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

FORM 10-Q

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

For the quarterly period ended July 3, 2004
------------

[ ] 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)

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

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

Registrant's telephone number, including area code (408) 435-9600
--------------------

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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

YES ____ NO X
-------

As of August 2, 2004, there were 12,316,925 shares of common stock, no par
value, issued and outstanding.

NANOMETRICS INCORPORATED

INDEX

Part I. Financial Information Page
----

Item 1. Financial Statements

Condensed Consolidated Balance Sheets -
July 3, 2004 and January 3, 2004 . . . . . . . . . . . . . . 3

Condensed Consolidated Statements of Operations -
Three months and six months ended
July 3, 2004 and June 28, 2003 . . . . . . . . . . . . . . 4

Condensed Consolidated Statements of Cash Flows -
Six months ended July 3, 2004 and June 28, 2003 . . . . . . 5

Notes to Condensed Consolidated Financial Statements . . . 6

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . 10

Item 3. Quantitative and Qualitative Disclosures
about Market Risk . . . . . . . . . . . . . . . . . . . . . 12

Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . 12

Part II. Other Information

Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 13

Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . 13

Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 13

Item 4. Submission of Matters to a Vote of Security Holders . . . 13

Item 5. Other Information . . . . . . . . . . . . . . . . . . . . 13

Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 13

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements

NANOMETRICS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share amounts)
(Unaudited)

July 3, January 3,
2004 2004
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 26,885 $ 7,949
Short-term investments -- 21,943
Accounts receivable, net of allowances of
$582 and $576, respectively 18,751 14,522
Inventories 28,076 24,264
Prepaid expenses and other 1,156 1,015
-------- --------

Total current assets 74,868 69,693

PROPERTY, PLANT AND EQUIPMENT, Net 49,085 49,738

INTANGIBLE ASSETS, Net 1,119 1,322

OTHER ASSETS 1,011 987
-------- --------

TOTAL $126,083 $121,740
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,836 $ 2,047
Accrued payroll and related expenses 2,057 1,593
Deferred revenue 3,337 2,345
Other current liabilities 1,376 1,436
Income taxes payable 1,392 1,528
Current portion of debt obligations 2,568 1,157
-------- --------
Total current liabilities 13,566 10,106

DEFERRED INCOME TAXES AND OTHER LONG-TERM LIABILITIES 375 545

DEBT OBLIGATIONS 2,305 2,648
-------- --------

Total liabilities 16,246 13,299
-------- --------

SHAREHOLDERS' EQUITY:
Common stock, no par value; 50,000,000 shares
authorized; 12,303,800 and 12,166,016
outstanding, respectively 102,254 101,099
Retained earnings 7,098 7,008
Accumulated other comprehensive income 485 334
-------- --------
Total shareholders' equity 109,837 108,441
-------- --------

TOTAL $126,083 $121,740
======== ========

See Notes to Condensed Consolidated Financial Statements.

NANOMETRICS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
(Unaudited)

Three Months Ended Six Months Ended
-------------------- --------------------
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
-------- -------- -------- --------

NET REVENUES:
Product sales $ 14,174 $ 7,865 $ 25,837 $ 15,300
Service 2,037 1,869 4,045 3,784
-------- -------- -------- --------

Total net revenues 16,211 9,734 29,882 19,084
-------- -------- -------- --------

COSTS AND EXPENSES:
Cost of product sales 5,922 4,828 11,325 8,487
Cost of service 1,648 1,607 3,259 3,493
Research and development 2,670 3,469 6,159 6,842
Selling 3,091 2,712 6,157 5,598
General and administrative 1,363 1,151 2,658 2,334
-------- -------- -------- --------

Total costs and expenses 14,694 13,767 29,558 26,754
-------- -------- -------- --------

INCOME (LOSS) FROM OPERATIONS 1,517 (4,033) 324 (7,670)

OTHER INCOME (EXPENSE):
Interest income 49 76 105 170
Interest expense (21) (23) (50) (47)
Other, net (182) (35) (185) (32)
-------- -------- -------- --------
Total other income (expense), net (154) 18 (130) 91
-------- -------- -------- --------

INCOME (LOSS) BEFORE INCOME TAXES 1,363 (4,015) 194 (7,579)

PROVISION FOR INCOME TAXES (61) (68) (104) (6,088)
-------- -------- -------- --------

NET INCOME (LOSS) $ 1,302 $ (4,083) $ 90 $(13,667)
======== ======== ======== ========

NET INCOME (LOSS) PER SHARE:
Basic $ 0.11 $ (0.34) $ 0.01 $ (1.14)
======== ======== ======== ========
Diluted $ 0.10 $ (0.34) $ 0.01 $ (1.14)
======== ======== ======== ========

SHARES USED IN PER SHARE
COMPUTATION:
Basic 12,262 12,008 12,226 12,008
======== ======== ======== ========
Diluted 13,292 12,008 13,445 12,008
======== ======== ======== ========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>

NANOMETRICS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)

Six Months Ended
---------------------
July 3, June 28,
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 90 $(13,667)
Reconciliation of net income (loss) to net cash
used in operating activities:
Depreciation and amortization 1,317 1,222
Deferred income taxes -- 5,982
Changes in assets and liabilities:
Accounts receivable (4,344) 263
Inventories (3,772) 2,888
Prepaid expenses and other (142) (260)
Accounts payable, accrued expenses and
other current liabilities 2,202 (1,850)
Income taxes payable (132) (129)
-------- --------

Net cash used in operating activities (4,781) (5,551)
-------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments -- (26,012)
Sales/maturities of short-term investments 21,943 29,000
Purchases of property, plant and equipment (464) (526)
-------- --------
Net cash provided by investing activities 21,479 2,462
-------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt obligations 1,361 --
Repayments of debt obligations (353) (188)
Issuance of common stock 1,155 65
-------- --------

Net cash provided by (used in) financing activities 2,163 (123)
-------- --------

EFFECT OF EXCHANGE RATE CHANGES ON CASH 75 (9)
-------- --------

NET CHANGE IN CASH AND CASH EQUIVALENTS 18,936 (3,221)
CASH AND CASH EQUIVALENTS, beginning of period 7,949 7,967
-------- --------

CASH AND CASH EQUIVALENTS, end of period $ 26,885 $ 4,746
======== ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 50 $ 50
======== ========
Cash paid for income taxes $ 33 $ 41
======== ========

See Notes to Condensed Consolidated Financial Statements

NANOMETRICS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Condensed Consolidated Financial Statements

The condensed consolidated financial statements include the accounts of
Nanometrics Incorporated and its wholly-owned subsidiaries. All inter-company
accounts and transactions have been eliminated.

While the quarterly condensed financial statements are unaudited, the
financial statements included in this report reflect all adjustments (consisting
only of normal recurring adjustments) which Nanometrics considers necessary for
a fair presentation of the results of operations for the interim periods covered
and of its financial condition at the date of the interim balance sheets. The
operating results for interim periods are not necessarily indicative of the
operating results that may be expected for the entire year. The information
included in this report should be read in conjunction with the information
included in Nanometrics' 2003 Annual Report on Form 10-K filed with the
Securities and Exchange Commission.

Note 2. Significant Accounting Policies

Fiscal Period - Nanometrics uses a 52/53 week fiscal year ending on the
Saturday nearest December 31. In prior financial statements, Nanometrics
presented, for convenience, all periods as if they ended on the month end date.
To provide greater clarity, these financial statements include references to
actual period end dates. All references to the quarter refer to Nanometrics'
fiscal quarter. The fiscal quarters and six month periods presented herein
include 13 weeks and 26 weeks, respectively.

Income Taxes - Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes and
operating loss and tax credit carryforwards measured by applying currently
enacted tax laws. A valuation allowance is provided when necessary to reduce
deferred tax assets to an amount that is more likely than not to be realized.
During the quarter ended March 29, 2003, Nanometrics recorded a valuation
allowance of $6,020,000 and expects to continue to provide a full valuation
allowance against deferred tax assets for the foreseeable future. The valuation
allowance was recorded primarily as a result of pretax losses incurred over the
past several years coupled with uncertainty about future expected income in the
then current market environment making it not more likely than not that the
deferred tax asset will be realized.

Short-Term Investments - Short-term investments consist of United
States Treasury bills and are stated at fair value based on quoted market
prices. Short-term investments are classified as available-for-sale based on
Nanometrics' intended use. The difference between amortized cost and fair value
representing unrealized holding gains or losses are recorded as a component of
shareholders' equity as accumulated other comprehensive loss and was not
significant as of July 3, 2004 and January 3, 2004. Gains and losses on sales of
short-term investments are determined on a specific identification basis.

Note 3. Inventories

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

July 3, January 3,
2004 2004
-------- ------------
Raw materials and subassemblies $14,688 $15,450
Work in process 5,821 4,506
Finished goods 7,567 4,308
------- -------
Total inventories $28,076 $24,264
======= =======

Note 4. Other Current Liabilities

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

July 3, January 3,
2004 2004
-------- ------------
Commissions payable $ 22 $ 32
Accrued warranty 599 513
Accrued professional services 137 254
Other 618 637
------- -------
Total other current liabilities $ 1,376 $ 1,436
======= =======

Note 5. Shareholders' Equity

Net Income (Loss) Per Share - The reconciliation of the share
denominator used in the basic and diluted net income (loss) per share
computations is as follows (in thousands):

Three Months Ended Six Months Ended
------------------ ------------------
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
------ ------ ------ ------

Weighted average common shares
outstanding-shares used in basic
net income (loss) per share computation 12,262 12,008 12,226 12,008
Dilutive effect of common stock equivalents,
using the treasury stock method 1,030 -- 1,219 --
------ ------ ------ ------
Shares used in diluted net income (loss)
per share computation 13,292 12,008 13,445 12,008
====== ====== ====== ======

As of July 3, 2004, Nanometrics had common stock options outstanding
which could potentially dilute basic net income per share in the future, but
were excluded from the computation of diluted net income per share as the common
stock options' exercise prices were greater than the average market price of the
common shares for the period. At July 3, 2004, 801,710 common stock options with
a weighted average exercise price of $19.64 per share were excluded from the
diluted net income per share computation as their exercise prices were greater
than the average market price of the common shares for the period.

As of June 28, 2003, diluted net loss per share excludes common
equivalent shares outstanding of 2,659,000, as their effect is anti-dilutive.

Note 6. Comprehensive Income (Loss)

Comprehensive income (loss), which consists of net income (loss) for
the periods and changes in accumulated other comprehensive income, was an income
of $833,000 for the three months ended July 3, 2004 compared to a loss of
$3,748,000 for the three months ended June 28, 2003. For the six months ended
July 3, 2004, the comprehensive income was $241,000 compared to a comprehensive
loss of $13,636,000 for the six months ended June 28, 2003. Substantially all of
the accumulated other comprehensive loss consists of accumulated translation
adjustments for all periods presented.

Note 7. Warranties

Nanometrics sells the majority of its products with a one-year repair
or replacement warranty and records a provision for estimated claims at the time
of sale. Components of the warranty accrual, which was included in the
accompanying consolidated balance sheets as other current liabilities, were as
follows (in thousands):

Six Months Ended
------------------
July 3, June 28,
2004 2003
----- -----
Balance as of beginning of period $ 513 $ 261
Actual warranty costs (274) (124)
Revision to existing warranty 105 (150)
Provision for warranty 255 271
----- -----
Balance as of end of period $ 599 $ 258
===== =====

Note 8. Stock-Based Compensation

Nanometrics accounts for stock-based compensation using the intrinsic
value method in accordance with the provision of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, as allowed by
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock
Based Compensation as amended by SFAS No. 148, Accounting for Stock Based
Compensation-Transition and Disclosures, an Amendment of FASB Statement No. 123.

Under the intrinsic value method, Nanometrics does not recognize any
compensation expense, as the exercise price of all stock options is equal to the
fair market value at the time the options are granted. Had compensation expense
been recognized using the fair value-based methods under SFAS No. 123,
Nanometrics' pro forma consolidated loss and loss per share would have been as
follows (in thousands, except per share amounts):

Three Months Ended Six Months Ended
---------------------- -----------------------
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
--------- --------- --------- ----------

Net Income (Loss)
As reported $ 1,302 $ (4,083) $ 90 $ (13,667)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related income tax effects (1,121) (1,525) (2,355) (5,724)
--------- --------- --------- ----------
Pro forma $ 181 $ (5,608) $ (2,265) $ (19,391)
========= ========= ========= ==========

As reported net income (loss) per share:
Basic $ 0.11 $ (0.34) $ 0.01 $ (1.14)
Diluted $ 0.10 $ (0.34) $ 0.01 $ (1.14)

Pro forma net income (loss) per share:
Basic $ 0.01 $ (0.47) $ (0.19) $ (1.61)
Diluted $ 0.01 $ (0.47) $ (0.19) $ (1.61)

Note 9. Intangible Assets

Intangible assets are recorded at cost, less accumulated amortization.
Intangible assets as of July 3, 2004 and January 3, 2004 consist of (in
thousands):

Gross Net
July 3, 2004 Carrying Accumulated Intangible
------------- Amount Amortization Assets
------ ------------ ------
Technology $2,290 $1,225 $1,065
Other 250 196 54
------ ------ ------
Total $2,540 $1,421 $1,119
====== ====== ======

Gross Net
January 3, 2004 Carrying Accumulated Intangible
--------------- Amount Amortization Assets
------ ------------ ------
Technology $2,709 $1,466 $1,243
Other 250 171 79
------ ------ ------
Total $2,959 $1,637 $1,322
====== ====== ======

Amortization expense for the three month and six month periods ended
July 3, 2004 was $102,000 and $203,000, respectively. Amortization expense for
the three month and six month periods ended June 28, 2003 were $102,000 and
$224,000, respectively. The estimated future amortization expense as of July 3,
2004 is as follows (in thousands):

Fiscal Years
------------
2004 (remaining six months) $ 194
2005 285
2006 256
2007 256
2008 128
----------
Total amortization $ 1,119
==========

ITEM 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations

This report, including the following Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains
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. Such
forward-looking statements are based upon current expectations and beliefs that
involve risks and uncertainties, such as our plans, objectives and intentions,
regarding, among other things: (i) customer demand for our products, which may
be affected by several factors including the cyclicality of the semiconductor,
flat panel display and other industries that we serve, patterns of capital
spending by our customers, technological changes in the markets we serve, and
market acceptance of our products and our customers' products; (ii) the timing,
cancellation or delay of our customers' orders and shipments; (iii) competition,
including competitive pressures on product prices and changes in pricing by our
customers or suppliers; (iv) fluctuations in foreign currency exchange rates,
particularly the Japanese yen; (v) the proportion of sales we make directly to
our customers versus sales through distributors and representatives; (vi) market
acceptance of new and enhanced versions of our products; (vii) the timing of our
new product announcements and releases, including our ability to design,
introduce and manufacture new products in a timely and cost effective manner, as
well as the announcements and releases by our competitors; (viii) the size and
timing of acquisitions of businesses, products or technologies and fluctuations
in the availability and cost of components and subassemblies of our products;
and (ix) the impact of regulatory compliance costs and diversion of management
resources.

In some cases, forward-looking statements can be identified by words
such as "believe," "expect," "anticipate," "plan," "potential," "continue" or
similar expressions. Forward-looking statements also include the assumptions
underlying or relating to any of the foregoing statements. 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors That May Affect Future Operating Results" in Nanometrics'
2003 Annual Report on Form 10-K. 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, financial condition and cash flows.

All forward-looking statements included in this report are based on
information available to us on the date hereof. We undertake no obligation to
update forward-looking statements made in this report to reflect events or
circumstances after the date of this report or to update reasons why actual
results could differ from those anticipated in such forward-looking statements.

Overview
- --------

We are a leader in the design, manufacture, marketing and support of
high-performance process control metrology systems used in the manufacture of
semiconductors and flat panel displays. Our systems precisely measure a wide
range of film types deposited on substrates during manufacturing in order to
control manufacturing processes and increase production yields.

Critical Accounting Policies
- ----------------------------

Income Tax Assets and Liabilities - We account for income taxes based
on Statement of Financial Accounting Standards (SFAS) No. 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 assets 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 based on estimates of our effective income
tax rate for the year. The effective tax rate is estimated based on the
geographic distribution of profits, the tax rates in different regions and the
availability of tax credits.

Results of Operations
- ---------------------

Total net revenues for the three months ended July 3, 2004 were
$16,211,000, an increase of $6,477,000 or 67% from the comparable period in
2003. For the six months ended July 3, 2004, total net revenues of $29,882,000
increased $10,798,000 or 57% from the comparable period in 2003. Product sales
of $14,174,000 and $25,837,000 for the three months and six months ended July 3,
2004, respectively, increased $6,309,000 or 80% and $10,537,000 or 69%,
respectively, as compared with the same periods during 2003. Sales of automated,
integrated and tabletop systems increased in the second quarter of 2004 from
their second quarter 2003 levels. The increase in product sales resulted from
demand for semiconductor process control equipment, primarily in the U.S. and
the Far East. We believe that increased consumer demand for high performance
electronics drives technology advancement in semiconductor design and
manufacturing which has in turn promoted the purchase of semiconductor capital
equipment featuring the latest advances in technology. Service revenue of
$2,037,000 and $4,045,000 for the three months and six months ended July 3,
2004, respectively, increased $168,000 or 9% and $261,000 or 7%, respectively,
as compared to the same periods in 2003 primarily due to higher sales of parts
and services, particularly in the Far East, due in part to a large installed
base of systems that have passed their warranty periods.

Cost of product sales as a percentage of product sales decreased to 42%
in the second quarter of 2004 from 61% in the second quarter of 2003 and
decreased to 44% in the six months ended July 3, 2004 from 55% for the same
period in 2003 due primarily to increased product sales volume in 2004 resulting
in lower per unit manufacturing costs. Cost of service as a percentage of
service revenue decreased to 81% in the second quarter of 2004 from 86% in the
second quarter of 2003 and decreased to 81% in the six months ended July 3, 2004
from 92% for the same period in 2003 primarily as a result of a change in the
mix of services provided to customers which resulted in a reduction in our
materials costs in 2004.

Research and development expenses for the three month and six month
periods ended July 3, 2004 decreased by $799,000 or 23% and $683,000 or 10%,
respectively, compared to the same periods in 2003 resulting primarily from cost
cutting measures that included reduced headcount and lower materials expenses.

Selling expenses for the three month and six month periods ended July
3, 2004 increased by $379,000 or 14% and $559,000 or 10%, respectively, compared
to the same periods in 2003 primarily due to higher headcount levels, higher
sales commissions, higher travel expenses and other expenses incurred promoting
our products to existing and potential customers.

General and administrative expenses for the three month and six month
periods ended July 3, 2004 increased $212,000 or 18% and $324,000 or 14%,
respectively, compared to the same periods in 2003 due in part to higher
regulatory compliance expenses (attributable to compliance with recently adopted
SEC regulations and NASDAQ rules in accordance with the Sarbanes-Oxley Act of
2002) as well as higher information technology expenses. We expect the trend
with respect to regulatory expenses to continue in the future. In addition,
salary and consulting expenses were lower in 2003 resulting from shutdown days
taken during that time.

Total other income (expense), net for the three month and six month
periods ended July 3, 2004 decreased $172,000 and $221,000, respectively, from
the comparable periods in 2003 due primarily to lower interest income, resulting
from lower investment balances and lower interest rates and foreign currency
transaction loss.

The effective tax rates of 4% and 54% for the three and six months
ended July 3, 2004 were primarily a result of the utilization of net operating
loss carryforwards and the release of the related valuation allowance, foreign
taxes and alternative minimum taxes. A provision for income taxes of $6,088,000
was recorded for the six-month period ended June 28, 2003, which primarily
represents a charge to record a valuation allowance against deferred income tax
assets. This charge was taken primarily as a result of pretax losses incurred
over the past several quarters coupled with uncertainty about future expected
income in the then-existing market environment, making it more likely than not
at that time that the deferred tax asset would not be realized.

As a result of the factors discussed above, our income from operations
was $1,517,000 and net income was $1,302,000 for the second quarter of 2004
compared to a loss from operations of $4,033,000 and a net loss of $4,083,000
for the same period in 2003. For the first six months of 2004, our income from
operations was $324,000 and net income was $90,000 which compared to a loss from
operations of $7,670,000 and a net loss of $13,667,000 for the same period in
2003.

Liquidity and Capital Resources
- -------------------------------

At July 3, 2004, our cash and cash equivalents totaled $26,885,000. At
July 3, 2004, Nanometrics had working capital of $61,302,000 compared to
$59,587,000 at January 3, 2004. The current ratio at July 3, 2004 was 5.5 to 1.
We believe that working capital including cash and cash equivalents will be
sufficient to meet our needs through at least the next twelve months.

Operating activities for the first six months of 2004 used cash of
$4,781,000 primarily from higher accounts receivable, which resulted from
increased sales and the timing of shipments and receipt of payments, and
increased inventory needed to support our higher sales. These were offset to
some extent by increased accounts payable resulting from higher purchases of
inventory and increased deferred revenue. Investing activities provided
$21,479,000 primarily due to sales of short-term investments of $21,943,000
offset to some extent by capital expenditures of $464,000 used to continue the
process of internalizing our manufacturing capacity in the U.S. Financing
activities provided $2,163,000 primarily due to stock issuances from the
exercise of stock options by employees and short term borrowings in Japan, which
were offset to some extent by repayment of long-term debt in Japan.

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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks, which include changes in
foreign currency exchange rates and interest rates. We do not use derivative
financial instruments. Instead, we actively manage the balances of current
assets and liabilities denominated in foreign currencies to minimize currency
fluctuation risk. As a result, a hypothetical 10% change in the foreign currency
exchange rates at July 3, 2004 would not have a material impact on our results
of operations. We also have fixed rate yen denominated debt obligations in Japan
that have no interest rate risk. At July 3, 2004, our total debt obligation was
$4,873,000 with a long-term portion of $2,305,000. A hypothetical 10% change in
interest rates at July 3, 2004 would not have a material impact on our results
of operations.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the periodic reports filed
by us with the Securities and Exchange Commission (the "Commission") is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Commission and that such information is
accumulated and communicated to our management. In designing and evaluating the
disclosure controls and procedures, our management recognized that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.

Based on their most recent evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures (as defined in Rule 13a-14 and 15d-14 of the Securities Exchange Act
of 1934, as amended) are effective as of the end of the period covered by this
Quarterly Report on Form 10-Q. There were not any significant changes in
internal controls or in other factors that could significantly affect our
internal controls during our last fiscal quarter.

PART II: OTHER INFORMATION

ITEM 1. Legal Proceedings
Not applicable.

ITEM 2. Changes in Securities and Use of Proceeds
Not applicable.

ITEM 3. Defaults Upon Senior Securities
Not applicable.

ITEM 4. Submission of Matters to a Vote of Security Holders

A. The annual meeting of shareholders was held on May 26, 2004.

B. The following directors were elected to the board of directors:
Vincent J. Coates
John D. Heaton
William G. Oldham
Edmond R. Ward
Stephen J Smith
Mircea V. Dusa *
J. Thomas Bentley

* Mr. Dusa ultimately declined to join the Board of Directors after
his election.

C. The following matters were voted upon at the annual meeting:

For Against Abstain
--- ------- -------

1. To elect the following directors to serve until
the next annual meeting of shareholders or
until their successors are elected:
Vincent J. Coates, Chairman 10,077,417 0 169,739
John D. Heaton, Director 10,081,162 0 165,994
William G. Oldham, Director 10,068,318 0 178,838
Edmond R. Ward, Director 10,068,293 0 178,863
Stephen J Smith, Director 10,075,518 0 171,638
Mircea V. Dusa, Director 10,075,418 0 171,738
J. Thomas Bentley, Director 10,064,118 0 183,038

2. To ratify the appointment of Deloitte &
Touche LLP as independent auditors for
the fiscal year ending December 31, 2004. 10,078,129 21,427 147,600

ITEM 5. Other Information

Not applicable.

ITEM 6. Exhibits and Reports on Form 8-K

A. Exhibits.
See Exhibit Index.

B. Reports on Form 8-K.
A Report on Form 8-K was furnished on April 29, 2004 under Items 7 and
9 with an attached press release. A Report on Form 8-K was filed on
June 25, 2004 under Items 4 and 7.

NANOMETRICS INCORPORATED

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

/s/ Vincent J. Coates
- -------------------------------
Vincent J. Coates
Chairman of the Board

/s/ John Heaton
- -------------------------------
John Heaton
Chief Executive Officer

/s/ Paul B. Nolan
- -------------------------------
Paul B. Nolan
Chief Financial Officer

Dated: August 23, 2004

Exhibit Index

No. Exhibit Title
- --- -------------

31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.