not bound by any Contract to indemnify, defend, hold harmless, or reimburse any other Person with respect to, or otherwise assumed or agreed to discharge or otherwise take responsibility for, any existing or potential intellectual property infringement, misappropriation, or similar claim (other than indemnification provisions in Seller’s Standard Form Agreements relating to the Business Intellectual Property owned by Seller).

(l) Bugs. None of the software (including firmware and other software embedded in hardware devices) owned, developed, marketed, distributed, licensed, or sold by Seller (collectively, “Seller Software”) (a) contains any bug, defect, or error (including any bug, defect, or error relating to or resulting from the display, manipulation, processing, storage, transmission, or use of date data) that materially and adversely affects the use, functionality, or performance of such Seller Software or any product or system containing or used in conjunction with such Seller Software; or (b) fails in any material respect to comply with any applicable warranty or other contractual commitment relating to the use, functionality, or performance of such Seller Software. Seller has provided to Buyer a complete and accurate list of all known bugs, defects, and errors in each version of the Seller Software.

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(m) Harmful Code. No Seller Software contains any “back door,” “drop dead device,” “time bomb,” “Trojan horse,” “virus,” or “worm” (as such terms are commonly understood in the software industry) or any other code designed or intended to have, or capable of performing, any of the following functions: (a) disrupting, disabling, harming, or otherwise impeding in any manner the operation of, or providing unauthorized access to, a computer system or network or other device on which such code is stored or installed; (b) damaging or destroying any data or file without the user’s consent; or (c) otherwise interfering with the operation of such Seller Software.

(n) Source Code. The source code for all Seller Software contains reasonably clear and accurate annotations and programmer’s comments, and otherwise has been documented in a professional manner that is both: (i) consistent with customary code annotation conventions and best practices in the software industry; and (ii) sufficient to independently enable a programmer of reasonable skill and competence to understand, analyze, and interpret program logic, correct errors and improve, enhance, modify and support the Seller Software. No source code for any Seller Software has been delivered, licensed, or made available to any escrow agent or other Person who is not, as of the date of this Agreement, an employee of Seller. Seller has no duty or obligation (whether present, contingent, or otherwise) to deliver, license, or make available the source code for any Seller Software to any escrow agent or other Person. No event has occurred, and no circumstance or condition exists, that (with or without notice or lapse of time) will, or could reasonably be expected to, result in the delivery, license, or disclosure of the source code for any Seller Software to any other Person.

(o) Open Source. Schedule 3.16(o) accurately identifies and describes (i) each item of Open Source Code that is contained in, distributed with, or used in the development of the Seller Products or from which any part of any Seller Product is derived, (ii) the applicable license terms for each such item of Open Source Code, and (iii) the Seller Product or Seller Products to which each such item of Open Source Code relates. No Seller Product contains, is derived from, is distributed with, or is being or was developed using Open Source Code that is licensed under any terms that (i) impose or could impose a requirement or condition that any Seller Product or part thereof (A) be disclosed or distributed in source code form, (B) be licensed for the purpose of making modifications or derivative works, or (C) be redistributable at no charge, or (ii) otherwise impose or could impose any other material limitation, restriction, or condition on the right or ability of the Seller to use or distribute any Seller Product.

(p) Data Bases. Schedule 3.16(p) identifies and describes each distinct electronic or other database containing (in whole or in part) personal data maintained by or for the Seller at any time (the “Seller Databases”), the types of personal data in each such database, the means by which the personal data was collected, and the security policies that have been adopted and maintained with respect to each such database. No breach or violation of any such security policy has occurred or, to the best of Seller’s knowledge, is threatened, and there has been no unauthorized or illegal use of or access to any of the data or information in any of the Seller Databases.

SECTION 3.17 Labor Law and Employees.

(a) Schedule 3.17(a) accurately sets forth, with respect to each employee of Seller (including any employee of Seller who is on a leave of absence or on layoff status):

(i) the name of such employee and the date as of which such employee was originally hired by Seller;

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(ii) such employee’s title, and a general description of such employee’s duties and responsibilities;

(iii) the aggregate dollar or New Israeli Shekel amount of the compensation (including wages, salary, commissions, director’s fees, fringe benefits, bonuses, profit-sharing payments and other payments or benefits of any type) received by such employee from Seller with respect to services performed in 2007;

(iv) such employee’s annualized compensation as of the date of this Agreement;

(v) each Employee Plan in which such employee participates or is eligible to participate;

(vi) any Authorization that is held by such employee and that relates to or is useful in connection with the Business; and

(vii) with respect to Israeli employees, all accrued vacation day and sick days, all recuperation pay owed; and any amounts owing to pension funds, managers insurance, education funds, recuperation pay [dmei havra’ah] or for other social benefits, including all accruals, allocations, severance and reserve Liabilities.

(b) Schedule 3.17(b) accurately identifies each former employee of Seller who is receiving or is scheduled to receive (or whose spouse or other dependent is receiving or is scheduled to receive) any benefits (whether from Seller or otherwise) relating to such former employee’s employment with Seller; and Schedule 3.17(b) accurately describes such benefits.

(c) The employment of each of Seller’s employees, subject to applicable notice periods, is terminable by Seller at will. Seller has delivered or granted to Buyer access to accurate and complete copies of all employee manuals and handbooks, disclosure materials, policy statements and other materials relating to the employment of the current and former employees of Seller.

(d) To the knowledge of Seller:

(i) no employee of Seller intends to terminate his employment with Seller;

(ii) no employee of Seller has received an offer to join a business that may be competitive with the Business; and

(iii) no employee of Seller is a party to or is bound by any confidentiality agreement, noncompetition agreement or other Contract (with any Person) that may have an adverse effect on: (A) the performance by such employee of any of his duties or responsibilities as an employee of Seller; or (B) the Business.

(e) Schedule 3.17(e) accurately sets forth, with respect to each independent contractor of Seller:

(i) the name of such independent contractor and the date as of which such independent contractor was originally engaged by Seller;

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(ii) a description of such independent contractor duties and responsibilities;

(iii) the aggregate dollar amount of the compensation (including all payments or benefits of any type) received by such independent contractor from Seller with respect to services performed during 2007;

(iv) the terms of compensation of such independent contractor; and

(v) any Authorization that is held by such independent contractor and that relates to or is useful in connection with the Business.

(f) Seller is not a party to or bound by, and in the past eight (8) years, Seller has not been a party to or bound by, any collective employment agreement or any union contract, collective bargaining agreement or similar Contract.

(g) Seller is not engaged, and Seller has never been engaged, in any unfair labor practice of any nature. There has never been any slowdown, work stoppage, labor dispute or union organizing activity, or any similar activity or dispute, affecting Seller or the Business. No event has occurred, and no condition or circumstance exists, that might directly or indirectly give rise to or provide a basis for the commencement of any such slowdown, work stoppage, labor dispute or union organizing activity or any similar activity or dispute. There are no actions, suits, claims, labor disputes or grievances pending or, to the best of the knowledge of Seller, threatened or reasonably anticipated relating to any labor, safety or discrimination matters involving any Current Employee, including, without limitation, charges of unfair labor practices or discrimination complaints.

(h) None of the current or former independent contractors of Seller could be reclassified as an employee. Seller has never had any temporary or leased employees. To the knowledge of Seller, no independent contractor of Seller is eligible to participate in any Employee Plan.

(i) All employees resident or working in Israel (“Israeli Employees”) are listed and identified as such on Schedule 3.17(a). All of the Israeli Employees are “at will” employees subject to termination upon up to thirty (30) days prior written notice under the termination notice provisions included in employment agreements or applicable law. Seller’s obligations to provide statutory severance pay to the Israeli Employees pursuant to the Severance Pay Law (5723-1963) are fully funded or accrued on the Seller’s Financial Statements and Seller has not invoked the provisions of Section 14 of the Severance Pay Law with respect to such statutory severance pay. To Seller’s knowledge, there are no circumstances that could give rise to any valid claim by a current or former Israeli Employee for compensation on termination of employment (beyond the statutory severance pay to which employees are entitled). All amounts that Seller is legally or contractually required either (A) to deduct from the Israeli Employees’ salaries or to transfer to the Israeli Employees’ pension or provident, life insurance, incapacity insurance, continuing education fund or other similar funds or (B) to withhold from the Israeli Employees’ salaries and benefits and to pay to any government entity as required by the Israeli Income Tax Ordinance and National Insurance Law or otherwise have, in each case, been duly deducted, transferred, withheld and paid, and Seller does not have any outstanding obligation to make any such deduction, transfer, withholding or payment; and (C) Seller is in compliance in all material respects with all applicable legal requirements and contracts

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relating to employment, employment practices, wages, bonuses and other compensation matters and terms and conditions of employment related to the Israeli Employees, including The Prior Notice to the Employee Law, 2002, The Notice to Employee (Terms of Employment) Law, 2002, The Prevention of Sexual Harassment Law, 1998, the Hours of Work and Rest Law, 1951, the Annual Leave Law, 1951, and The Employment by Human Resource Contractors Law, 1996. Seller has not engaged any Israeli Employees whose employment would require special licenses or permits. There are no unwritten policies or customs that, by extension, could entitle Israeli Employees to benefits in addition to what they are entitled by law (including, by way of example but without limitation, unwritten customs concerning the payment of statutory severance pay when it is not legally required). Seller has not engaged any consultants, sub-contractors or freelancers who, according to Israeli law, are entitled to the rights of an employee vis-a-vis Seller, including rights to severance pay, vacation, recuperation pay [dmei havra’ah] and other employee-related statutory benefits. Seller has provided to Buyer a correct and complete summary of the calculations concerning the components of the Israeli Employees’ salaries, including any components that are not included in the basis for calculation of amounts set aside for purposes of statutory severance pay. Seller has provided to Buyer (a) any and all agreements with human resource contractors, or with consultants, sub-contractors or freelancers; and (b) full documents, manuals, and written policies relating to the employment and termination of Israeli Employees.

SECTION 3.18 No Finders. Other than as set forth in Schedule 3.18, no act of Seller or its Affiliates has given or will give rise to any claim against Buyer for a brokerage commission, finder’s fee or other like payment in connection with the transactions contemplated herein.

SECTION 3.19 Product Liability Claims. All Seller Products that Seller has manufactured, distributed or sold were merchantable, free from defects in design, specifications, processing, manufacture, material or workmanship, and suitable for the purpose for which they were intended. Except as specifically set forth in Schedule 3.19, Seller has never incurred any uninsured or insured Product Liability, or received a claim based upon alleged Product Liability, and, to the best of Seller’s knowledge, no basis for any such claim exists. Seller does not have any liability or obligation with respect to any Product Liability, whether or not heretofore asserted, or product recalls related to products manufactured, distributed or sold at or prior to the Closing.

SECTION 3.20 Relations with Suppliers and Customers. No material current supplier of Seller has canceled any contract or order for provision of, and, to the knowledge of Seller there has been no threat by any such supplier not to provide, raw materials, products, supplies, or services to the Business when owned by Seller. Except as specifically set forth in Schedule 3.20, Seller has not received any information from any customer that accounted for more than 10% of the revenues of Seller during the last full fiscal year to the effect that such customer intends to decrease the amount of business it does with the Business when owned by Seller.

SECTION 3.21 Environmental Matters. Except as specifically set forth in Schedule 3.21: (a) Seller has obtained, and is in compliance with, all permits, licenses or other approvals necessary under the Environmental Laws with respect to the Business and the Purchased Assets, and is in compliance with all Environmental Laws; (b) no capital or other expenditures are necessary so that the Business and the Purchased Assets comply fully with any Environmental Law; (c) neither Seller nor the Business or the Purchased Assets have

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been or are subject to any actual or threatened investigations, administrative proceedings, litigation, regulatory hearings, or other action threatened, proposed or pending that alleges (i) actual or threatened violation of or noncompliance with any Environmental Law, or (ii) actual or threatened personal injury or property damage or contamination of any kind resulting from a release or threatened release of a Hazardous Substance with respect to the Business and the Purchased Assets; (d) Seller has not taken or failed to take any action with respect to the Business, the Purchased Assets or the real property presently or formerly used in connection therewith that could reasonably be expected to result in (i) actual or threatened violation of or noncompliance with any Environmental Law, or (ii) actual or threatened personal injury or property damage or contamination resulting from a release of a Hazardous Substance that requires remediation or other similar corrective action under any applicable Environmental Laws; and (e) no Hazardous Substances have been used, manufactured, generated, transported, released or disposed of in violation of any Environmental Law by Seller.

SECTION 3.22 Contracts with Related Parties. Except as set forth on Schedule 3.22, there are no agreements or contracts between Seller and any officer, director, or shareholder of Seller, any subsidiary of Seller or any entity in which any such officer, director or shareholder owns more than a five percent (5%) equity interest.

SECTION 3.23 Government Grants.

(a) Schedule 3.23(a) provides a complete list of all pending and outstanding grants, incentives, exemptions and subsidies from the Government of the State of Israel or any agency thereof, or from any non-Israeli governmental entity, granted to the Seller or assigned to or assumed by the Seller (collectively, “Government Grants”), including, without limitation, (i) the Investment Center of the Ministry of Industry, Trade and Labor, (ii) the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor (the “OCS”) including for avoidance of doubt grants received within the framework of MAGNET, MAGNETON, HEZNEK and other similar programs; (iii) the BIRD Foundation and any other similar governmental or government-related entity, (iv) the Fund for the Encouragement of Marketing, and (v) the Income Tax Authorities.

(b) Seller has made available to Buyer accurate and complete copies of all documents requesting or evidencing Government Grants or amendments thereto submitted by Seller and of all letters of approval, and supplements thereto, granted to Seller, as well as all correspondence or written summaries pertaining thereto, and has provided Buyer with an accurate and complete description of any unwritten or informal arrangements or understandings that relate to the Government Grants.

(c) Schedule 3.23(a) also details all the aggregate amount of each Government Grant, the amounts already received under such Government Grant, the amounts still receivable under such Government Grant, the royalties paid by Seller with respect to the and the aggregate outstanding obligations of the Seller thereunder with respect to royalties, or the outstanding amounts to be paid by Seller in respect of such Government Grants.

(d) Seller is in compliance with all of the material terms, conditions and requirements of the Government Grants and has duly fulfilled all the undertakings relating thereto. Seller has no knowledge of any intention of the Investment Center or the OCS to revoke or materially modify any of the Government Grants or that the Investment Center or the OCS believes that Seller is not in compliance in all material respects with the terms of any Grant. Neither the execution or delivery of this Agreement, nor the

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consummation of the transactions contemplated hereby does, will or would reasonably be expected to (with or without notice or lapse of time) give any governmental body the right to revoke, withdraw, suspend, cancel, terminate or modify any Government Grant identified or required to be identified in Schedule 3.23(a).

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF BUYER

Buyer represents and warrants to Seller as follows:

SECTION 4.01 Organization of Buyer. Buyer is a corporation duly organized and validly existing under the laws of Israel.

SECTION 4.02 Authority. Buyer has full power and authority to enter into this Agreement and to perform its obligations hereunder. The execution and delivery by Buyer of this Agreement and other agreements contemplated hereby to which Buyer is a party, and the consummation by Buyer of the transactions hereby and thereby, have been duly and validly authorized by Buyer’s Board of Directors, no other action of Buyer’s Board of Directors, or corporate proceedings on the part of Buyer is necessary to authorize this Agreement and no other action of Buyer’s Board of Directors, or corporate action on the part of Buyer, is necessary to consummate the transactions contemplated hereby. This Agreement has been duly authorized, executed, and delivered by Buyer and constitutes a legal, valid and binding agreement of Buyer, enforceable against Buyer in accordance with its terms. Neither the execution and delivery of this Agreement nor compliance by Buyer with its terms and provisions will violate (i) any provision of the articles of association of Buyer or (ii) any law, statute, regulation, or to Buyer’s knowledge, injunction, order or decree of any government agency or authority or court to which Buyer or any of Buyer’s assets is subject.

SECTION 4.03 No Finders. No act of Buyer has given or will give rise to any valid claim against any of the parties hereto for a brokerage commission, finder’s fee or other like payment in connection with the transactions contemplated herein.

ARTICLE V

CERTAIN COVENANTS AND AGREEMENTS

SECTION 5.01 Approvals and Consents. Seller and Buyer shall use commercially reasonable efforts to cause the satisfaction of the conditions to Closing contained in this Agreement. Each party hereto shall use commercially reasonable efforts to obtain all Authorizations, consents, orders and approvals of all governmental authorities and the consents of third parties to the assignment or transfer, for the benefit of Buyer of the agreements listed on Article VII or Article VIII that are, may be or become necessary for its execution and delivery of, and the performance of its obligations pursuant to, this Agreement and shall cooperate fully with the other party in promptly seeking to obtain all such Authorizations, consents, orders and approvals. The parties agree to take similar actions with respect to any applicable prior notification requirements under competition laws of foreign countries. The parties hereto acknowledge that time shall be of the essence in this Agreement and agree not to take any action or omit to take any action that will have the effect of unreasonably delaying, impairing or impeding the receipt of any required authorizations, consents, orders or approvals.

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SECTION 5.02 Conduct of Business. Until the Closing, except with the prior written consent of Buyer (which consent shall not be unreasonably withheld or delayed), Seller will operate the Business and maintain the Purchased Assets, only in the ordinary course of business consistent with past practice (including continuing to fulfill its supply obligations and maintenance of customary levels of Inventory), and, without limiting the foregoing, Seller will:

(a) use commercially reasonable efforts to preserve intact the present business organization and personnel of Seller;

(b) use commercially reasonable efforts to preserve the goodwill and relationships of the Business with suppliers, independent contractors, customers, employees, any governmental authority and other persons material to the operation thereof;

(c) not incur any obligation, liability, or indebtedness (absolute, accrued, contingent or other), other than trade payables incurred in the ordinary course of business consistent with past practice;

(d) not mortgage, pledge or subject to Lien any of the Purchased Assets;

(e) not sell, assign or transfer any asset, property or business or cancel any debt or claim or waive any right with respect to the Purchased Assets, except in the ordinary course of business consistent with past practice;

(f) not sell, assign, license, transfer or permit to lapse any right with respect to Intellectual Property;

(g) not grant any increase in the compensation payable to any officer, director, consultant, employee or agent who is, or will be offered the opportunity to be, a New Buyer Employee;

(h) not make or authorize any capital lease or any capital expenditure for additions to plant and equipment of the Business that would be treated as part of the Purchased Assets in excess of $50,000 per item or $100,000 in the aggregate except as may be necessary for ordinary repair, maintenance or replacement;

(i) not enter into or amend any contract for the employment of any officer, employee or other person who is, or may be offered the opportunity to be, a New Buyer Employee, on a full-time, part-time or consulting basis that is not terminable upon notice of 30 days or less without cost or other liability to the Business;

(j) not enter into or amend any contract or collective bargaining agreement with any labor union related to any Current or New Buyer Employees;

(k) not enter into or amend any bonus, pension, profit-sharing, retirement, stock purchase, stock option, deferred compensation, incentive compensation, hospitalization, insurance or similar plan, contract or understanding providing for employee benefits, including the grant or award of any stock option or stock appreciation or similar right that would purport to confer rights to shares of Seller or any of their Affiliates upon the consummation of the transactions contemplated by this Agreement;

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(l) not enter into any agreement relating to the lease of any real property, whether as lessor or lessee, or any contract for the purchase or sale of real property;

(m) not enter into any contract continuing for a period of more than three months from its date that is not terminable upon notice of 30 days or less without cost or liability to the Business, if such contract would be an Assumed Liability;

(n) not accept any order or enter into any agreement with a customer of the Business for the sale of any product or services of the Business that is at a price that reflects a discount that is not in the ordinary course of business or is not in accordance with discounts given on similar products or services of the Business over the past 6 months, if such agreement would be an Assumed Liability;

(o) not engage in (i) any trade loading practices or any other promotional marketing, sales or discount activity with any customers or distributors with the effect or any intent of accelerating to prior fiscal periods sales to the trade or otherwise, that would otherwise be expected (based on past practice) to occur in subsequent fiscal periods, (ii) any practice which is intended or would have the effect of accelerating to prior fiscal periods collections of receivables that would otherwise be expected (based on past practice) to be made in subsequent fiscal periods or (iii) any practice which is intended or would have the effect of postponing to subsequent fiscal periods payments by the Company that would otherwise be expected (based on past practice) to be made in prior fiscal periods, in each case in clauses (i) through (iii) in a manner outside the ordinary course of business consistent with past practices; or

(p) pay accounts payable and pursue collection of its accounts receivable not in the ordinary course of business, consistent with past practices;

(q) not request a tax pre-ruling or otherwise contact the tax authorities except on routine day-to-day matters, without the express, written permission of Buyer;

(r) not otherwise take any action that would impair Buyer’s rights under this Agreement or fail to take any action that would preserve Buyer’s rights under this Agreement:

(s) keep in full force all insurance policies;

(t) not change any of its methods of accounting or accounting practices in any respect;

(u) not enter into any transaction or take any other action outside the ordinary course of business;

(v) not agree, commit or offer (in writing or otherwise) to take any of the actions described in clauses “(a)” through “(t)” of this Section 5.02.

SECTION 5.03 No Solicitation of Other Offers. Prior to the Closing, neither Seller nor any of its Affiliates shall directly or indirectly discuss or negotiate with any person (other than Buyer), encourage the submission of inquiries, proposals or offers from any person (other than Buyer), or otherwise provide information to any other person, with respect

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to the sale of or investment in Seller (whether by merger, combination, sale of assets, sale of stock, or otherwise) or the sale, licensing, distribution or other disposition of any products, assets or technology of Seller, other than the sale of product Inventory in the ordinary course of business.

SECTION 5.04 Access to Information and Records. Except as required pursuant to any confidentiality agreement or similar agreement or arrangement to which Seller is a party (in which case the Seller shall use all commercially reasonable efforts to provide acceptable alternative arrangements, not in violation of such agreement or arrangement, for disclosure to Buyer or its advisors) or pursuant to applicable law, Seller shall afford to Buyer and to Buyer’s accountants, officers, directors, employees, counsel, and other representatives reasonable access during normal business hours upon reasonable prior notice, from the date hereof through the Closing, to all of the properties, books, data, contracts, commitments, and records of Seller, and, during such period, Seller shall furnish promptly to Buyer all information concerning Seller’s prospects, properties, liabilities, results of operations, financial condition, product evaluations and testing as Buyer may reasonably request and reasonable opportunity to contact and obtain information from Seller’s officers, employees as Buyer may reasonably request.

SECTION 5.05 Non-competition. As a material inducement and consideration for Buyer to enter into this Agreement, Seller agrees that from and after the Closing until two years following the Closing Date (the “Non-competition Period”), Seller undertakes, not, within any jurisdiction in the world, own, operate, advise, assist or lend funds to or invest funds in any person in any manner that would aid or assist any person or entity to compete, in any material respect, with the Business or any substantially similar business. During the Non-competition Period, Seller further agrees not to, directly or indirectly, interfere with, disrupt or attempt to disrupt the relationship between Seller or any of its Affiliates and any third party, including any customer, collaborator, supplier or employee of Buyer or any of its Affiliates. The parties hereto agree that the duration and geographic scope of the non-competition provisions set forth in this Section are reasonable. If any covenant in this Section is held to be invalid, illegal or unenforceable by any court of competent jurisdiction or any other governmental entity, it is agreed and understood that such covenant will not be voided but rather will be construed to impose limitations upon the activities of Seller that are no greater than allowable under then applicable laws.

SECTION 5.06 Further Assurances; Seller Access to Records. At such time and from time to time on and after the Closing Date upon request by Buyer, Seller will execute, acknowledge and deliver, or will cause to be done, executed, acknowledged and delivered, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney, and assurances that may be required for the better conveying, transferring, assigning, delivering and confirming ownership to, or reducing to the possession of, Buyer or its respective successors and assigns all of the Purchased Assets and to otherwise carry out the purposes of this Agreement. Seller agrees to promptly deliver, remit or return to Buyer all assets and amounts received by it after the Closing that, pursuant to the terms hereof, are owned by or are due to Buyer. Buyer shall permit Seller and its authorized representatives to have reasonable access to, on a confidential basis, and to copy, at Seller’s expense, during regular business hours and upon reasonable advance notice to Buyer and in a manner non-disruptive to Buyer’s conduct of the Business, such books, records and documents related to the conduct of the Business prior to the Closing that are necessary for Seller to comply with any applicable law or regulation or to respond to any legal or administrative claim or

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investigation. Seller agrees to cooperate, and to cause its independent accountants to cooperate, with Buyer and its accountants in the preparation of any financial statements of Seller as of the Closing Date.

SECTION 5.07 Israeli Approvals. Each party to this Agreement shall use reasonable efforts to deliver and file, as promptly as practicable after the date of this Agreement, each notice, report or other document required to be delivered by such party to or filed by such party with any Israeli governmental authority with respect to the transaction contemplated hereby. Without limiting the generality of the foregoing: (i) as promptly as practicable after the date of this Agreement, Buyer and Seller shall prepare and file the notifications required, if any, under the Israeli Restrictive Trade Practices Law in connection with the transaction contemplated hereby; (ii) Buyer and Seller shall respond as promptly as practicable to any inquiries or requests received from the Israeli Restrictive Trade Practices Commissioner for additional information or documentation; (iii) Seller shall use reasonable efforts to obtain, as promptly as practicable after the date of this Agreement, the following consents, and any other consents that may be required in connection with the transaction contemplated hereby: (x) approval of the OCS; and (y) approval of the Investment Center; and (iv) Buyer shall provide to the OCS, the Investment Center, the Israeli Restrictive Trade Practices Commissioner any information reasonably requested by such authorities and shall, without limitation of the foregoing, execute an undertaking in customary form in which Buyer undertakes to comply with the R&D Laws and regulations. Each party to this Agreement shall (i) give the other parties prompt notice of the commencement of any legal proceeding by or before any Israeli governmental entity with respect to the transaction contemplated hereby, (ii) keep the other parties informed as to the status of any such legal proceeding and (iii) promptly inform the other parties of any communication to the Israeli Restrictive Trade Practices Commissioner, the OCS, the Investment Center or any other Israeli governmental entity regarding any of the transactions contemplated by this Agreement. The parties to this Agreement will consult and cooperate with one another, and will consider in good faith the views of one another, in connection with any analysis, appearance, presentation, memorandum, brief, argument, opinion or proposal made or submitted in connection with any Israeli legal proceeding relating to the transaction contemplated hereby. In addition, except as may be prohibited by any Israeli governmental entity or by any Israeli legal requirement, in connection with any such legal proceeding under or relating to the Israeli Restrictive Trade Practices Law or any other Israeli antitrust or fair trade law, each party hereto will permit authorized representatives of the other party to be present at each meeting or conference relating to any such legal proceeding and to have access to and be consulted in connection with any document, opinion or proposal made or submitted to any Israeli governmental entity in connection with any such legal proceeding.

SECTION 5.08 Transfer of Approved Enterprise Status. At the request and expense of Buyer, whether before or after the Closing, Buyer and Seller shall jointly approach the Investment Center in order to obtain the consent of the Investment Center to the substitution of Buyer for Seller as the beneficiary of the Approved Enterprise Status that Seller received in respect of the approved enterprise status granted to certain facilities of the Company as set forth in Schedule 3.23(a) (the “Approved Enterprise Status”), such that Buyer shall be entitled to all rights and entitlements to which Seller is currently entitled pursuant to the Approved Enterprise Status, subject to the terms and conditions relating to such status. Seller undertakes not to take any action that shall prevent, delay or jeopardize the obtaining of such approval. Buyer and Seller shall cooperate and coordinate any communications with the Investment Center in respect of the transactions contemplated herein.

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SECTION 5.09 Fees and Expenses. Whether or not the transaction contemplated by this Agreement are consummated, all fees and expenses incurred in connection with this Agreement and the transaction contemplated hereby, shall be the obligation of the respective party incurring such fees and expenses, and any expenses incurred by Seller prior to or at the Closing and paid at or after the Closing shall not be deemed as an Assumed Liability and will considered a Retained Liability. Fees and expenses incurred by a party in connection with the transaction contemplated by this Agreement, include: (i) all third party legal, accounting, financial advisory, consulting and finders fees and expenses and all other like fees and expenses of third parties incurred by a party in connection with the negotiation, documentation and effectuation of the terms and conditions of this Agreement and the other transaction documents and the transactions contemplated hereby and thereby (collectively “Transaction Expenses”); (ii) any bonuses, change in control payments to employees or consultants of Seller or its subsidiaries, which shall be deemed expenses incurred by Seller (the “Transaction Bonus Payments”), and (iii) any payments in connection with any change in control obligations or any payment of consideration arising under any consents, waivers or approvals of any party under any Contract of Seller or its subsidiary which are effective as of immediately prior to the Closing date, which shall be deemed expenses of Seller (the “Change in Control Payments”).

SECTION 5.10 Notification. During the pre-Closing period, Seller shall promptly notify Buyer in writing of: (a) the discovery by Seller of any event, condition, fact or circumstance that occurred or existed on or prior to the date of this Agreement and that caused or constitutes a material breach of any representation or warranty made by Seller in this Agreement; (b) any event, condition, fact or circumstance that occurs, arises or exists after the date of this Agreement and that would cause or constitute a material breach of any representation or warranty made by Seller in this Agreement if (i) such representation or warranty had been made as of the time of the occurrence, existence or discovery of such event, condition, fact or circumstance, or (ii) such event, condition, fact or circumstance had occurred, arisen or existed on or prior to the date of this Agreement; (c) any material breach of any covenant or obligation of Seller; and (d) any event, condition, fact or circumstance that may make the timely satisfaction of any of the conditions set forth in Articles VII and Article VIII impossible or unlikely. If any event, condition, fact or circumstance that is required to be disclosed pursuant to this Section 5.10 requires any change in the Disclosure Schedule, or if any such event, condition, fact or circumstance would require such a change assuming the Disclosure Schedule were dated as of the date of the occurrence, existence or discovery of such event, condition, fact or circumstance, then Seller shall promptly deliver to Buyer an update to the Disclosure Schedule specifying such change. No such update, not approved by Buyer, shall be deemed to supplement or amend the Disclosure Schedule for the purpose of determining whether any of the conditions set forth in Article VII or Article VIII have been satisfied.

SECTION 5.11 Change of Name. Immediately after the Closing, Seller shall change its name and the name of each of its subsidiaries to a name that does not include the word “Tevet” or any variation thereof and that is satisfactory to Buyer and shall execute a written consent in form and substance to the satisfaction of the purchaser whereby it permits Buyer to use the name “Tevet”.

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ARTICLE VI

EMPLOYEE MATTERS

SECTION 6.01 Offer to Employees. Prior to Closing, certain Current Employee shall be given an offer letter by Buyer, as determined by Buyer in its sole discretion. Each such offer letter will (i) provide that the offer of employment will be conditional on the completion of the transactions contemplated by this Agreement and that such offer of employment will be effective as of the Closing, and (ii) provide for terms that, taken as a whole, are not materially less favorable than those terms of the relevant employee’s current terms of employment; provided, however, that such offers of employment will be “at will” unless otherwise specified by Buyer in an individual offer letter. To the extent applicable, Current Employees receiving offer letters shall receive full credit for years of service with the Company to the extent such service is taken into account under the Buyer’s customary employment practices.

SECTION 6.02 Pension Plans. The benefits of Current Employees, who do not accept the offer letters as per Section 6.01 (who will not become New Buyer’s Employees) (the “Terminated Employees”), under any Seller Pension Plans, shall be paid by Seller to such Terminated Employees in accordance with the terms of the applicable plan, and Buyer assumes no liability thereunder or in any other manner with respect to any Terminated Employees. Seller shall remain the sponsor of such Terminated Employees Employee Plans and Buyer assumes no obligations thereunder. The benefits of New Buyer’s Employees under any Seller Pension Plans, shall be paid by Buyer to such New Buyer’s Employees in accordance with the terms of the applicable plan, and Buyer assumes all liabilities and obligations thereunder for the period of time following the Closing Date.

SECTION 6.03 Other Benefits. Seller shall be responsible for any payments with respect to accrued vacation, convalescence pay [dmei havraa], sick pay, prior notice for termination and any other benefit to which Terminated Employees may be entitled with respect to their employment with Seller, and for any such payments to which New Buyer Employees may be entitled with respect to their employment with Seller for the period of time prior to the Closing Date. Buyer shall be responsible for any payments with respect to accrued vacation, convalescence pay [dmei havraa], sick pay, prior notice for termination and any other benefit to which New Buyer Employees may be entitled with respect to their employment with Seller for the period of time following the Closing Date. The provisions of this Section 6.03 shall also apply to any individual employed by Seller at any time, and any individual retained under another agreement such as a consultancy or representative agreement, who claims any employment-related benefits, rights or payments in relation to his/her contractual engagement with Seller.

SECTION 6.04 Severance. Unless otherwise agreed with Buyer to enable employees to work during their notice period, immediately upon Closing, Seller shall terminate the employment of each of the New Buyer’s Employees. Seller shall be responsible for all amounts required to be paid to Terminated Employees, or any former employees of the Business, or individuals claiming such amounts, in connection with the sale of the Purchased Assets or the termination of such person’s employment by Seller, including without limitation severance pay, prior notice salaries or equivalent and redemption of vacation days, and payments with respect to Employee Plans, and shall provide Buyer with a release duly executed by each such employee acknowledging receipt of all sums to such employee.

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ARTICLE VII

CONDITIONS TO BUYER’S OBLIGATIONS

The obligations of Buyer under this Agreement shall, at its option, be subject to the satisfaction, on or prior to the Closing Date, of all of the following conditions:

SECTION 7.01 Representations, Warranties and Covenants. Subject to paying the EVP Loan Repayment Amount to EVP at the Closing, the representations and warranties of Seller herein shall be true and accurate in all material respects (except with respect to representations and warranties qualified by materiality, which shall be true and accurate in all respects) at the Closing with the same effect as though made at such time. Seller shall have performed all of its obligations and complied with all of its covenants prior to or as of the Closing. Seller shall have delivered to Buyer approvals and documentation in evidence thereof, as well as an officers’ certificate in a form to be agreed by Closing, dated as of the Closing and executed by the chief executive of Seller to all such effects.

SECTION 7.02 Opinion of Counsel for Seller. Herzog, Fox & Neeman & Co., counsel for Seller, shall have delivered to Buyer a written opinion, dated the Closing Date, in a form to be agreed prior to the Closing.

SECTION 7.03 Corporate Approvals. All resolutions of the shareholders of Seller, including meetings of classes of shares, and the board of directors of Seller shall be delivered to Buyer.

SECTION 7.04 Approvals; Consents; Releases. All permissions, releases, consents or approvals, governmental or otherwise, necessary on the part of Seller to consummate the transactions contemplated hereunder shall have been obtained by Seller and delivered to Buyer, including, subject to paying the EVP Loan Repayment Amount to EVP at the Closing, the release of any and all Liens on the Purchased Assets not including Liens associated with the Assumed Liabilities, and completion of all attendant filing procedures at each relevant official registry, including without limitation the Israeli Registrar of Companies and the Israeli Registrar of Pledges.

SECTION 7.05 Litigation Affecting Closing. No suit, action or other proceeding shall be pending or threatened by any third party or by or before any court or governmental agency in which it is sought to restrain or prohibit or to obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated by this Agreement, and no investigation that might result in any such suit, action or other proceeding shall be pending or threatened.

SECTION 7.06 Legislation. No statute, rule, regulation, order, or interpretation shall have been enacted, entered or deemed applicable by any domestic or foreign government or governmental or administrative agency or court that would make the transactions contemplated by this Agreement illegal or otherwise materially adversely affect the Purchased Assets, the Business or the conduct of the Business in the hands of Buyer.

SECTION 7.07 Other Agreements. The approvals of the third parties to the assignment or transfer, as the case may be, of the agreements listed in Schedule 7.07 shall have been obtained in writing without any onerous conditions being imposed on Buyer, except that Buyer shall be entitled, in its sole discretion, to waive the omission of any such consent required hereunder, and in such case, the parties agree to use all reasonable efforts to obtain such consent post Closing.

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SECTION 7.08 Transfer Documents. Buyer shall have received from Seller such instruments of transfer, assignment, conveyance and other instruments sufficient to convey, transfer and assign to Buyer all right, title and interest in the Purchased Assets, together with possession of such Purchased Assets, all in form and substance reasonably satisfactory to Buyer and its counsel.

SECTION 7.09 Employees. At least six (6) of the Key Employees shall have remained continuously employed with Seller from the date of this Agreement through the Closing and shall have signed employment agreements with Buyer as contemplated by Section 6.01 above.

SECTION 7.10 OCS Approvals. Buyer shall have received from Seller written approval by the OCS, which shall not impose any condition upon Buyer, except for the requirement that it undertake to comply with the R&D Law, for the transfer to Buyer of all rights in and to all know-how of Seller subject to the R&D Law and/or developed in connection with OCS Grants, with respect to which it is agreed that Seller shall consult with Buyer in all matters pertaining to such application, and that Buyer shall cooperate in such regard, including provision of undertakings required under the R&D Law.

SECTION 7.11 No Material Adverse Effect. There shall have occurred no Material Adverse Effect since the date of this Agreement and no event shall have occurred and no condition or circumstance shall exist that could be expected to give rise to any such Material Adverse Effect.

SECTION 7.12 Transfer of Purchase Agreements. The agreements identified in Schedule 3.01(c)(iii) with respect to the supply to Seller of raw materials, supplies or equipment shall have been assigned to Buyer.

ARTICLE VIII

CONDITIONS TO SELLER’S OBLIGATIONS

The obligations of Seller under this Agreement shall, at its option, be subject to the satisfaction, on or prior to the Closing Date, of all of the following conditions:

SECTION 8.01 Representations, Warranties and Covenants. The representations and warranties of Buyer herein shall be true in all material respects on the Closing Date with the same effect as though made at such time. Buyer shall have performed all of its obligations and complied with all of its covenants herein prior to or as of the Closing Date.

SECTION 8.02 Legislation. No statute, rule, regulation, order or interpretation shall have been enacted, entered or deemed applicable by any domestic or foreign government or governmental or administrative agency or court that would make the transactions contemplated by this Agreement illegal.

SECTION 8.03 Litigation Affecting Closing. No suit, action or other proceeding shall be pending or threatened by any third party or by or before any court or governmental agency in which it is sought to restrain or prohibit in connection with this Agreement or the consummation of the transactions contemplated by this Agreement.

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SECTION 8.04 Corporate Authorization. Seller shall have received all requisite approvals for the transaction contemplated by this Agreement from the shareholders of Seller.

ARTICLE IX

INDEMNIFICATION

SECTION 9.01 Indemnification of Buyer. Subject to the limitations and other provisions set forth in Sections 9.04 and 9.06, Seller shall indemnify, defend and hold harmless Buyer and each of its subsidiaries, officers, directors, employees, and shareholders (each an “Indemnitee” and collectively “Indemnitees”) from and against and in respect of any and all demands, claims, actions or causes of action, assessments, losses, damages, liabilities, interest and penalties, costs and expenses (including, without limitation, reasonable legal fees and disbursements incurred in connection therewith and in seeking indemnification therefore, and any amounts or expenses required to be paid or incurred in connection with any action, suit, proceeding, claim, appeal, demand, assessment or judgment), whether or not involving a third-party claim, (collectively “Indemnifiable Losses”) resulting from or incurred by any Indemnitee with respect to any of the following:

(a) any breach of any representation or warranty of Seller contained in this Agreement, the Disclosure Schedule, the Purchase Price Adjustment Schedule or the officers’ certificate in the form of Exhibit B, as of the date of this Agreement and as of the Closing Date (without giving effect to any qualification as to materiality contained or incorporated in such representation or warranty);

(b) any breach of any covenant or obligation of Seller contained in this Agreement;

(c) any failure by Seller to satisfy, perform, pay, discharge or resolve any liabilities and obligations of, or claims against, Seller not included within the Assumed Liabilities; and

(d) any Liability (other than the Assumed Liabilities) to which the Buyer or any of the other Indemnitees may become subject and that arises directly or indirectly from or relates directly or indirectly to the Retained Assets, or any Liability related to Terminated Employees or any Liability with respect to New Buyer Employees not expressly assumed by Buyer.

SECTION 9.02 Indemnification of Seller. Subject to the limitations and other provisions set forth in Sections 9.04 and 9.06 below, Buyer shall indemnify, defend and hold harmless Seller and each of its officers, directors, employees and shareholders from and against and in respect of any and all Indemnifiable Losses resulting from or incurred by any person to be indemnified hereunder by any of the following reasons: (i) any breach of any representation or warranty of Buyer contained in this Agreement; (ii) any breach of any covenant or obligation of Buyer contained in this Agreement; and (iii) Buyer’s failure to satisfy, perform, pay, discharge or resolve any Assumed Liability.

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SECTION 9.03 Procedures.

(a) Procedures for Third Party Claims. If a claim by a third party is made against Buyer or its Indemnitees, within the survival period set forth in Section 9.04 below, arising out of a matter for which Buyer or any of its Indemnitees, as the case may be, is entitled to be indemnified pursuant to Section 9.01 (a “Third Party Claim”), Buyer shall promptly notify Seller in writing of such claim. The failure to notify promptly Seller hereunder shall not relieve Seller of its obligations hereunder except to the extent (and only to the extent) that Seller is actually prejudiced (including by losing the opportunity to mitigate damages) by such failure. Seller shall be responsible for the fees and expenses of counsel employed by the Indemnitee; provided that in no event shall Seller be liable for the fees and expenses of more than one counsel (in addition to any local counsel) for all Indemnitees in connection with any one action or separate but similar or related actions arising out of the same general allegations or circumstances. Seller shall be entitled to participate in the defense of a Third Party Claim, through counsel of its choice, at the expense of Seller; provided that with respect to any Third Party Claim, Buyer shall control all proceedings in connection with such Third Party Claim and, without limiting the foregoing, may in its sole discretion, subject to this Section 9.03(a), pursue or forego any and all administrative appeals, proceedings, hearings and conferences with any governmental entity with respect thereto. So long as Seller is participating in the defense of a Third Party Claim in good faith, or if Seller so requests in writing, Buyer shall reasonably cooperate with Seller by providing records and information that are reasonably relevant to such Third Party Claim. Buyer shall not settle or compromise any Third Party Claim without the written consent of Seller, which consent will not be unreasonably withheld or delayed. No such consent will be required (i) if Buyer agrees in writing to forego all claims for indemnification from Seller with respect to such Third Party Claim, or (ii) Buyer reasonably believes itself to be potentially or actually exposed to Indemnifiable Losses materially in excess of amounts reasonably expected to be received from Seller, or (iii) Buyer reasonably believes itself to be potentially or actually exposed to non-monetary remedies; provided, however, that Buyer uses reasonable best efforts to obtain in such settlement a release of Seller with respect to all such Third Party Claims.

(b) Procedures for Direct Claims. In the event Buyer or any Indemnitee should have a claim against Seller under this Agreement that does not involve a Third Party Claim being asserted against or sought to be collected from Buyer or such Indemnitee (a “Direct Claim”), the Buyer shall deliver notice of such Direct Claim, within the survival period set forth in Section 9.04 below, with reasonable promptness to Seller. The failure by Buyer to so notify Seller hereunder shall not relieve Seller of their obligations hereunder except to the extent (and only to the extent) that Seller is actually prejudiced by such failure. If Seller does not notify Buyer within thirty (30) calendar days following his receipt of such notice that Seller disputes its liability to Buyer or the Indemnitee, as the case may be, such Direct Claim specified by Buyer in such notice shall be conclusively deemed a liability of Seller (and will be subject to the limitations set forth in this Article IX).

SECTION 9.04 Termination of Indemnification. Except with respect to fraud, willful misrepresentation, willful misconduct or willful concealment by or on behalf of Seller: (i) other than the representations and warranties set forth in Section 3.02 (Organization) and 3.04 (Authority), the representations and warranties set forth in this Agreement shall terminate twelve (12) months following the Closing, except that such obligations shall not terminate with respect to any item as to which Buyer or any Indemnitee has, before the expiration of such period, previously made a Third Party Claim or a Direct

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Claim (a “Claim”) against Seller by delivering a notice to Seller in accordance with this Agreement, which obligations, if they relate to a Claim that has not been resolved, shall survive until such Claim is finally resolved; and (ii) the representations and warranties set forth in Section 3.02 (Organization) and 3.04 (Authority) shall terminate upon the expiration of the relevant statute of limitations, taking into account extensions thereof, except that such obligations shall not terminate with respect to any item as to which Buyer or any Indemnitee has, before the expiration of the relevant period, previously made a Claim against Seller by delivering a notice to Seller in accordance with this Agreement, which obligations, if they relate to a Claim that has not been resolved, shall survive until such Claim is finally resolved.

SECTION 9.05 Exclusive Remedy Against Seller. Except with respect to fraud, willful misrepresentation, willful misconduct or willful concealment by or on behalf of Seller and except for injunctive relief that may be obtained to enjoin the breach, or threatened breach, of any provision of this Agreement or a Claim for specific performance, Buyer’s or an Indemnitee’s right to indemnification under this Article IX constitutes Buyer’s or such Indemnitee’s sole and exclusive remedy with respect to any inaccuracy in, or any breach of, any representation or warranty or any covenant or agreement of Seller in this Agreement or in any certificate, instrument, document or agreement delivered by or on behalf of Seller pursuant to or in connection with this Agreement or any failure by Seller to perform any covenant, agreement, obligation or undertaking in this Agreement or any such certificate, instrument, document or agreement.

SECTION 9.06 Limitation of Indemnification. Notwithstanding anything to the contrary in this Agreement: (i) Seller shall not be liable for any Indemnifiable Losses pursuant to this Agreement (A) in the aggregate greater than the Escrow Amount and (B) other than Indemnifiable Losses with respect to the Purchase Price Adjustment Schedule which may be recovered in full, unless the aggregate amount of all such Indemnifiable Losses pursuant to this Agreement for which indemnification is sought exceeds on a cumulative basis Fifty Thousand Dollars ($50,000) (the “Indemnity Basket”); provided that, if the aggregate amount of all Indemnifiable Losses exceeds the Indemnity Basket, Buyers or the Indemnitees, as the case may be, shall be entitled to indemnification for all such Indemnifiable Losses, without regard to the Indemnity Basket; (ii) in any Claim for indemnification the Buyer or any Indemnitee, as the case may be, may seek indemnification for its Indemnifiable Losses only from the Escrow Amount (and pursuant to the terms of the Escrow Agreement); (iii) Seller shall not be liable for any Indemnifiable Losses that was not submitted within the survival period set forth in Section 9.04; and (iv) Buyer or any Indemnitee shall be entitled to receive (out of the Escrow Amount) any amount that: (A) has been determined by a court of competent jurisdiction to be owing by Seller to Buyer or to an Indemnitee, or (B) that Seller has agreed in writing to be owing by Seller to Buyer or to an Indemnitee.

SECTION 9.07 Cooperation as to Indemnified Liability. Each party hereto shall cooperate fully with the other parties with respect to access to books, records, or other documentation within such party’s control, if deemed reasonably necessary or appropriate by any party in the defense of any claim that may give rise to indemnification hereunder.

SECTION 9.08 Nature of Indemnification. Buyer’s right to indemnification and payment of Indemnifiable Losses, or other remedy, based on Seller’s representations, warranties, covenants and obligations, shall not be affected by any investigation conducted by Buyer or any knowledge acquired (or capable of being acquired) at any time by Buyer, whether before or after the execution and delivery of this Agreement or the Closing, with

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respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant or obligation. The parties recognize and agree that the representations, warranties and covenants operate as bargained for promises and risk allocation devices and that, accordingly, Buyer’s knowledge, and the waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, shall not affect the right to indemnification or payment of Indemnifiable Losses pursuant to this Article IX, or other remedy, based on such representations, warranties, covenants, and obligations.

ARTICLE X

TERMINATION

SECTION 10.01 Termination Prior to Closing. Notwithstanding any contrary provisions of this Agreement, this Agreement and the respective obligations of the parties hereto to consummate the transaction contemplated hereby may be terminated and abandoned at any time at or before the Closing only as follows:

(a) by either Buyer, on the one hand, or Seller, on the other hand, at the option of either Buyer or Seller, if the Closing shall not have occurred by June 30, 2008; provided that party seeking to terminate shall not have breached in any material respect its obligations under this Agreement in any manner that shall have been the proximate cause of, or resulted in, the failure to consummate the Closing; or

(b) at any time, without liability of any party to the others, upon the mutual written consent of Seller and Buyer; or

(c) by Buyer (i) if Seller have breached in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform (A) would give rise to the failure of a condition set forth in Article VII and (B) has not been or is incapable of being cured by Seller within 20 days after its receipt of written notice thereof from Buyer; or (ii) if any of the effects set forth in Section 7.05 (Litigation Affecting Closing) shall be in effect and shall have become final and nonappealable; or

(d) by Seller, (i) if Buyer shall have breached in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform (A) would give rise to the failure of a condition set forth in Article VIII, and (B) has not been or is incapable of being cured by Buyer within 20 days after its receipt of written notice thereof from Seller; or (ii) if any of the effects set forth in Section 8.03 (Litigation Affecting Closing) shall be in effect and shall have become final and nonappealable.

SECTION 10.02 Effect of Termination. If this Agreement is terminated pursuant to Section 10.01, all further obligations of the parties under this Agreement shall terminate; provided, however, that: (a) no party shall be relieved of any obligation or other liability arising from any willful or intentional breach by such party of any provision of this Agreement; (b) the parties shall, in all events, remain bound by and continue to be subject to the provisions set forth in Section 5.09.

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ARTICLE XI

MISCELLANEOUS

SECTION 11.01 Complete Agreement. The Schedules and Exhibits to this Agreement shall be construed as an integral part of this Agreement to the same extent as if they had been set forth verbatim herein. This Agreement constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior proposals, discussions, or agreements, whether written or oral, relating hereto.

SECTION 11.02 Waiver, Discharge, Amendment, Etc. The failure of any party hereto to enforce at any time any of the provisions of this Agreement, including the election of such party to proceed with the Closing despite a failure of any condition to such party’s closing obligations to occur, shall in no way be construed to be a waiver of any such provision, nor in any way to affect the validity of this Agreement or any part thereof or the right of the party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to be a waiver of any other or subsequent breach. Any amendment to this Agreement shall be in writing and signed by the parties hereto.

SECTION 11.03 Notices. All notices or other communications to a party required or permitted hereunder shall be in writing and shall be given by hand delivery, courier service (with acknowledgment of receipt), fax or email transmission (with confirmation of transmission), or by certified mail, postage prepaid with return receipt requested, addressed to the parties at the following addresses:

if to Buyer, to:	Nanometrics-Israel Ltd. c/o Nanometrics, Inc. 1550 Buckeye Drive Milpitas, CA 95035 USA Attention: Timothy Stultz, President and CEO Telephone: +1 408 545 6141 Facsimile: +1 408 232 5910 E-mail: tstultz@nanometrics.com
with a copy (which shall not constitute notice) to:	Thelen Reid Brown Raysman & Steiner LLP 101 Second Street, Suite 1800 San Francisco, CA 94105-3606 USA Attention: Jay Margulies, Esq. Telephone: +1 408 282 1815 Facsimile: +1 408 278 8215 E-mail: jlmargulies@thelen.com
and to	Yigal Arnon & Co. 22 Rivlin Street Jerusalem 94263 Israel Attention: Barry Levenfeld, Adv. Telephone: +972 2 623 9220 Facsimile: +972 2 623 9236 E-mail: barry@arnon.co.il

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and if to Seller, to:	Tevet Process Control Technologies Ltd. P.O. Box 690 Yoqneam Industrial Park, Building 2 Area 7 Yoqneam, Israel, 206920 Attention: Offer Du-Nour, CEO Telephone: +972 4 9591775 Facsimile: +972 4 9591776 E-mail: ofer.dunour@tevet-pct.com
with a copy (which shall not constitute notice) to:	Herzog, Fox, Neeman & Co. Asia House 4 Weizmann Street Tel Aviv 64239, Israel Attention: Alon Sahar, Adv. Telephone: +972-3-6922861/2 Facsimile: +972-3-696-6464 E-mail: sahar@hfn.co.il

Any party may change the above-specified recipient and/or mailing address by notice to all other parties given in the manner herein prescribed. All notices shall be deemed given on the day when actually delivered as provided above (if delivered personally, by courier or by telecopy or email) or on the day shown on the return receipt (if delivered by mail).

SECTION 11.04 Public Announcement. Each of the parties to this Agreement hereby agrees with the other parties hereto that, except as may be required to comply with the requirements of applicable law, no press release or similar public announcement or communication will be made or caused to be made concerning the execution or performance of this Agreement unless specifically approved in advance by Buyer and Seller. The foregoing shall not restrict Buyer’s and Seller’s internal communications with employees, shareholders or customers.

SECTION 11.05 Expenses. Except as otherwise expressly provided herein, each party hereto shall pay its own expenses (including, but not limited to, all compensation and expenses of its own counsel, financial advisors, consultants, actuaries and independent accountants) incident to this Agreement and the preparation for, and consummation of, the transactions provided for herein.

SECTION 11.06 Governing Law; Forum Selection. The legality, validity, enforceability and interpretation of this Agreement shall be governed by the laws of the State of Israel, without giving effect to the principles of conflict of laws. The courts of the District of Tel-Aviv-Jaffa will have exclusive jurisdiction over any dispute arising from or in connection with this Agreement.

SECTION 11.07 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and the successors or assigns of the parties hereto; provided that the rights of Seller herein may not be assigned, and all or any portion of the rights of Buyer may be assigned only to a subsidiary of Buyer or to such business organization that shall succeed to the business of Buyer or of such subsidiary to which this Agreement relates, provided that Buyer remains liable for the fulfillment by such assignee(s), in accordance with and subject to the terms and conditions hereof, of Buyer’s obligations hereunder.

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SECTION 11.08 Severability. If any provision of this Agreement is held invalid, unenforceable or void by a court of competent jurisdiction, the remaining provisions shall nonetheless be enforceable according to their terms. In such case, the parties agree to use their best efforts to achieve the purpose of the invalid provision. Further, if any provision is held to be overbroad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and shall be enforced as amended.

SECTION 11.09 Benefit. Nothing in this Agreement or the agreements referred to herein, expressed or implied, shall confer on any person other than the parties hereto or thereto, or their respective permitted successors or assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, the agreements referred to herein, or the transactions contemplated herein or therein.

SECTION 11.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument.

[remainder of page intentionally left blank]

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IN WITNESS WHEREOF, each of the Seller and Buyer has caused this Agreement to be signed by its officers thereunto duly authorized as of the date first written above.

NANOMETRICS-ISRAEL LTD.
By:	/s/ Timothy J. Stultz
	Name: Timothy J. Stultz
	Title:

TEVET PROCESS CONTROL TECHNOLIGIES LTD.
By:	/s/ Ofer Du-Nour
	Name: Ofer Du-Nour
	Title:

46

EX-31.1

Exhibit 31.1

I, Timothy J. Stultz, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Nanometrics Incorporated;

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 registrant as of, and for, the periods presented in this report;

4. The registrant’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-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant 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 registrant, 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. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’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

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

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 registrant’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 registrant’s internal control over financial reporting.

Date: August 7, 2008

By:	/s/ Timothy J. Stultz
	Timothy J. Stultz Chief Executive Officer

EX-31.2

Exhibit 31.2

I, Gary C. Schaefer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Nanometrics Incorporated;

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 registrant as of, and for, the periods presented in this report;

4. The registrant’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-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant 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 registrant, 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. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’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

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

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 registrant’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 registrant’s internal control over financial reporting.

Date: August 7, 2008

By:	/s/ Gary C. Schaefer
	Gary C. Schaefer Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Timothy J. Stultz, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Nanometrics Incorporated on Form 10-Q for the quarterly period ended June 28, 2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Nanometrics Incorporated.

August 7, 2008

/s/ Timothy J. Stultz

Timothy Stultz
Chief Executive Officer

I, Gary C. Schaefer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Nanometrics Incorporated on Form 10-Q for the quarterly period ended June 28, 2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Nanometrics Incorporated.

August 7, 2008

/s/ Gary C. Schaefer

Gary C. Schaefer
Chief Financial Officer