Analyst: Victor Sula, Ph.D.

Initial Report
January 15th, 2009

01/15/09
NANO daily
1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.0
Nanometrics Inc. 0.9
Nanometrics Incorporated 0.8
1550 Buckeye Drive volume © BigCharts.com
Milpitas, CA 95035 US 1

Millions
Tel:408.545.6000 0.5

Fax:408.232.5910
Website: www.nanometrics.com 0
Nov Dec 09

MARKET DATA

Share Statistics NASDAQ 2006 2007 %Chg 9m 9m %Chg

(12/23/08) 2007 2008
Symbol NANO Revenues, $ Mn. 96.4 146.3 51.7% 113.1 81.6 -27.9%
Current price $1.50 Gross margin 37.1% 42.1% 5.0 b.p. 41.6% 44.2% 2.6 b.p.
Low/ High 52 weeks $0.80 - 8.50 Operating margin (23.0)% (2.8)% 20.2 b.p. (2.4)% (98.0)% -100.4
Average Volume 28,896 Net margin (23.0)% (2.8)% 20.2 b.p. (2.4)% (98.0)% b.p.
Market Capitalization $30.0 Mn -100.4
Shares Outstanding 18.3 Mn EPS, $ (1.47) (0.22) n/m (0.15) (4.31) b.p.

Source: Yahoo Finance, Analyst Estimates

Background
Nanometrics Inc. (NANO) designs, manufactures, sells and supports process
control metrology systems used in semiconductor manufacturing and com-
pound semiconductor substrates, devices and integrated circuits. The Com-
pany’s systems are designed to monitor film thickness and dimensions that
are necessary to control the manufacturing process and enable semiconductor
manufacturers to improve yields, increase productivity and performance, and
lower their manufacturing costs.

NANO’s metrology systems measure various thin-film properties, critical

circuit dimensions and overlay registration accuracy of successive layers of
semiconductor patterns on wafers in the photolithography process. Addi-
tionally, the Company’s metrology systems measure electrical and material
properties, including composition, crystal structure, layer thickness, dopant
concentration, contamination and electron mobility. The Company’s products
can be divided into three groups: stand-alone, fully automated systems for

Nanometrics Inc. (NASDAQ: NANO) 1

 Analyst: Victor Sula, Ph.D.
Initial Report
January 15th, 2009

measurements of thin films in high-volume manufacturing operations; integrated systems used to measure in-
process wafers automatically and quickly without having to leave the enclosed wafer processing system that
provides virtually immediate measurements and feedback to improve process control and increase throughput;
and tabletop systems used to manually or semi automatically measure thin films in engineering and low-volume
production environments.

The Company sells its metrology systems worldwide to many of the major semiconductor manufacturers and
equipment suppliers, as well as to producers of silicon wafers and photomasks. Generally, NANO has a di-
rect sales presence in the U.S., Europe, South Korea, Japan, Taiwan, China and Singapore. The Company gets
around two-thirds of its sales outside of the U.S. The Company has been selling its systems since 1977, and has
an extensive base of industry leading customers, including Applied Materials, Dainippon Screen, Ebara Tech-
nologies, Hitachi, Hynix Semiconductor (about 11% of 2007 sales), Ebara Technologies Inc., Intel Corporation,
International Business Machines Corporation, Micron Technology Inc., Mimasu Semiconductor Industry Co.,
ProMOS Technologies, Renesas Technology Corp. Ltd., Samsung Electronics (nearly 16% of 2007 sales), SMIC
and Toshiba America Inc.

Highlights

Strategically important acquisitions designed to fortify NANO’s position as a key supplier of metrology equip-
ment to the global semiconductor industry

In order to address business challenges and opportunities, the Company pursues an active acquisition strategy.
In 2006, NANO acquired Soluris Inc., a supplier of advanced overlay metrology equipment, and Accent Optical
Technologies Inc., one of the leading suppliers of compound semiconductor and advanced 200mm and 300mm
overlay metrology equipment. These strategic transactions were made to allow the Company to become more
competitive and to achieve greater financial strength, operational efficiencies and growth potential. The new
business combination created one of the largest metrology and Process Control companies in the semiconductor
equipment industry with a strong installed base of new customers.
In 2008, NANO acquired Tevet Process Control Technologies Ltd., an inte-
grated metrology company serving the worldwide semiconductor and solar
manufacturing industry. With this acquisition, the Company added one of the
industry’s highest-throughput excursions monitoring IM product to its portfo-
lio of metrology solutions.

Solid historical revenue growth offset by the semiconductor industry slow-

down in 2008 and 2009

The Company has seen a strong revenue increase since the recession of 2002,
reporting sales of $146 million in 2007. The main driver of growth was a high
demand for NANO’s automated products as semiconductor manufacturers
continue their conversion to 300mm wafer to achieve better production effi-
ciencies and continue to increase their manufacturing capacity. The Company’s
revenues also increased as result of additional revenues from the acquired Ac-
cent and Soluris, which contributed to higher sales of parts and services, due
in part to a larger installed base of systems and more customers signing up for
post-warranty service contracts. In the fiscal year 2007, NANO derived 86% of
its total net revenues from product sales and 14% from services.

Nanometrics
Nanometrics Inc.
Inc. (NASDAQ:
(NASDAQ: NANO)
NANO) 22
 Analyst: Victor Sula, Ph.D.
Initial Report
January 15th, 2009

Revenue, $ Mn

Source: SEC filings; Reuters.com

Adverse market conditions are likely to cause the Company to report a decline in revenue for FY 2008 and 2009.

Solid gross margins despite revenue decline in FY2008

Gross Margin, %

Source: SEC filings.

During the last quarters, the Company reported solid gross-profit margins in the neighborhood of 45%, mainly
due to higher demand for NANO’s automated products, reductions in product cost structure and manufacturing
expenses, a higher level of in-the-field tool upgrades, increased efforts on billable service and spare parts sales,
and integration of Accent Optical Technologies Inc. and Soluris Inc. revenues, which naturally generated very
favorable gross margins. NANO expects to maintain its gross margins at a high level, making a reasonable profit
on sales by keeping overhead costs in control.

Nanometrics Inc. (NASDAQ: NANO) 3

 Analyst: Victor Sula, Ph.D.
Initial Report
January 15th, 2009

Restructuring program to alienate the industry decline

According to the Semiconductor Industry Association (SIA), the global semiconductor industry generated
$255.6 billion in sales for 2007. Revenues were up 3.2% from $247.7 billion in 2006. Industry growth was driven
by strong demand for semiconductors for personal computers, cellular telephones, consumer electronics, wired
and wireless telecommunications infrastructure. However, the industry experienced a decline in 2008, and is
likely to decline in 2009 as well. Gartner forecasted that the worldwide semiconductor revenue would fall to
$219.2 billion in 2009, a 16.3% decline from 2008.

In these conditions, the Company has undertaken an important restructuring program to weather the decline
storm. Particularly, the Company reduced the manufacturing sites count from five to two; integrated the sales
and distribution channels; increased the outsourcing at systems level; sold the non-strategic product lines; shut
down machine and plating shop; closed or sold facilities in California, Massachusetts and Japan; centralized the
core competencies and introduced new products in key markets; and diversified the product lines, serving Si IC,
Solar PV, HB-LED and compound semiconductor markets.

Launch of Caliper InSight metrology system

In December 2008, NANO announced the launch of its Caliper InSight, a turnkey, image-based overlay metrol-
ogy solution for advanced high-volume IC manufacturing. Following the success of the Caliper élan and Caliper
Ultra systems supporting the 90nm, 65nm and 45nm technology nodes, the Caliper InSight takes the next step
forward in platform and optical design to improve system precision and throughput for overlay metrology solu-
tions down to the 32nm and 22nm technology nodes. Combining the InSight with an IMPULSE™ (OCD) module
onto a Lynx platform, NANO offers to its customers a more complete solution for advanced lithography process
control, all within a single system having the lowest cost of ownership in the industry, according to David Doyle,
director of NANO’s Standalone Business Unit.

Strong cash position and working capital

The Company has the strongest liquidity position in more than two years with $22 million in cash and $58.3 mil-
lion in net working capital as of September 27, 2008.

Selected balance sheet data, $ Mn

29-Dec-07 27-Sep-08

Total Assets, including 207.1 131.2

Cash and marketable securities 14.9 21.8
Working Capital 57.1 58.3

Liabilities, including 31.2 35.4

Debt 1.4 13.1
Equity 175.8 95.8

Source: SEC Filings; year-ending December, 29.

The Company has approximately $13.1 million of borrowings for general corporate purposes and for future
acquisitions or expansions.

Nanometrics Inc. (NASDAQ: NANO) 4

 Analyst: Victor Sula, Ph.D.
Initial Report
January 15th, 2009

Changing trends in the semiconductor industry are increasing the need for metrology as a major component of
manufacturing systems

As the industry moves to sub-45-nm technology, new and emerging processes bring new requirements for mea-
surement and control: wafer thinning and bonding, deep silicon etching, bond pad inspection and more. When-
ever materials change, metrology must be revisited. Before a company can introduce a new material, it has to
measure its critical features; then, in any new manufacturing process, a company also must find defects, and that
is where automated process control metrology systems come into play. Overall, however, the major measurement
problem is still unmet and the challenge for metrology companies is to anticipate industry’s needs and provide
production-worthy, cost-effective solutions.

Investment sentiment
NANO is an innovator and a leader in the design, manufacture and marketing of high-performance process
control metrology systems used in semiconductor manufacturing. With offices throughout North America, Asia/
Pacific region and Europe, the Company serves the global semiconductor industry as its primary market.

The acquisition of Accent Optical Technologies Inc. and Soluris Inc. created one of the largest independent metrol-
ogy company in the semiconductor industry with more than 6,000 systems installed worldwide. The Company’s
revenues increased 52%, from $96 million in 2006 to $146 million in 2007 through a combination of organic growth
and acquisitions. In addition, the strong base of revenues is expected to be improved by penetration of new
HBLED and photovoltaic markets with recent acquisition of Tevet Process Control Technologies Ltd.

The semiconductor industry, which is posed for the first back-to-back decline in annual global revenue, is ex-
pected to bounce back in 2010 and 2011, with worldwide semiconductor revenue reaching $251.2 billion in 2010,
a 14.6% increase from 2009, and in 2011 revenue reaching $274.9 billion. Being optimistic about the prospects for
NANO’s business in the following years, and considering the results of restructuring program that allowed to
improve the gross margins we rate the Company as a “Buy.”

Peer table
Price Mrkt. P/E P/S EPS, $
Company Name Ticker per Cap.
12.01.09 symbol Share, $ $ Mn 2008 2009 2008 2009 2008 2009 %chg
KLA Tencor Corp.* KLAC 21.46 3,723 69.23 20.83 2.24 1.99 0.31 1.03 232%
Lam Research Corp.* LRCX 22.28 2,936 n/m 445.60 2.48 2.53 -0.12 0.05 n/m
Novellus Systems Inc. NVLS 13.63 1,344 194.71 n/m 1.33 1.92 0.07 -0.38 n/m
Rudolph Technologies Inc. RTEC 3.32 109.5 n/m n/m 0.82 1.28 -0.14 -0.40 n/m
Applied Materials Inc.* AMAT 10.00 13,780 41.67 13.70 2.33 1.85 0.24 0.73 204%
Mattson Technology Inc. MTSN 1.28 67.4 n/m n/m 0.51 0.67 -1.05 -1.12 n/m
FEI Co. FEIC 19.26 729.7 28.32 18.88 1.23 1.23 0.68 1.02 50%
Veeco Instruments Inc. VECO 6.27 210.8 12.80 0.00 0.47 0.58 0.49 0.00 n/m

Median 41.67 18.88 1.28 1.57 204%

Nanometrics Inc. NANO 1.50 30.0 n/m n/m 0.30 0.31 -0.75 -0.48 n/m

*year-ending 2009/2010.
Source: Reuters.com

Nanometrics Inc. (NASDAQ: NANO) 5

 Analyst: Victor Sula, Ph.D.
Initial Report
January 15th, 2009

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this report.

Victor Sula, Ph.D. - Senior Analyst

Victor Sula, Ph.D. has held the position of Senior Analyst with several independent investment research firms since 2004. Prior to 2004, Mr. Sula held Senior
Financial Consultant positions within the World Bank sponsored Agency for Restructuring and Enterprise Assistance and TACIS sponsored Center for Produc-
tivity and Competitiveness of Moldova, where he was involved in corporate reorganization and liquidation. He is also employed as Associate Professor at the
Academy of Economic Studies of Moldova. Mr. Sula earned his Ph.D. degree in 2001 and bachelor’s degree in Finance in 1997 from the Academy of Economic
Studies of Moldova. Mr. Sula is currently a level III candidate in the CFA program.

Nanometrics Inc. (NASDAQ: NANO) 6