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

FORM 10-Q

|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|------------------------------------------------------------- | ---------------------------------------------------------------------------------------
|For the Quarterly Period Ended March 31, 2008                
|OR                                                           
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934          
|For the transition period
from                             to

Commission file number 0-21321

CYMER, INC.(Exact name of registrant as specified in its charter)

|Nevada(State or other jurisdiction of incorporation or organization)         |  | 33-0175463(I.R.S. Employer Identification No.)
|---------------------------------------------------------------------------- |  | ----------------------------------------------
|17075 Thornmint Court, San Diego, CA(Address of principal executive offices) |  | 92127(Zip Code)                               

(858) 385-7300(Registrant's telephone number, including area code)

N/A(Former name, former address and former fiscal year, if changed since last report).

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. ý Yes    o No

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

|Large accelerated filer ý |  | Accelerated filer o |  | Non-accelerated filer o (Do not check if a smaller reporting company) |  | Smaller reporting company o
|------------------------- |  | ------------------- |  | --------------------------------------------------------------------- |  | ---------------------------

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

The total number of shares of Common Stock, with $0.001 par value, outstanding on May 2, 2008 was 30,351,118.



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CYMER, INC.        FORM 10-Q        For the Quarterly Period Ended March 31, 2008        INDEX

|           |  |                                                                                                    |  | Page
|---------- |  | -------------------------------------------------------------------------------------------------- |  | ----
|PART I.    |  | FINANCIAL INFORMATION                                                                              |  |     
|ITEM 1.    |  | Financial Statements (unaudited)                                                                   |  | 3   
|           |  | Condensed Consolidated Balance Sheets as of December 31, 2007 and March 31, 2008                   |  | 3   
|           |  | Condensed Consolidated Statements of Income for the three months ended March 31, 2007 and 2008     |  | 4   
|           |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2008 |  | 5   
|           |  | Notes to Condensed Consolidated Financial Statements                                               |  | 6   
|ITEM 2.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations              |  | 17  
|ITEM 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  | 30  
|ITEM 4.    |  | Controls and Procedures                                                                            |  | 32  
|PART II.   |  | OTHER INFORMATION                                                                                  |  | 32  
|ITEM 1.    |  | Legal Proceedings                                                                                  |  | 32  
|ITEM 1A.   |  | Risk Factors                                                                                       |  | 32  
|ITEM 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                        |  | 47  
|ITEM 3.    |  | Defaults Upon Senior Securities                                                                    |  | 47  
|ITEM 4.    |  | Submission of Matters to a Vote of Security Holders                                                |  | 47  
|ITEM 5.    |  | Other Information                                                                                  |  | 47  
|ITEM 6.    |  | Exhibits                                                                                           |  | 47  
|SIGNATURES |  | 48                                                                                                

2

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ITEM 1.    Financial Statements

CYMER, INC.  CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)  (In thousands, except share data)

|                                                                                                                                                                          |                                               | December 31,
2007          |          | March 31,
2008 |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------- | -------------------------- | -------- | -------------- | -------
|ASSETS                                                                                                                                                                    |                                               |                            |          |                |        
|CURRENT ASSETS:                                                                                                                                                           |                                               |                            |          |                |        
|                                                                                                                                                                          | Cash and cash equivalents                     |                            | $        | 305,707        |        
|                                                                                                                                                                          | Short-term investments                        |                            |          | 22,355         |        
|                                                                                                                                                                          | Accounts receivablenet                       |                            |          | 91,875         |        
|                                                                                                                                                                          | Accounts receivablerelated party             |                            |          | 1,112          |        
|                                                                                                                                                                          | Foreign currency forward exchange contracts   |                            |          | 2              |        
|                                                                                                                                                                          | Inventories                                   |                            |          | 129,757        |        
|                                                                                                                                                                          | Deferred income taxes                         |                            |          | 42,147         |        
|                                                                                                                                                                          | Prepaid expenses and other assets             |                            |          | 8,928          |        
|                                                                                                                                                                          |                                               |                            |          |                |        
|                                                                                                                                                                          |                                               | Total current assets       |          |                | 601,883
|PROPERTY AND EQUIPMENTNET                                                                                                                                                |                                               |                            | 116,725  |                |        
|LONG-TERM INVESTMENTS                                                                                                                                                     |                                               |                            | 29,443   |                |        
|DEFERRED INCOME TAXES                                                                                                                                                     |                                               |                            | 19,272   |                |        
|GOODWILL                                                                                                                                                                  |                                               |                            | 8,833    |                |        
|INTANGIBLE ASSETSNET                                                                                                                                                     |                                               |                            | 12,951   |                |        
|OTHER ASSETS                                                                                                                                                              |                                               |                            | 5,045    |                |        
|                                                                                                                                                                          |                                               |                            |          |                |        
|TOTAL ASSETS                                                                                                                                                              |                                               | $                          | 794,152  |                | $      
|                                                                                                                                                                          |                                               |                            |          |                |        
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                      |                                               |                            |          |                |        
|CURRENT LIABILITIES:                                                                                                                                                      |                                               |                            |          |                |        
|                                                                                                                                                                          | Accounts payable                              |                            | $        | 23,980         |        
|                                                                                                                                                                          | Accounts payablerelated party                |                            |          | 4,428          |        
|                                                                                                                                                                          | Accrued warranty and installation             |                            |          | 24,832         |        
|                                                                                                                                                                          | Accrued payroll and benefits                  |                            |          | 24,406         |        
|                                                                                                                                                                          | Accrued patents, royalties and other fees     |                            |          | 3,303          |        
|                                                                                                                                                                          | Convertible subordinated notes                |                            |          |               |        
|                                                                                                                                                                          | Income taxes payable                          |                            |          | 13,468         |        
|                                                                                                                                                                          | Deferred revenue                              |                            |          | 4,974          |        
|                                                                                                                                                                          | Foreign currency forward exchange contracts   |                            |          | 170            |        
|                                                                                                                                                                          | Other current liabilities                     |                            |          | 3,917          |        
|                                                                                                                                                                          |                                               |                            |          |                |        
|                                                                                                                                                                          |                                               | Total current liabilities  |          |                | 103,478
|CONVERTIBLE SUBORDINATED NOTES                                                                                                                                            |                                               |                            | 140,722  |                |        
|INCOME TAXES PAYABLE                                                                                                                                                      |                                               |                            | 17,755   |                |        
|DEFERRED REVENUE                                                                                                                                                          |                                               |                            | 5,562    |                |        
|OTHER LIABILITIES                                                                                                                                                         |                                               |                            | 17,401   |                |        
|                                                                                                                                                                          |                                               |                            |          |                |        
|                                                                                                                                                                          |                                               | Total liabilities          |          |                | 284,918
|                                                                                                                                                                          |                                               |                            |          |                |        
|MINORITY INTEREST                                                                                                                                                         |                                               |                            | 5,711    |                |        
|                                                                                                                                                                          |                                               |                            |          |                |        
|COMMITMENTS AND CONTINGENCIES                                                                                                                                             |                                               |                            |          |                |        
|STOCKHOLDERS' EQUITY:                                                                                                                                                     |                                               |                            |          |                |        
|Preferred stock$.001 par value; authorized 5,000,000 shares; no shares issued or outstanding                                                                             |                                               |                            |         |                |        
|Common stock$.001 par value per share; 100,000,000 shares authorized; 42,339,000 and 42,381,000 shares outstanding at December 31, 2007 and March 31, 2008, respectively |                                               |                            | 42       |                |        
|                                                                                                                                                                          | Additional paid-in capital                    |                            |          | 579,711        |        
|Treasury stock at cost12,049,000 common shares at December 31, 2007 and March 31, 2008                                                                                   |                                               |                            | (450,704 | )              |        
|                                                                                                                                                                          | Accumulated other comprehensive income (loss) |                            |          | 214            |        
|                                                                                                                                                                          | Retained earnings                             |                            |          | 374,260        |        
|                                                                                                                                                                          |                                               |                            |          |                |        
|                                                                                                                                                                          |                                               | Total stockholders' equity |          |                | 503,523
|                                                                                                                                                                          |                                               |                            |          |                |        
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                |                                               | $                          | 794,152  |                | $      
|                                                                                                                                                                          |                                               |                            |          |                |        

See Notes to Unaudited Condensed Consolidated Financial Statements.

3

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CYMER, INC.  CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)  (In thousands, except per share data)

|                                                         |                                                                          | Three months ended
March 31,     |       
|-------------------------------------------------------- | ------------------------------------------------------------------------ | -------------------------------- | ------
|
|REVENUES:                                                |                                                                          |                                  |       
|                                                         | Product sales                                                            |                                  | $     
|                                                         | Product salesrelated party                                              |                                  |       
|                                                         | Other                                                                    |                                  |       
|                                                         |                                                                          |                                  |       
|                                                         |                                                                          | Total revenues                   |       
|                                                         |                                                                          |                                  |       
|COSTS AND EXPENSES:                                      |                                                                          |                                  |       
|                                                         | Cost of product sales                                                    |                                  |       
|                                                         | Research and development                                                 |                                  |       
|                                                         | Sales and marketing                                                      |                                  |       
|                                                         | General and administrative                                               |                                  |       
|                                                         |                                                                          |                                  |       
|                                                         |                                                                          | Total costs and expenses         |       
|                                                         |                                                                          |                                  |       
|OPERATING INCOME                                         |                                                                          |                                  | 26,567
|                                                         |                                                                          |                                  |       
|OTHER INCOME (EXPENSE):                                  |                                                                          |                                  |       
|                                                         | Foreign currency exchange gain                                           |                                  |       
|                                                         | Write-down of investments                                                |                                  |       
|                                                         | Interest and other income                                                |                                  |       
|                                                         | Interest and other expense                                               |                                  |       
|                                                         |                                                                          |                                  |       
|                                                         |                                                                          | Total other income (expense)net |       
|                                                         |                                                                          |                                  |       
|INCOME BEFORE INCOME TAX PROVISION AND MINORITY INTEREST |                                                                          |                                  | 31,832
|INCOME TAX PROVISION                                     |                                                                          |                                  | 12,227
|MINORITY INTEREST                                        |                                                                          |                                  | 716   
|                                                         |                                                                          |                                  |       
|NET INCOME                                               |                                                                          | $                                | 20,321
|                                                         |                                                                          |                                  |       
|EARNINGS PER SHARE:                                      |                                                                          |                                  |       
|Basic earnings per share                                 |                                                                          | $                                | 0.55  
|                                                         |                                                                          |                                  |       
|                                                         | Weighted average common shares outstanding                               |                                  |       
|                                                         |                                                                          |                                  |       
|Diluted earnings per share                               |                                                                          | $                                | 0.52  
|                                                         |                                                                          |                                  |       
|                                                         | Weighted average common and dilutive potential common shares outstanding |                                  |       
|                                                         |                                                                          |                                  |       

See
Notes to Unaudited Condensed Consolidated Financial Statements.

4

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CYMER, INC.  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)  (In thousands)

|                                                             |                                                                                   | For the
three months ended
March 31,                      |                                            
|------------------------------------------------------------ | --------------------------------------------------------------------------------- | --------------------------------------------------------- | -------------------------------------------
|
|OPERATING ACTIVITIES:                                        |                                                                                   |                                                           |                                            
|                                                             | Net income                                                                        |                                                           | $                                          
|                                                             | Adjustments to reconcile net income to net cash provided by operating activities: |                                                           |                                            
|                                                             |                                                                                   | Depreciation and amortization                             |                                            
|                                                             |                                                                                   | Non-cash stock-based compensation                         |                                            
|                                                             |                                                                                   | Minority interest                                         |                                            
|                                                             |                                                                                   | Provision for deferred income taxes                       |                                            
|                                                             |                                                                                   | Loss on disposal and impairment of property and equipment |                                            
|                                                             |                                                                                   | Write-down of investments                                 |                                            
|                                                             |                                                                                   | Change in assets and liabilities:                         |                                            
|                                                             |                                                                                   |                                                           | Accounts receivablenet                    
|                                                             |                                                                                   |                                                           | Accounts receivablerelated party          
|                                                             |                                                                                   |                                                           | Foreign currency forward exchange contracts
|                                                             |                                                                                   |                                                           | Inventories                                
|                                                             |                                                                                   |                                                           | Prepaid expenses and other assets          
|                                                             |                                                                                   |                                                           | Accounts payable                           
|                                                             |                                                                                   |                                                           | Accounts payablerelated party             
|                                                             |                                                                                   |                                                           | Accrued expenses and other liabilities     
|                                                             |                                                                                   |                                                           | Deferred revenue                           
|                                                             |                                                                                   |                                                           | Income taxes payable                       
|                                                             |                                                                                   |                                                           |                                            
|                                                             |                                                                                   |                                                           |                                            
|                                                             |                                                                                   |                                                           |                                            
|INVESTING ACTIVITIES:                                        |                                                                                   |                                                           |                                            
|                                                             | Acquisition of property and equipment                                             |                                                           |                                            
|                                                             | Purchases of investments                                                          |                                                           |                                            
|                                                             | Proceeds from sold or matured investments                                         |                                                           |                                            
|                                                             |                                                                                   |                                                           |                                            
|                                                             |                                                                                   |                                                           |                                            
|                                                             |                                                                                   |                                                           |                                            
|FINANCING ACTIVITIES:                                        |                                                                                   |                                                           |                                            
|                                                             | Proceeds from issuance of common stock                                            |                                                           |                                            
|                                                             | Tax windfall/shortfall from stock option exercises                                |                                                           |                                            
|                                                             |                                                                                   |                                                           |                                            
|                                                             |                                                                                   |                                                           |                                            
|                                                             |                                                                                   |                                                           |                                            
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |                                                                                   |                                                           | (25                                        
|                                                             |                                                                                   |                                                           |                                            
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS         |                                                                                   |                                                           | 25,712                                     
|CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD         |                                                                                   |                                                           | 302,098                                    
|                                                             |                                                                                   |                                                           |                                            
|CASH AND CASH EQUIVALENTS AT END OF THE PERIOD               |                                                                                   | $                                                         | 327,810                                    
|                                                             |                                                                                   |                                                           |                                            
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:            |                                                                                   |                                                           |                                            
|                                                             | Interest paid                                                                     |                                                           | $                                          
|                                                             |                                                                                   |                                                           |                                            
|                                                             | Income taxes paid, net                                                            |                                                           | $                                          
|                                                             |                                                                                   |                                                           |                                            

See Notes to Unaudited Condensed Consolidated Financial Statements.

5

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CYMER, INC.        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        Three Months Ended March 31, 2008        (Unaudited)

1. BASIS OF PRESENTATION

Unaudited Interim Financial StatementsThe accompanying condensed consolidated financial information
has been prepared by Cymer, Inc., and its wholly-owned subsidiaries and majority-owned joint venture, TCZ, Pte. Ltd. ("TCZ") (collectively, "Cymer"), without audit, in accordance with
the instructions to Form 10-Q and Article 10 of Regulation S-X. The condensed consolidated balance sheet at December 31, 2007 was derived from the
audited financial statements at that date; however it does not include all disclosures required by accounting principles generally accepted in the United States.

In
the opinion of management, the unaudited condensed consolidated financial statements for the interim period presented reflect all material adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial position and results of operations as of and for such periods indicated. These unaudited condensed consolidated financial
statements and notes hereto should be read in conjunction with the condensed consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the
year ended December 31, 2007. Results for the interim periods presented herein are not necessarily indicative of results that may be reported for any other interim period or for the fiscal year
ending December 31, 2008.

Principles of ConsolidationThe accompanying condensed consolidated financial statements include the accounts of
Cymer, Inc. and the accounts of our wholly-owned subsidiaries. We also consolidate the financial position and results of operations of TCZ and reflect the minority interest in the joint venture
in our condensed consolidated financial statements. Earnings or losses of TCZ are distributed in accordance with the respective percentage interests of the joint owners. All significant intercompany
balances and transactions have been eliminated in consolidation.

Use of EstimatesThe condensed consolidated financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America. Applying these principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual
results may differ from those estimates.

Accounting Pronouncements Adopted

In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements" ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value using generally accepted accounting principles, and expands disclosures
related to fair value measurements. This Statement applies to other accounting pronouncements that require or permit fair value measurements. Accordingly, SFAS No.157 does not require any new fair
value measurements. However, for some entities, the application of this Statement changes current practice. This Statement became effective for us on January 1, 2008. Subsequent to the issuance
of SFAS No. 157, the FASB issued FASB Staff Position 157-2 ("FSP 157-2"). FSP 157-2 delays the effective date of the application of SFAS No. 157 to
fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a
nonrecurring basis. We adopted all of the provisions of SFAS No. 157 on January 1, 2008 with the exception of the application

6

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CYMER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Three Months Ended March 31, 2008

(Unaudited)

1. BASIS OF PRESENTATION (Continued)

of
the Statement to non-recurring nonfinancial assets and nonfinancial liabilities. Although SFAS No. 157 increases the level of disclosures required for us for certain of our
financial assets and liabilities, it did not have a material impact on our unaudited condensed consolidated financial statements. See Note 10, "Fair Value Measurements" for our SFAS
No. 157 disclosures for the three months ended March 31, 2008.

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment of FASB Statement
No. 115" ("SFAS No. 159"). This Statement permits companies to choose to measure many financial assets and liabilities at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in net income. This Statement also establishes presentation and disclosure requirements to facilitate comparisons between entities that choose different
measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. This Statement became effective for us
on January 1, 2008. Based upon our analysis and implementation of SFAS No. 159 as it relates to our balance sheet accounts, we did not elect the fair value option permitted in SFAS
No. 159 for any of our eligible financial assets or liabilities. Therefore, SFAS No. 159 did not have any impact on our unaudited condensed consolidated financial statements.

2. STOCK-BASED COMPENSATION

We grant equity awards from our 2005 Equity Incentive Plan (the "Incentive Plan"), which provides for the issuance of incentive stock options,
non-statutory stock options, stock appreciation rights, stock bonus awards, stock purchase awards, stock unit awards and other stock awards to our employees, non-employee
directors and consultants. Stock options issued under the Incentive Plan expire ten years after the options are granted and generally vest and become exercisable ratably over a four-year
period following the date of grant. Stock unit awards issued under the Incentive Plan generally vest one to four years from the date granted.

2007 Long-Term Incentive PlanIn April 2007, the compensation committee of our board of directors adopted the
Long-Term Incentive Bonus Plan ("2007 LTIP") for 2007. Per the provisions of the 2007 LTIP, any bonuses accrued for performance in 2007 are paid 50% in cash and 50% in the form of
restricted stock unit awards and both are ultimately earned or awarded based on the achievement of certain financial and performance criteria as set forth in the 2007 LTIP. The number of shares
subject to the target restricted stock unit awards for 2007 were determined by dividing the cash value of the award by $44.57, the closing price of our common stock as reported on the Nasdaq Global
Select Market on April 16, 2007, the grant date.

In
March 2008, the compensation committee approved the 2007 LTIP payments based on the achievement of the performance conditions for 2007 and issued 66,000 restricted stock units from
our Incentive Plan. The restricted stock units will vest in three equal annual installments beginning January 1, 2009.

Long-Term Incentive Bonus ProgramIn October 2007, the compensation committee of our board of directors approved
the Long Term Incentive Bonus Program ("LTIP") which became effective January 1, 2008 for our executive officers and certain key employees. Any potential equity based

7

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CYMER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Three Months Ended March 31, 2008

(Unaudited)

2. STOCK-BASED COMPENSATION (Continued)

bonuses
awarded under the LTIP are calculated based on a target dollar amount. This target amount is divided into two equity award components to be granted from our Incentive Plan: 50% of the target
amount in time-based vesting stock options and 50% in performance-based restricted stock units ("PRSUs"). During the three months ended March 31, 2008, we granted stock options to
purchase 434,000 shares under the LTIP and they will vest over our standard four-year schedule. The shares subject to the PRSU awards will vest and become issuable following a
three-year performance period that commences on the grant date only if our relative performance compared to specified peer companies over the three-year period meets or exceeds
certain performance measures. Vesting of the PRSU awards is subject to downward adjustment if the participant fails to meet 100% of his or her individual
management-by-objective goals during the three-year performance period.

We
value the stock unit awards which are issued to our non-employee directors and key employees using an intrinsic calculation based on the price of our stock on the date
that the stock unit award is granted. Compensation expense related to these stock unit awards is recognized straight line over the service period. For those stock unit awards that have
performance-based conditions such as those granted under our long term incentive programs, we adjust the compensation expense over the service period based upon the expected achievement of the
performance conditions under our programs. The fair value of stock-based options granted, less expected forfeitures, is recognized to expense over the requisite service period.

Share-Based CompensationThe components of share-based compensation expense for employees, non-employee directors
and non-employees for the three months ended March 31, 2007 and 2008 are as follows (in thousands):

Three months ended
March 31,2007

2008Stock optionsemployees and non-employee directors

$
1,158

$
912Stock optionsnon-employees or change in status


23


(14
)Restricted stock unit awardsemployees





153Restricted stock unitsnon-employee directors


175


204Performance restricted stock unit awardsemployees





310Total share-based compensation

$
1,356

$
1,565


The
tax windfall realized for share-based compensation for the three months ended March 31, 2007 totaled approximately $313,000. For the three months ended March 31, 2008,
we realized a tax shortfall for share-based compensation of approximately $60,000.

3. EARNINGS PER SHARE

Basic and diluted earnings per share are presented in accordance with SFAS No. 128, "Earnings Per Share". Basic earnings per share ("EPS") is computed by
dividing net income or loss attributable to common stockholders by the weighted-average number of common shares outstanding for the

8

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CYMER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Three Months Ended March 31, 2008

(Unaudited)

3. EARNINGS PER SHARE (Continued)

period.
Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (convertible subordinated notes using the "if-converted" method,
and common stock options, restricted stock units, and employee stock purchase plan ("ESPP") shares using the treasury stock method) were exercised or converted into common stock. Potential dilutive
securities are excluded from the diluted EPS computation in loss periods as their effect would be anti-dilutive.

The
following table sets forth the basic and diluted EPS (in thousands, except per share information):

Three months ended
March 31,2007

2008NET INCOME:Net income, as reported

$
20,321

$
12,892Interest expense on convertible subordinated notes, net of taxes


822


841Net earnings available to common shareholders, diluted

$
21,143

$
13,733WEIGHTED AVERAGE SHARES:Basic weighted average common shares outstanding


37,269


30,315Effect of dilutive securities:Options, stock units and ESPP


534


111Assumed conversion of subordinated notes


2,814


2,814Diluted weighted average common shares outstanding


40,617


33,240Earnings per share:Basic

$
0.55

$
0.43Diluted

$
0.52

$
0.41


For
the three months ended March 31, 2007 and 2008, weighted average options to purchase shares of common stock totaling approximately 739,000 shares and 2.6 million
shares, respectively, were not
included in the computation of diluted earnings per share as their effect was anti-dilutive. Additionally, for the three months ended March 31, 2008, weighted average restricted
stock units totaling approximately 267,600 shares were not included in the computation of diluted earnings per share as their effect was anti-dilutive. There were no
anti-dilutive shares related to restricted stock units for the three month period ended March 31, 2007.

4. INVENTORIES

Inventories are carried at the lower of cost, which approximates the first-in, first-out method, or market.

9

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CYMER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Three Months Ended March 31, 2008

(Unaudited)

4. INVENTORIES (Continued)

Inventories
consisted of the following (in thousands):

December 31,
2007

March 31,
2008INVENTORIES:Raw materials

$
43,238

$
43,417Work-in-progress


21,610


23,116Finished goods


64,909


86,596Total

$
129,757

$
153,129


5. REPORTING COMPREHENSIVE INCOME

Comprehensive income includes net income, net unrealized gains and losses on effective foreign currency forward exchange contracts, foreign currency translation
adjustments, net unrealized pension gains and losses, and net unrealized gains and losses on available-for-sale securities, which are recorded as short-term and
long-term investments in the accompanying condensed consolidated balance sheets.

Comprehensive
income consisted of the following components (in thousands):

Three months ended
March 31,2007

2008Net income

$
20,321

$
12,892Foreign currency translation adjustments


(27
)

(5,747
)Unrealized gains on available-for-sale investments, net of tax


159


298Net unrealized gains (losses) on foreign currency forward exchange contracts, net of tax


6


(469
)Net unrealized pension gains





5Comprehensive income

$
20,459

$
6,979


The
components of accumulated other comprehensive income (loss) are as follows (in thousands):

December 31,
2007

March 31,
2008Foreign currency translation adjustments

$
37

$
(5,710
)Unrealized gains on available-for-sale investments, net of tax


229


527Net unrealized gains (losses) on foreign currency forward exchange contracts, net of tax


90


(379
)Net unrealized pension gains (losses)


(142
)

(137
)Accumulated other comprehensive income (loss)

$
214

$
(5,699
)


10

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CYMER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Three Months Ended March 31, 2008

(Unaudited)

6. INCOME TAXES

As of March 31, 2008, the balance of our net FASB Interpretation No. 48 ("FIN 48") liability was $17.3 million. The balance at
March 31, 2008 was $483,000 lower than the balance at December 31, 2007 due primarily to a decrease in reserves previously recorded and the effect of foreign currency translation, offset
by additional interest accrued for the three months ended March 31, 2008. We filed a Request for Automatic Accounting Method Change with the Internal Revenue Service ("IRS") to correct our
position with regard to inventory capitalization for tax purposes, a book/tax temporary difference. We had previously determined that our position with regard to the capitalization of several items of
expense into inventory for tax purposes was erroneous and we had recorded a FIN 48 reserve for the position. As the change request is automatic, we are granted audit protection and we have
reduced our previously recorded interest expense to reflect the inability of the IRS to assess this item.

We
are currently under an IRS audit for the 2003 through 2006 tax years. Though the estimated completion date of the audit is not known, it is unlikely that the audit will be completed
or that the progress of the audit will cause us to reassess our tax reserves for these years within the next twelve months. The completion of this audit could require a material change to our gross
unrecognized tax benefits. However, based on the status of this audit and the protocol for finalizing such audits, it is not possible to estimate the impact of this audit on previously recorded
uncertain tax positions. We do not foresee material changes to the state or foreign uncertain tax positions within the next twelve months.

7. GUARANTEES AND WARRANTIES

In the ordinary course of business, we are not subject to potential obligations under guarantees that fall within the scope of FASB Interpretation No. 45
("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", except for standard warranty provisions associated with
product sales and indemnification provisions related to intellectual property that are contained within many of our lithography tool manufacturer agreements.
All of these provisions give rise only to the disclosure requirements prescribed by FIN 45 except for product warranties.



11

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CYMER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Three Months Ended March 31, 2008

(Unaudited)

7. GUARANTEES AND WARRANTIES (Continued)



Three months ended
March 31,2007

2008Balance as of January 1

$
29,450

$
24,350Liabilities accrued for warranties issued, net of adjustments and expirations


5,085


6,343Warranty expenditures incurred during the period


(4,335
)

(4,728
)Balance as of March 31

$
30,200

$
25,965






12

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CYMER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Three Months Ended March 31, 2008

(Unaudited)

7. GUARANTEES AND WARRANTIES (Continued)



8. RELATED PARTY TRANSACTIONS

Carl Zeiss SMT AG and Carl Zeiss Laser Optics Beteiligungsgesellschaft mbH ("Zeiss").As a result of the formation of our TCZ
joint venture in July 2005 and under the terms of the joint venture agreement which was amended in September 2006, Zeiss is a related party. In addition to transactions that occur among us, Zeiss and
TCZ related to the joint venture, we also purchase certain optical parts directly from Zeiss and periodically sell our light source system products to Zeiss. We recorded revenue associated with this
related party of $466,000 and $921,000 for the three months ended March 31, 2007 and 2008, respectively. As of December 31, 2007 and March 31, 2008, we had an accounts receivable
balance of $1.1 million and $2.8 million, respectively, and an accounts payable balance of $4.4 million and $2.7 million, respectively, all of which were associated with
these related party transactions with Zeiss.

9. CONTINGENCIES AND COMMITMENTS

We are from time to time party to legal actions in the normal course of business. Based in part on the advice of legal counsel, our management does not expect the
outcome of legal action in the normal course of business to have a material impact on our financial position, liquidity, or results of operations.

Our
former Japanese manufacturing partner, Seiko, and one of our Japanese customers were notified in July 1996 that our light source systems in Japan may infringe certain Japanese
patents held by another Japanese company. We have agreed to indemnify our former Japanese manufacturing partner and our customers against patent infringement claims under certain circumstances, even
after the termination date of the contract manufacturing agreement. We believe, based upon the advice of counsel, that our products do not infringe any valid claim of the asserted patents or that we
are entitled to prior use claims in Japan.

10. FAIR VALUE MEASUREMENTS

We adopted SFAS No. 157, "Fair Value Measurements" as of January 1, 2008, with the exception of the application of the statement to our
non-recurring nonfinancial assets and nonfinancial liabilities. Non-recurring nonfinancial assets and nonfinancial liabilities for which we have not applied the fair value
provisions of SFAS No. 157 currently include those measured within goodwill, intangible and long-lived assets impairment testing and those associated with asset retirement
obligations.

13

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CYMER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Three Months Ended March 31, 2008

(Unaudited)

10. FAIR VALUE MEASUREMENTS (Continued)

SFAS
No. 157 currently applies to all financial assets and liabilities that are being measured and reported on at fair value on a recurring basis. This includes certain items we
currently report in cash equivalents and available-for-sale securities within our cash and cash equivalents, short term and long term investments on the accompanying balance
sheets. In addition, our derivatives, which only include foreign currency forward exchange contracts are reported at fair value and are included in the scope of SFAS No. 157.

SFAS
No. 157 stipulates that fair value is defined as the price at which an asset or liability could be exchanged in a current transaction between knowledgeable, willing parties.
Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are
applied. These valuation techniques include unobservable inputs and involve some level of estimation and judgment on the part of the reporting entity, the degree of which is dependent on the price
transparency for the instruments or market and the instruments' complexity.

Upon
our adoption of SFAS No. 157, assets and liabilities recorded at fair value in our condensed consolidated balance sheets are categorized based upon the level of judgment
associated with the inputs used to measure their fair value. The levels as defined by the fair value hierarchy in SFAS No. 157 are as follows:



The
majority of our available-for-sale securities and our foreign currency forward exchange contracts are priced via independent providers. In obtaining such
valuation information from third parties, we have evaluated the valuation methodologies used to develop the fair values in order to determine whether such valuations are representative of an exit
price in our principal markets.

Available-for- Sale Securities.The fair values of our available-for-sale
securities are determined by a matrix pricing, which is a mathematical technique widely used to value securities without relying exclusively on quoted prices for the specific securities but rather by
relying on the securities' relationship to other benchmark-quoted securities. Such assets are classified as Level 2 inputs in the fair value hierarchy and typically include our commercial paper
and government and corporate fixed income securities which are included in our investment portfolio.

Auction Rate Securities.We currently hold one auction rate security ("ARS") within our investment portfolio which is
classified as an available-for-sale-security and has a par value of $5.6 million. Under normal market conditions, we would determine the fair value of this
ARS based on observable market prices for identical or similar instruments. However, due to the recent crisis in the

14

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CYMER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Three Months Ended March 31, 2008

(Unaudited)

10. FAIR VALUE MEASUREMENTS (Continued)

credit
markets and the fact that this ARS has failed in multiple auctions since it was purchased in October 2007, we were unable to obtain such market data on which to base our valuation at
March 31, 2008. Therefore, we calculated the fair value of this ARS utilizing a discounted cash flow model, a Level 3 input in the fair value hierarchy, at March 31, 2008. This
model assumes that we will enter into a credit default swap to protect the par value of the ARS and that it will settle in 40 years. Other inputs to this discounted cash flow calculation
include a coupon rate and a default swap risk rate over the 40 year period. As a result of utilizing this model, we determined that the fair value of this ARS was $1.8 million at
March 31, 2008 which resulted in an impairment of $3.8 million or approximately 68% of its par value.

In
addition to this ARS having multiple failed auctions since it was purchased, the company that insures the ARS and the ARS itself were significantly downgraded as of March 31,
2008. As a result of the failed auctions associated with this ARS, the magnitude of the impairment, the downgrading of the ARS itself and the company that insures it, and the current credit market
crisis, we determined that the $3.8 million impairment was other-than-temporary. Since we determined that this was an other-than-temporary
impairment, we recorded this as a write-down of investments in other income (expense), net in the accompanying unaudited condensed consolidated statements of income. It is uncertain that
we will be able to liquidate this ARS in the near term and the likelihood is high that we will hold this ARS in excess of 12 months. Therefore, we have classified the $1.8 million fair
value of this ARS as a long-term investment on our unaudited condensed consolidated balance sheet at March 31, 2008.

Derivative Instruments.Our foreign currency forward exchange contracts are valued using an income approach which includes
observable Level 2 market expectations at the measurement date and uses a standard valuation technique to convert future amounts to a single discounted present amount. Key inputs in this
discounted calculation include spot currency exchange rates at the measurement date, interest rates, volatilities and credit derivative markets. The principal market in which we execute our foreign
currency forward exchange contracts is the retail market. Since significant inputs in the
valuation of our foreign currency forward exchange contracts are observable in the active market, they are classified as Level 2 in the fair value hierarchy.

15

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CYMER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Three Months Ended March 31, 2008

(Unaudited)

10. FAIR VALUE MEASUREMENTS (Continued)

Our
financial assets and liabilities measured at fair value on a recurring basis which are subject to the disclosure requirements of SFAS No. 157 at March 31, 2008 are as
follows (in thousands):

Level 1

Level 2

Level 3

TotalAssets:Cash and cash equivalents

$
117,321

$
121,263




$
238,584Auction rate securities








1,794


1,794Other available-for-sale securities


14,843


90,393





105,236Total Assets

$
132,164

$
211,656

$
1,794

$
345,614Liabilities:Foreign currency forward exchange contracts




$
1,840




$
1,840Total Liabilities




$
1,840




$
1,840


The
following table summarizes the change in balance sheet carrying value associated with the ARS which was the only Level 3 financial instrument carried at fair value at
March 31, 2008 (in thousands):

Balance at January 1, 2008

$
Transfers in and out of Level 3


5,600Total realized and unrealized gains (losses)Included in earnings


(3,806
)Included in other comprehensive income


Purchases, sales, issuances and settlements


Balance at March 31, 2008

$
1,794


We
currently have convertible subordinated notes which are outstanding and these notes are recorded at face value on our condensed consolidated balance sheets. Per the guidance in SFAS
No. 107 "Disclosures about Fair Value of Financial Instruments", we are required to disclose the fair value of such notes at the end of each reporting period. The principal amount of the notes
outstanding at March 31, 2008 was $140.7 million and the fair value of such debt based on quoted market prices on Bloomberg's at March 31, 2008 was $138.4 million. As there
are quoted prices for our convertible subordinated notes in active markets, our disclosure is based on Level 1 inputs per the SFAS No. 157 fair value hierarchy.

11. SUBSEQUENT EVENT

On April 21, 2008, we announced that our board of directors had authorized us to repurchase up to $100 million of our common stock in the open
market or in privately negotiated transactions. The program may be discontinued at any time. As of May 2, 2008 we did not have any purchases under this program.

16

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

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed
consolidated financial statements and notes thereto included in "Item 1. Financial Statements" of this Quarterly Report on Form 10-Q and the audited condensed consolidated
financial statements and notes thereto and the section titled "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2007, filed with the Securities Exchange Commission on February 27, 2008 .

Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q that are not strictly historical in nature are forward-looking statements. These statements
include, but are not limited to, references to the outlook for the semiconductor industry and us; expected domestic and international product sales and development; our research and development
activities and expenditures; adequacy of our capital resources and investments; effects of business cycles in the semiconductor business; our competitive position; and our relationships with customers
and third-party manufacturers of our products, and may contain words such as "believes," "anticipates," "expects," "plans," "intends" and words of similar meaning. These statements are predictions
based on current information and our expectations and involve a number of risks and uncertainties. The underlying information and our expectations are likely to change over time. Actual events or
results may differ materially from those projected in the forward-looking statements due to various factors, including, but not limited to, those contained under the caption "Risk Factors" and
elsewhere in this Quarterly Report on Form 10-Q. Forward-looking statements herein speak only as of the date of this Quarterly Report on Form 10-Q. Unless
required by law, we undertake no obligation to update or revise any forward-looking statements to reflect new information or future events or developments. Thus, you should not assume that our silence
over time means that actual events are bearing out as expressed or implied in such forward-looking statements.

Overview

We provide state-of-the-art lithographic light sources designed to help enable the performance of leading edge wafer steppers
and scanners built by our three lithography tool manufacturer customers, and provide field support products customized to support our chipmaker customers' production use of these light sources in
advanced wafer patterning applications. We currently supply deep ultraviolet ("DUV") light sources to each of our lithography tool manufacturer customers, ASML, Canon, and Nikon, who in turn supply
their wafer steppers and scanners to chipmakers. In addition, we sell replacement parts and services to our lithography tool manufacturer customers as well as directly to our chipmaker customers. To
provide optimally responsive service and support for our customers, we maintain field service and support offices throughout the world. Our light source systems currently constitute a substantial
majority of all excimer light sources incorporated in lithography wafer stepper and scanner tools at chipmakers worldwide. As the leading supplier of light sources, almost all consumer electronic
devices manufactured in the last several years contain a semiconductor manufactured using our light sources.

Since
we derive a substantial portion of our revenues from our lithography tool manufacturer customers, we are subject to the volatile and unpredictable nature of the semiconductor
equipment industry. The semiconductor equipment industry is inherently cyclical and historically has experienced periodic ups and downs, some of them quite dramatic. In recent years, industry cycles
appear to have become more muted, involving relatively short periods of moderate growth, followed by relatively short periods when revenue has either flattened or declined moderately.

17

---



The
most recent growth year for the semiconductor equipment industry was 2006, during which we achieved record revenue and net income levels. Although we and many of the companies in our
industry initially expected 2007 to be another growth year, we began seeing signs of industry slowing in late 2006 and early 2007 when some customers requested that we reschedule shipments of a number
of light sources into subsequent quarters. As 2007 progressed, some chipmakers reduced capital equipment purchases in line with delays in their planned build-outs of new fabs, and
chipmaker capital spending remained cautious. In the first quarter of 2008, this trend continued as a number of additional chipmakers announced reductions in their capital spending plans, and their
intention to delay some equipment deliveries.

As
we had anticipated, these delays affected the tool-building plans of our lithography tool manufacturer customers, and they reduced their overall demand for our light
sources in the first quarter of 2008 compared to the fourth quarter of 2007. However, demand for our XL Series argon fluoride ("ArF") light sources remained strong in the first quarter of 2008. We
shipped 13 of our most advanced ArF light sources for immersion applications in the first quarter of 2008, and shipped triple the number of XLR 500i light sources as in the fourth quarter of 2007.
Because our product mix was
so heavily weighted toward ArF light sources, our currency adjusted average selling price rose in the first quarter of 2008 as compared to prior quarters. Additionally, the pulse usage rates of our
light sources continued to grow in the first quarter of 2008, resulting in higher than anticipated non-systems revenue.

We
continued to make significant progress in our extreme ultraviolet ("EUV") source development during the first quarter of 2008. Since successfully demonstrating 100 watts ("W") of
burst power in October 2007, we have achieved increases in average power for growing durations of running time. We are currently building our first deliverable EUV source for shipment by the end of
2008 under our supply agreement with ASML. Additionally, we also made good progress at TCZ, our joint venture with Zeiss that is developing a production tool for the flat panel display industry. TCZ
conducted critical customer demonstrations on the first full-scale tool during the first quarter of 2008, processing panels in quantity for multiple customers. We remain optimistic about
TCZ's opportunity to install the first TCZ 900X system this year.

Regarding
the near-term future, there is a growing belief among economists that the United States economy has already entered a recession. American consumers, under
increasing pressure from lower real estate values, tighter credit, and higher food and energy prices, are finding themselves with less discretionary income. These macroeconomic factors are affecting
the semiconductor capital equipment industry worldwide.

Though
the current cyclical environment is challenging, we are well-positioned as growing numbers of chipmakers adopt and ramp ArF immersion techniques, and continue rapidly
moving toward adoption of ArF double patterning, and the evaluation of EUV. Near term, the adoption cycle for the XLR Series of products is gaining momentum and should continue over a number of years
as more and more chipmakers enter production at the 45nm node. Installations of the XLR 500i began early in the second quarter of 2008, and are anticipated to continue in growing numbers throughout
the year. Medium term, we anticipate the 90W XLR 600i will become the light source of choice for double patterning at the 32nm production node. Longer-term, the success of our laser
produced plasma source development has solidly positioned us as the EUV technology leader. Additionally, the potential for significant ongoing growth in our non-systems revenue is evident.
This growth should be driven not only by the increasing pulse usage of our light sources and a growing installed base, but more and more by our continuing efforts to provide our customers with higher
performance features and upgrades designed to deliver substantial improvements in uptime, availability and cost.

We
remain dedicated to understanding our customers' immediate and longer-term requirements and enabling productivity and cost reduction enhancements for them through the
development of more

18

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advanced
light sources, such as the XLR Series and the high performance versions of our XLA Series, technologies such as our Gas Lifetime eXtension control system, and comprehensive
productivity improvement offerings such as OnPulse®. We will continue our numerous efforts to enhance the reliability and performance of our products for our customers and increase
customer satisfaction, while pursuing our initiatives to enhance our operating efficiencies and improve financial performance. However, macro-economic factors as mentioned above impact the economy and
could have a negative impact on consumer spending, including spending on electronic devices. Additionally, geopolitical turmoil can create a heightened sense of uncertainty that can also cause
consumers to become more cautious in their spending. Either or both of these factors would have a negative effect on the demand for our products.

Critical Accounting Policies and Estimates



The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and use judgment that
may impact the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. As a part of our ongoing internal processes, we regularly
evaluate our estimates and judgments associated with revenue recognition, inventory valuation, refurbished inventories, warranty obligations, stock-based compensation, income taxes, allowances for bad
debts, long-lived assets valuation, intangible assets valuation, and contingencies and litigation. We base these estimates and judgments upon historical information and other facts and
assumptions that we believe to be valid and/or reasonable under the circumstances. These assumptions and facts form the basis for making judgments and estimates and for determining the carrying values
of our assets and liabilities that are not apparent from other sources. Actual results could vary from our estimates if we were to use different assumptions and conditions.

We
believe that revenue recognition, inventory valuation, refurbished inventories, warranty obligations, stock-based compensation, and income taxes require more significant judgments and
estimates in the
preparation of our condensed consolidated financial statements than do other of our accounting estimates and judgments.



Our revenues consist of product sales, which primarily include sales of light source systems, replacement parts, and to a lesser extent, upgrades, services,
training, and refurbishments of our light source systems. From time to time, our revenues also consist of certain funded development activities performed for our customers and under government
contracts and license agreements.

The
sales of our light source systems generally include training and installation services. We determined these elements qualify as one unit of accounting under Emerging Issues Task
Force Bulletin No. 00-21, "Revenue Arrangements with Multiple Deliverables", ("EITF 00-21"), as we do not have evidence of fair value for the undelivered training
and installation elements. Furthermore, we determined that the undelivered training and installation elements are perfunctory performance obligations and are not essential to the functionality of our
light source systems. Therefore, in accordance with the provisions of Staff Accounting Bulletin No. 104, we recognize revenue when the revenue recognition criteria are met for the light source
system, and accrue the costs of providing the training and installation services. We recognize light source system revenue at one of following three points, depending on the terms of our arrangement
with our customer1) shipment of the light source system, 2) delivery of the light source system or 3) receipt of an acceptance certificate. For the majority of our light
source system sales, the shipping terms are F.O.B. shipping point and revenue is recognized

19

---



upon
shipment. For our arrangements which include F.O.B. destination shipping terms, revenue is recognized upon delivery of the light source system to our customer. Lastly, one of our arrangements
includes an acceptance provision, which is satisfied by the issuance of an acceptance certificate by the customer. For these transactions, we recognize revenue upon receipt of the acceptance
certificate. In addition, we test our light source systems in environments similar to those used by our customers prior to shipment to ensure that they meet published specifications.

Revenue
from replacement parts sales and upgrades is recognized at the point that legal title passes to the customer, which is generally upon shipment from our facility. For a
significant portion of our parts sales, our customers return the consumed assembly to us as part of the sale of the new part. We reuse some of the material within these core assemblies, mainly metal
components, for the future build of core assemblies. As a result, our revenue consists of both cash and the value of the reusable parts received from our customers as consideration for these
replacement part sales. Revenue associated with our customers' return of core assemblies is recognized upon receipt of the returned core assembly. The amount of the revenue is determined based upon
the fair value of the reusable parts that we expect to yield from the returned core assembly based on historical experience.

Service
and training revenue is recognized as the services are rendered. For our service contracts, including OnPulse®, revenue is generally recognized straight line over the
term of the contract or based on pulse usage.

On
a very limited basis, we refurbish light source systems owned by our customers to their original or new condition. Revenue from refurbished light source systems is recognized when the
refurbishment process has been completed and, depending upon the customer, the proper delivery or acceptance terms have been met.

On
a limited basis, certain of our product sales transactions are accounted for as multiple-element arrangements in accordance with EITF 00-21. A multiple-element
arrangement is a transaction which may involve the delivery or performance of multiple products, or services, and performance may occur at different points in time or over different periods of time.
We allocate consideration to multiple element transactions based on the relative fair values of each separate element which we determine based on prices charged for such items when sold on a stand
alone basis. In cases where there is objective and reliable evidence of the fair value of the undelivered item(s) in an arrangement but no such evidence for the delivered item(s), we use the residual
method to allocate the arrangement consideration. If there is no objective and reliable evidence of the fair value of the undelivered item, we account for the transaction as a single unit of
accounting per the requirements of EITF 00-21. Our sales arrangements do not include general rights of return.

For
funded development contracts, funds received are accounted for on the percentage-of-completion method based on the relationship of costs incurred to total
estimated costs. Revenues generated from these types of funded development contracts are included in other revenue, and are derived from cost sharing contracts between certain customers and us. If
milestones on these funded development contracts require that specific results be achieved or reported by us, revenue is not recognized until that milestone is completed.

Deferred
revenue represents payments received from our customers in advance of the delivery of products and/or services, or before the satisfaction of all revenue recognition
requirements as described above.



Our inventories are carried at the lower of cost, which approximates the first-in, first-out method, or market. We evaluate the need to
record adjustments for impairment of our inventory on a quarterly basis and our policy is to assess the valuation of all inventories, including raw materials,

20

---



work-in-process,
finished goods, spare parts and reusable parts that we use for our refurbishment activities. Obsolete inventory or inventory for which we either do not have
expected usage based on our forecasted demand for the next 12 months or that we do not expect to have a high likelihood of use beyond 12 months is written down to its estimated market
value, if less than its cost. When we perform our quarterly analysis of obsolete and excess inventory, we take into consideration certain assumptions related to market conditions and future demands
for our products, including changes to product mix, new product introductions, and/or product discontinuances, which may result in excess or obsolete inventory. As part of this analysis, we also
determine whether there are potential amounts owed to vendors as a result of cancelled or modified raw material orders. We estimate and record a separate liability, which is included in accrued and
other liabilities in the accompanying balance sheets for such amounts owed.

The
methodologies used to analyze excess and obsolete inventory and determine the value of our inventory are significantly affected by future demand and usage of our products. There are
many factors that could potentially affect the future demand or usage of our products, including the following:



Based
upon our experience, we believe that the estimates we use to calculate the value of our inventories are reasonable and properly reflect the risk of excess and obsolete inventory.
If actual demand or the usage periods for our inventory are substantially different from our estimates, such differences may have a material adverse effect on our financial condition and results of
operations.



As part of our regular business activities, we conduct significant parts refurbishment and material reclaim activities related to some of our core assemblies,
particularly our chamber assemblies. These activities involve arrangements with our customers where we sell a new part to the customer at a reduced sales price if the customer returns the consumed
assembly that the new part replaces. These returned core assemblies contain a certain amount of material, primarily metal components, that may be reused by us in the manufacture of future core
assemblies. Upon receipt of these consumed core assemblies from our customers, we record an entry to recognize the estimated fair value of the reusable components either 1) as revenue if the
return of the core assembly relates to a spare part replacement sale or 2) as a reduction in cost of product sales if the return of the core assembly is related to a part being replaced under
our warranty or per the terms of an active service contract with our customer. The value of the reusable parts contained within the consumed assembly is determined based upon historical data on the
value of the reusable parts that we typically yield from a consumed assembly.



We maintain an accrual for the estimated cost of product warranties associated with our product sales. Warranty costs include the replacement parts and labor
costs to repair our products during the

21

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warranty
periods. At the time revenue is recognized, we record a warranty provision, which is included in cost of product sales in the accompanying unaudited condensed consolidated statements of
income. The warranty coverage period and terms for light source systems and replacement parts varies by light source system model. The warranty provision for our products is reviewed monthly and
determined by using a statistical financial model, which takes into consideration actual historical expenses, product failure rates, and potential risks associated with our different products. This
model is then used to estimate future expenses related to warranty and the required warranty provision. The risk levels and historical cost information and failure rates used within this model are
reviewed throughout the year and updated as these inputs change over the product's life cycle. Due to the highly technical nature of our light source system products, the newer model light sources and
the modules contained within them have higher inherent warranty risks with their initial shipments and require higher warranty provisions until the technology becomes more mature.

We
actively engage in product improvement programs and processes to limit our warranty costs, but our warranty obligation is affected by the complexity of our product, product failure
rates and costs incurred to correct those product failures at customer sites. The industry in which we operate is subject to rapid technological change, and as a result, we periodically introduce
newer, more complex light sources. Although we classify these newly released light source models as having a higher risk in our warranty model resulting in higher warranty provisions, we are more
likely to have differences between the estimated and actual warranty costs for these new products. This is due to limited or no historical product performance data on which to base our future warranty
costs. Warranty provisions for our older and more established light source models are more predictable as we have more historical information available on these products. If actual product failure
rates or estimated costs to repair those product failures were to differ from our estimates, revisions to our estimated warranty provision would be required, which could harm our financial condition
and results of operations.



We adopted the provisions of Statement of Financial Accounting Standards No. 123R ("SFAS No. 123R"), "Share-Based Payment", on January 1,
2006. SFAS No. 123R requires companies to estimate the fair value of stock-based compensation awards on the date of grant using an option-pricing model and amortize the resulting expense over
the requisite service period of the award, which is generally the vesting period. Upon adoption of SFAS No. 123R, we elected to use the Black-Scholes option pricing model to estimate the fair
value of stock options that we grant under our equity incentive plans. In
order to determine the fair value of stock option grants under the Black-Scholes option pricing model, we must use subjective assumptions including the expected term of the stock options and our
expected stock price volatility over the expected term of the stock options. SFAS No. 123R also requires that a forfeiture rate be estimated and included in the calculation of stock-based
compensation expense at the time that the stock option or other stock awards such as our restricted stock unit awards are granted and revised if necessary in subsequent periods if actual forfeiture
rates differ from those estimates.

We
use a combination of historical and implied volatility ("blended volatility") to determine the expected stock volatility that we include in the Black-Scholes option pricing model to
value our stock options. Historical volatility is based on a period commensurate with the expected term of the options. Implied volatility is derived based on six-month traded options of
our common stock. The expected term of our stock options represents the period of time options are expected to be outstanding and is based on observed historical exercise patterns for our company
which we believe are indicative of future exercise behavior. We estimate forfeiture rates based on the historical activity for our company which we believe are indicative of future forfeiture rates.

If
we change any of the key assumptions that we use in the Black-Scholes option pricing model as described above, or if we decide to use a different valuation model in the future or
change our

22

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forfeiture
rate, the compensation expense that we record under SFAS No. 123R may differ significantly in the future from what we have recorded in the current period and could materially impact
our operating results.

During
the first quarter of 2008, we granted performance restricted stock units ("PRSUs") to our executive officers and certain key employees under our new Long-Term
Incentive Program which became effective on January 1, 2008. PRSUs are a form of share-based award in which the number of shares ultimately received will be determined based on our relative
performance compared to a specified peer companies over a three-year performance period and eligible individual's management by objectives ("MBO") achievement during the same three year
performance period. The value of each PRSU is determined on the grant date, based on our stock price, and assumes that performance targets will be achieved. Each quarter over the
three-year performance period we will calculate and record the stock-based compensation expense for the PRSUs using the following estimates: 1) our expected performance (both
revenue growth and net income growth) as compared to the specified peer group companies as defined by the plan over the three year period and 2) the expected average percentage achievement of
each of the participant's individual MBO goals over the three year period. The results of these two estimates will be used to calculate the expected PRSUs which will vest at the end of the three year
period and the resulting quarterly stock-based compensation expense. At each accounting period, we will reassess these estimates and the probability of meeting these goals and adjust our estimated
stock-based compensation expense accordingly. If actual results are not consistent with our initial assumptions and judgments used in estimating the forecasted metrics, we may be required to increase
or decrease compensation expense, which could materially impact our operating results.



Income taxes are accounted for in accordance with SFAS No. 109 ("SFAS No. 109"), "Accounting for Income Taxes", which requires deferred tax assets
and liabilities to be recognized using enacted tax rates for the effect of temporary differences between the financial statement and tax bases of recorded assets and liabilities. SFAS No. 109
also requires that deferred tax assets 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. We have determined that our
future taxable income will be sufficient to recover our deferred tax assets. If in the future we determine that a change has occurred which will not allow this recovery, we will record a valuation
allowance against our deferred tax assets. This will result in a charge against our income tax provision.

The
calculation of our effective tax rate is dependant upon the geographic composition of our world wide earnings, tax regulations governing each region and the availability of tax
credits. In addition, the calculation of our tax liabilities involves uncertainties in the application of complex tax laws and regulations. We recognize these uncertainties based on the Financial
Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes". The final payment of the amounts regarding these uncertainties may
ultimately prove to be less than or greater than our estimate. If this occurs there will be either a benefit or a charge to our income tax provision.

23

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RESULTS OF OPERATIONS

The following table sets forth certain items in our condensed consolidated statements of income as a percentage of total revenues for the periods indicated:

Three months ended
March 31,2007

2008Revenues:Product sales

99.5
%
99.2
%Product salesrelated party

0.4

0.7Other

0.1

0.1Total revenues

100.0
%
100.0
%Cost and expenses:Cost of product sales

51.3

51.7Research and development

15.2

18.4Sales and marketing

5.5

5.5General and administrative

7.0

8.5Total costs and expenses

79.0

84.1Operating income

21.0

15.9Other income (expense)net

4.1

(0.4
)Income before income tax provision and minority interest

25.1

15.5Income tax provision

9.7

5.7Minority interest

0.6

0.6Net income

16.0
%
10.4
%Gross margin on product sales

48.6
%
48.3
%


Three Months Ended March 31, 2008 and 2007

Revenues.The types of revenue that we generate and how we recognize revenue for each is explained above under the heading
"Critical Accounting Policies and Estimates". The following table

24

---



summarizes
the components of our revenue and provides comparisons from period to period (in thousands, except units sold and percentage change):

For the three months
ended March 31,

2007 vs. 2008Increase
(Decrease)

%
Change2007

2008Light source systems:Revenue

$
58,869

$
44,773

$
(14,096
)
-24
%Units sold


51


31


(20
)
-39
%Average selling price(1)

$
1,154

$
1,459

$
305

26
%Replacement parts and service products

$
67,756

$
79,026

$
11,270

17
%Product sales

$
126,625

$
123,799

$
(2,826
)
-2
%Other revenue

$
89

$
153

$
64

72
%Total revenue

$
126,714

$
123,952

$
(2,762
)
-2
%




Product
sales decreased 2% from the three months ended March 31, 2007 to the three months ended March 31, 2008. This decrease in product sales was primarily due to a
decline in light source system revenues which was substantially offset by an increase in our replacement parts and service product revenues for the three months ended March 31, 2008 compared to
the three months ended March 31, 2007. Growth in the installed base and steady utilization of our existing light source systems continues to increase demand for replacement parts and service
and support products. The average selling price of our light source systems increased 26% period over period due to a significant shift in our customer purchases to our most advanced, highest
value-added light sources for high volume immersion production applications which include our XLR series light sources. On a foreign currency adjusted basis, the average selling price was impacted by
a favorable increase of 25% period over period. The decrease in units of light source systems sold from period to period reflects the reduction in capital spending by our chipmaker customers and
delays of equipment deliveries. There were no sales revenue recorded or earned associated with the TCZ joint venture for the three months ended March 31, 2007 or 2008. We expect our revenue to
remain relatively flat in the second quarter of 2008.

Our
DUV backlog includes only those orders for which we have received a completed purchase order from a customer, and that will be delivered to a customer within the following twelve
months. For the period ended March 31, 2007, our DUV backlog totaled $83.4 million and total DUV bookings were $115.7 million which yielded a book-to-bill
ratio of 0.91 compared to the period ended March 31, 2008, where our DUV backlog totaled $76.7 million and total DUV bookings were $101.1 million which yielded a
book-to-bill ratio of 0.82. The increase in our DUV backlog primarily reflects the strong demand for replacement parts and service associated with the increase in the installed
base and steady utilization of our light source systems and to a lesser extent the demand for our most advanced ArF immersion products and their corresponding higher average selling price. The
declines in DUV bookings and book to bill ratio period over period reflect the slowing conditions of the semiconductor industry.

We
installed 48 light sources at chipmakers and other end-users for the three months ended March 31, 2007 as compared to 55 light sources installed during the three
months ended March 31, 2008.

25

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Sales
to our three lithography tool manufacturing customers, ASML, Canon, and Nikon, amounted to 38%, 6% and 14%, respectively, of total revenue for the three months ended
March 31, 2007, and 28%, 4% and 16%, respectively, of total revenue for the three months ended March 31, 2008.

Our
sales are generated primarily by shipments to customers in the United States, Japan, Korea and, to a lesser extent, other Asian countries and Europe. Approximately 86% and 85% of our
sales for the three months ended March 31, 2007 and 2008, respectively, were derived from customers outside the U.S. We maintain a wholly owned Japanese subsidiary, Cymer Japan, which sells to
our Japanese customers. Revenues from Japanese customers, generated primarily by Cymer Japan, accounted for 20% of total revenues for both the three months ended March 31, 2007 and 2008. The
activities of Cymer Japan are limited to sales and service of products purchased by Cymer Japan from us as the parent corporation. We anticipate that international sales will continue to account for a
significant portion of our sales.

Cost of Product Sales.Cost of product sales includes direct material and labor, warranty expenses, license fees,
manufacturing and service overhead. Cost of product sales also includes foreign exchange gains and losses on foreign currency forward exchange contracts ("forward contracts") associated with purchases
of our products by Cymer Japan for resale under firm third-party sales commitments. Shipping costs associated with our product sales are also included in cost of product sales. We do not charge our
customers for shipping fees. The cost of product sales decreased 2% from $65.1 million for the three months ended March 31, 2007 to $64.1 million for the three months ended
March 31, 2008. This slight decrease was primarily due to lower light source system sales for the three months ended March 31, 2008 compared to the three months ended March 31,
2007 offset by increased costs associated with our replacement parts and service products.

Gross
profit decreased slightly from $61.6 million for the three months ended March 31, 2007 compared to $59.7 million for the three months ended March 31,
2008 primarily due to lower sales from period to period. Gross margin on product sales was 49% for the three months ended March 31, 2007 compared to 48% for the three months ended
March 31, 2008.

Research and Development.Research and development expenses include costs of internally-funded projects as well as continuing
product development expenses, which consist primarily of employee and material costs, depreciation of equipment and other engineering related costs. Research and development expenses increased 18%
from $19.3 million for the three months ended March 31, 2007 to $22.8 million for the three months ended March 31, 2008 due primarily to costs associated with our EUV
source development and to a lesser extent our low-temperature poly-silicon ("LTPS") product development efforts associated with our TCZ joint venture. As a percentage of total
revenues, research and development expenses increased from 15.2% for the three months ended March 31, 2007 to 18.4% for the three months ended March 31, 2008. We expect that our
investment in research and development will continue as we commercialize our EUV source and TCZ technologies.

Sales and Marketing.Sales and marketing expenses include sales, marketing and customer support staff expenses and other
marketing expenses. Sales and marketing expenses decreased 2% from $7.0 million for the three months ended March 31, 2007 to $6.8 million for the three months ended
March 31, 2008. The slight decrease in sales and marketing expenses from period to period primarily reflects a decrease in profit sharing, bonuses and stock-based compensation expense which was
partially offset by an increase in salaries and benefits due to increases in headcount. As a percentage of total revenues, sales and marketing expenses remained constant at 5.5% for both the three
months ended March 31, 2007 and 2008. We anticipate that sales and marketing expenses will remain relatively flat or increase slightly in the second quarter of 2008.

General and Administrative.General and administrative expenses consist primarily of management and administrative personnel
costs, professional services, including external audit fees, and

26

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administrative
operating costs. General and administrative expenses increased 20% from $8.8 million for the three months ended March 31, 2007 to $10.6 million for the three months
ended March 31, 2008. The increase was primarily due to a $908,000 increase in employee compensation and benefits, a $351,000 increase in bad debt expense associated with our accounts
receivable and an increase of $744,000 in other expenses which primarily includes legal and consulting fees. These increases were partially offset by decreased advisory fees of $318,000 due to our
adoption and implementation of FIN 48 in the first quarter of 2007. No such fees were incurred during the first quarter of 2008. We anticipate that general and administrative expenses will
remain relatively flat or increase slightly in the second quarter of 2008.

Total Other Income (Expense)Net.Net other income (expense) consists primarily of interest income earned on our
investment and cash portfolio, interest expense incurred on our convertible subordinated notes, foreign currency exchange gains and losses associated with fluctuations in the value of the functional
currencies of our foreign subsidiaries against the U.S. dollar and other items that may be specific to a reporting period. Other income, net totaled $5.3 million for the three months ended
March 31, 2007 compared to other expense, net of $510,000 for the three months ended March 31, 2008.

The
change from net other income to net other expense from period to period was primarily due to a $3.8 million write-down of our investments that we recorded in the
three month period ended March 31, 2008. This write-down is related to the only auction rate security that is currently included in our investment portfolio and has a par value of
$5.6 million. Based on the current crisis in the credit market and our evaluation of the fair value of this auction rate security, we determined that an
other-than-temporary impairment in the amount of $3.8 million existed at March 31, 2008. This change from net other income to net other expense was also caused by
a reduction in interest income from period to period as a result of lower overall cash and investment balances and lower interest rate yields. These decreases in net other income (expense) were offset
by an increase of $1.3 million in foreign exchange gains from period to period, primarily due to significant changes in the foreign exchange rates in parts of Asia and Europe where we conduct
our business.

Income Tax Provision.The tax provision of $12.2 million and $7.1 million for the three months ended
March 31, 2007 and 2008, respectively, reflects a tax rate for the quarter of 38% and 37%, respectively. Due to the discrete impact of changes in our tax reserves for the three months ended
March 31, 2007, the quarterly tax rate was higher than the annual effective tax rate for 2007 of 34%. The annual effective tax rate for 2008 is expected to be 37%. The increase in the annual
effective tax rate from 34% to 37% is primarily attributable to the expiration of the federal research and development credit on December 31, 2007. Our future annual effective tax rate depends
on various factors, such as tax legislation and credits and the geographic compositions of our pre-tax income. The currently expired federal research and development tax credit is expected
to be reinstated; however, it is unknown when this reinstatement will take place. In the quarter in which this occurs, the tax benefit from the credit will be recognized.

LIQUIDITY AND CAPITAL RESOURCES

Historically we have funded our operations primarily from cash generated from operations, the proceeds of note offerings, and the proceeds from employee stock
option exercises. As of March 31, 2008, we had approximately $238.6 million in cash and cash equivalents, $84.6 million in short-term investments, $22.4 million
in long-term investments, and $367.2 million in working capital.

Net
cash provided by operating activities was approximately $27.1 million and $6.9 million for the three months ended March 31, 2007 and 2008, respectively. Net cash
provided by operating activities for the three months ended March 31, 2007 primarily reflects net income for the period, a decrease in accounts receivable balances and increases in inventories
and accrued and other liabilities. The

27

---



decrease
in accounts receivable was primarily due to collection efforts during the period and the increase in inventories was primarily due to a push out of light source system deliveries from the
first quarter of 2007 to the second half of 2007. Net cash provided by operating activities for the three months ended March 31, 2008 primarily reflects lower net income for the period and
increases in inventory which were offset by a decrease in accounts receivable during the period. The increase in inventory is due primarily to increases in our field spare parts inventory to support
the increased utilization of our light sources, to provide for faster spare parts availability to support the new XLR installations and to support our new OnPulse® service agreements. The
decrease in accounts receivable was primarily due to ongoing collection efforts.

Net
cash used in investing activities was approximately $3.0 million and $68.8 million for the three months ended March 31, 2007 and 2008, respectively. Net cash
used in investing activities during the three months ended March 31, 2007 reflects the timing of short-term and long-term investments that matured and were reinvested
during the period, and the acquisition of $4.1 million of property and equipment. Net cash used in investing activities for the three months ended March 31, 2008 was due primarily to the
timing of short-term and long-term investments that matured and were reinvested during the period and the
acquisition of $10.2 million of property and equipment, the majority of which relates to building improvement costs associated with our EUV research, development and productization efforts.

Net
cash provided by financing activities was approximately $1.6 million and $517,000 for the three months ended March 31, 2007 and 2008, respectively. Net cash provided by
financing activities for the three months ended March 31, 2007 reflects the proceeds received from the exercise of employee stock options totaling $1.3 million and a tax windfall for the
period from stock options exercises totaling $313,000. Net cash provided by financing activities for the three months ended March 31, 2008 reflects the proceeds received from the exercise of
employee stock options totaling $577,000 and tax shortfall for the period from stock options exercises totaling $60,000.

Additionally,
our cash and cash equivalents were unfavorably impacted by the exchange rate changes in the value of the functional currencies of our foreign subsidiaries against the U.S.
dollar for the three months ended March 31, 2007 and 2008. The effect of exchange rates on cash and cash equivalents was approximately $25,000 and $5.7 million for the three months ended
March 31, 2007 and 2008, respectively.

Our
primary near term potential cash commitment is in February 2009 when the $140.7 million in principal amount of our 3.5% convertible subordinated notes that are currently
outstanding will mature. These notes are convertible into shares of our common stock at a conversion rate of 20 shares per $1,000 principal or an effective conversion price of $50.00 per share and are
redeemable by us if the price of our common stock reaches certain levels.

We
require substantial working capital to fund our business, particularly to finance inventories, including purchase orders with our vendors, accounts receivable, and for capital
expenditures. Our future capital requirements depend on many factors, including our manufacturing activity, the timing and extent of spending to support product development efforts, expansion of sales
and marketing and field service and support, competitive labor market compensation requirements, the timing of introductions of new products and enhancements to existing products, and the market
acceptance of our products. We believe that cash generated from operations along with the liquidity provided by our existing cash balances and short-term investments will be sufficient to
sustain operations and provide for any potential future expansion of our business for at least the next 12 months.

OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

As of March 31, 2008, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as
structured finance, variable interest, or special

28

---



purpose
entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we did
not engage in trading activities involving non-exchange traded contracts. As a result, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had
engaged in such relationships. We do not have relationships and transactions with persons and entities that derive benefits from their non-independent relationship with us or our related
parties except as disclosed herein.

We
have no significant contractual obligations that are not recorded on our condensed consolidated financial statements or fully disclosed in the notes thereto.

As
of March 31, 2008, we had a gross liability for income taxes associated with uncertain tax positions of approximately $22.4 million related to FIN 48. The timing
of any payments which could result from these unrecognized tax benefits will depend on a number of factors. Accordingly, we cannot make reasonably reliable estimates of the amount and period of
potential cash settlements, if any, with taxing authorities.

SUBSEQUENT EVENT

On April 21, 2008, we announced that our board of directors had authorized us to repurchase up to $100 million of our common stock in the open
market or in privately negotiated transactions. The program may be discontinued at any time. As of May 2, 2008 we did not have any purchases under this program.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value using generally accepted accounting principles, and expands disclosures related to fair value measurements. Subsequent
to the issuance of SFAS No. 157, the FASB issued FASB Staff Position 157-2 ("FSP 157-2"). FSP 157-2 delays the effective date of the application of
SFAS No. 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. We adopted all of the provisions of SFAS No. 157 on January 1, 2008 with the exception of the application of the statement to
non-recurring nonfinancial assets and nonfinancial liabilities. We will adopt FSP 157-2 as of January 1, 2009 and are currently evaluating the impact of this
pronouncement on our condensed consolidated financial statements.

In
September 2006, FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plansan Amendment of FASB Statements
No. 87, 88, 106, and 132(R)" ("SFAS No. 158"). We adopted all provisions of SFAS No. 158 in December 2006 except for the provision which will require us to measure the funded
status of our pension plans as of the date of our year-end statement of financial position. This provision will be effective for us for the fiscal year ending December 31, 2008.
SFAS No. 158 provides two approaches that a company can follow to transition to a fiscal year-end measurement date. We plan on utilizing the second approach which allows a company
to continue using the measurements determined for the prior fiscal year-end reporting to estimate the effects of the SFAS No. 158 change at December 31, 2008. We do not
expect its adoption to have a material impact on our condensed consolidated financial statements.

In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS No. 141R"), which replaces FASB Statement No. 141. SFAS No. 141R
establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree at the acquisition date. The Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business
combination. SFAS No. 141R is effective for

29

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fiscal
years beginning after December 15, 2008. We will apply SFAS No. 141R to any acquisitions that we might commence subsequent to January 1, 2009.

In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statementamendments of ARB No. 51" ("SFAS No. 160").
SFAS No. 160 states that accounting and reporting for minority interests will be recharacterized as noncontrolling interests and classified as a component of equity. The Statement also
establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS
No. 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an
outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. This statement is effective for fiscal years beginning after December 15, 2008. We will adopt
SFAS No. 160 as of January 1, 2009 and are currently evaluating the impact of this pronouncement on our condensed consolidated financial statements.

In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activitiesan Amendment of FASB Statement 133" ("SFAS
No. 161"). SFAS No. 161 requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses
derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" and how
derivative instruments and related hedged items affect a company's financial position, financial performance and cash. SFAS No. 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. We will adopt SFAS No. 161 as of January 1, 2009 and are currently evaluating the impact of this pronouncement on our condensed consolidated financial
statements.

ITEM 3.    Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Risk

We conduct business in several international currencies through our global operations. Due to the large volume of our business that we conduct in Japan, the
Japanese operation poses our greatest foreign currency risk. Our risk management strategy includes the use of derivative financial instruments, principally forward contracts, to manage our foreign
currency risk exposure. We enter into forward contracts in order to reduce the impact of currency fluctuations related to purchases of our inventories by Cymer Japan in U.S. dollars for resale under
firm third-party sales commitments denominated in Japanese Yen, as well as other foreign currency exposures including exposures related to intercompany debt. Our objective is to offset gains or losses
resulting from these exposures with gains and losses on forward contracts, thereby reducing volatility of our earnings. We do not enter into forward contracts for speculative purposes.

As
of March 31, 2008, we had outstanding forward contracts to buy U.S. $31.1 million for 3.3 billion Yen under foreign currency exchange facilities with contract
rates ranging from 96.9 Yen to 112.9 Yen per U.S. dollar. These contracts expire on various dates through September 2008.

Our
forward contracts generally qualify for hedge accounting treatment per the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". As a
result, we defer changes in the fair value for the effective portion of these hedges and record the amount in accumulated other comprehensive income (loss). Subsequently, we reclassify the gain or
loss to cost of product sales in the same period that the related sale is made to the third party. The fair value of all of our forward contracts and the deferred loss, net of tax, for those that
qualify for hedge accounting treatment totaled $1.8 million and $379,000, respectively, as of March 31, 2008. The foreign currency exchange gain totaled approximately $427,000 and
$1.7 million for the three months ended March 31, 2007 and 2008,

30

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respectively,
and is included in other income (expense), net on the accompanying unaudited condensed consolidated statements of income.

A
10% adverse change in the exchange rate of the Japanese Yen against the U.S. dollar would decrease the fair value of these forward contracts by $3.1 million. However, if this
occurred, the fair value of the underlying exposures hedged by the contracts would increase by a similar amount. Accordingly, we believe that a 10% change in the foreign exchange rate of the Japanese
Yen against the U.S. dollar would have an immaterial impact on the consolidated results of operations. We will continue to monitor our exposure to foreign currency fluctuations in all countries in
which we do business, particularly in Korea where we have a manufacturing facility and, if appropriate, use hedging transactions such as these forward contracts to minimize the effect of foreign
currency fluctuations. Although we enter into such forward contracts, they may not be adequate to eliminate the impact of our exchange rate exposure. Failure to sufficiently hedge or otherwise manage
such foreign currency risks properly could have a material adverse effect on our results of operations.

Investment and Debt Risk

We maintain an investment portfolio consisting primarily of government and corporate fixed income securities, certificates of deposit and commercial paper. While
it is our general intent to hold such securities until maturity, we will occasionally sell certain securities for cash flow purposes. Therefore, our investments are classified as
available-for-sale and are carried on the balance sheet at fair value. A change in market interest rates of 10% would have impacted our net income from these investments by
approximately $175,000 for the three months ended March 31, 2008.

We
also currently hold one auction rate security within our investment portfolio which was purchased according to our investment policy in October 2007 at a par value of
$5.6 million. Although this auction rate security is insured, the company that insures it was downgraded as of the end of March 2008, and as a result, the auction rate security itself was
downgraded. This auction rate security has gone to auction every 28 days since November 2007 and has failed at every auction. As a result of these failed auctions, the downgrading of the
auction rate security and the company that insures it, and the current credit market crisis, we recorded an impairment charge on this investment of $3.8 million at March 31, 2008 to
properly reflect its fair value. Since we determined that this was an other-than-temporary impairment, we recorded this as a
write-down of investments in other income (expense), net in the accompanying unaudited condensed consolidated statements of income. It is uncertain that we will be able to liquidate this
auction rate security in the near term and the likelihood is high that we will hold this auction rate security in excess of twelve months. Therefore, we have classified the $1.8 million fair
value of this auction rate security as a long-term investment on our unaudited condensed consolidated balance sheet at March 31, 2008. Since this auction rate security is immaterial
to our overall cash and investment balances, we do not anticipate that our inability to liquidate it at its current fair value in the near term or long term will have an affect on our liquidity.

In
February 2002, we issued $250.0 million principal amount of unsecured fixed rate 3.50% convertible subordinated notes due February 15, 2009. Interest on these notes is
payable on February 15 and August 15 of each year. The notes are convertible into shares of our common stock at a conversion rate of 20 shares per $1,000 principal amount subject to
adjustment under certain conditions. Because the interest rate is fixed, we believe there is no risk of increased expense. To date, we have repurchased, at a discount to par, $109.2 million of
these notes. The principal amount outstanding at March 31, 2008 was $140.7 million and the fair value of such debt based on quoted market prices on March 31, 2008 was
$138.4 million. Per the fair value hierarchy defined in SFAS No. 157, "Fair Value Measurements", which we adopted effective January 1, 2008, this fair value qualifies as a
level 1 input since it is based on observable prices which we obtain from Bloomberg at the end of each quarterly reporting period.

31

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ITEM 4.    Controls and Procedures

Evaluation of disclosure controls and procedures.For the first quarter of 2008, our chief executive officer and our chief
financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of March 31, 2008, and concluded that as of such date, our disclosure controls and procedures were effective in ensuring that information required to
be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules and forms of the Securities and
Exchange Commission.

Changes in internal control over financial reporting.There has been no change in our internal control over financial
reporting during the quarter ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.    Legal Proceedings

None.

ITEM 1A.    Risk Factors

The risks described below may not be the only risks we face. Additional risks that we do not currently think are material may also impair
our business operations. The risk factors set forth below with an asterisk (*) next to the title contain changes to the description of the risk factors associated with our business as previously
disclosed in Item 1A to our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. If any of the events or circumstances described in the following
risks actually occur, our business, financial condition or results of operations could suffer, and the trading price of our common stock could decline.

Our revenues and operating results from quarter to quarter and year to year have varied in the past and our future operating results may continue to fluctuate significantly.

Factors that contribute to fluctuations in our revenues and operating results include:



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We
have historically derived a large portion of our quarterly and annual revenues from selling a small number of light source systems. In recent years, light source sales have accounted
for approximately half of our revenue in a given period. Because we sell a small number of light source system products, the precise time that we recognize revenue from an order may have a significant
impact on our total revenue for a particular period. As is the practice in our industry, our customers may cancel or reschedule orders with little or no penalty. Orders expected in one quarter could
shift to another period due to changes in the anticipated timing of our customers' purchase decisions or rescheduled delivery dates requested by our customers. Our operating results for a particular
quarter or year may be adversely affected if our customers cancel or reschedule orders, or if we cannot fill orders in time due to unexpected delays in manufacturing, testing, shipping, or product
acceptance. In addition, our light source systems used in a production environment generate ongoing support revenues based on system usage. Our operating results for a particular period may be
adversely affected if our customers reduce usage rates or change their buying patterns.

We
manage our expense levels based, in large part, on expected future revenues. As a result, our expenses are relatively fixed for the short term, and if our actual revenue decreases
below the level we expect, our operating results will be adversely affected. As a result of these or other factors, we could fail to achieve our expectations as to future revenue, gross profit,
operating income, net income, earnings per share, and cash flows. Our failure to meet the performance expectations set and published by external sources could result in a sudden and significant drop
in the price of our stock, particularly on a short-term basis, and could negatively affect the value of any investment in our stock.

*Our business depends on the semiconductor and the semiconductor capital equipment industries, which are volatile and unpredictable.

We derive a substantial portion of our revenues from our lithography tool manufacturer customers who, as original equipment manufacturers ("OEMs"), incorporate
our light source systems in photolithography tools that they sell to semiconductor manufacturers, or chipmakers, and from our chipmaker customers who purchase replacement parts, upgrades and service
directly from us in support
of the light source products. Like us, our OEM customers depend on demand for their products from the chipmakers. The capital equipment and related operating expenditures of chipmakers depend on a
number of factors, including the current and anticipated market demand for semiconductors and the many products using semiconductors. That demand is volatile and unpredictable.

As
a result of the cyclicality of the semiconductor industry, the semiconductor capital equipment industry historically has experienced periodic ups and downs. The cyclical nature of the
semiconductor and the semiconductor capital equipment industries affects our ability to accurately predict future

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revenue
and therefore our ability to manage our future expense levels. When cyclical fluctuations result in lower than expected revenue levels, operating results may be adversely affected and cost
reduction measures may be necessary in order for us to remain competitive and financially sound. During a down cycle or slowdown, we must be in a position to adjust our cost and expense structure to
prevailing market conditions while still maintaining our longer term strategies, continuing to provide outstanding service and support for our customers, and motivating and retaining our key
employees. During periods of rapid growth, we must be able to increase manufacturing capacity and personnel to meet our customers' needs. We can provide no assurance that these objectives can be met
in a timely manner in response to industry cycles. We are not able to predict with any certainty the duration of any industry cycle or the timing or order of magnitude of any recovery from a down
cycle or slowdown.

Downturns
in the semiconductor industry often result in decreases in demand for semiconductor manufacturing equipment, including the photolithography tools that our OEM customers
produce. Downturns in the semiconductor industry have generally had severe effects on the demand for semiconductor manufacturing equipment and to a lesser extent, the associated replacement parts and
support services. Fluctuating levels of investment by chipmakers and resulting pricing volatility will continue to materially affect our aggregate bookings, revenues and operating results. Even during
periods of reduced revenues we believe we must continue to invest in research and development and to maintain extensive ongoing worldwide customer service and support capabilities to meet our
customers' needs and to remain competitive. Continued spending in furtherance of these objectives may temporarily harm our financial results. Semiconductor industry downturns and slowdowns will likely
continue to adversely affect our business, financial condition and operating results from time to time, and our operating results may fall below the expectations of public market analysts or investors
in future quarters. Any failure to meet such expectations could materially adversely affect the price of our common stock.

Our
OEM customers try to manage their inventories and production requirements to appropriate levels that reflect their expected sales to chipmakers. Market conditions in the
semiconductor industry and our OEM customers' production efficiency can cause them to expand or reduce their orders for new light source systems as they try to manage their inventories and production
requirements. We continue to work closely with our OEM customers to better understand these issues. However, we cannot guarantee that we will be successful in understanding our OEM customers'
inventory management or production requirements or that our OEM customers will not build up an excess inventory of light source systems. If our OEM customers retain an excess inventory of light source
systems, our revenue could be reduced in future periods as the excess inventory is utilized, which could adversely affect our operating results, financial condition and cash flows. If our OEM
customers demand shorter product
lead times to improve their inventory and cash positions, our inventory management and cash position may be negatively impacted, which may adversely affect our operating results, financial condition
and cash flows.

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A significant percentage of our revenue is derived from sales to our lithography tool manufacturer customers, and if we are not able to retain these customers, or they
reschedule, reduce or cancel orders, or delay or default on payments, our revenues would be reduced and our financial condition and cash flows would suffer.

Three large companies, ASML, Nikon and Canon dominate the photolithography tool business. Collectively, these three customers accounted for the following
percentage of our total revenue during the periods indicated:

Three months ended
March 31,2007

2008ASML

38
%
28
%Nikon

14
%
16
%Canon

6
%
4
%Total

58
%
48
%


Collectively,
these three companies accounted for the following percentage of our total accounts receivable at the dates indicated:

December 31,
2007

March 31,
2008ASML

31
%
25
%Nikon

25
%
17
%Canon

3
%
3
%Total

59
%
45
%


We
expect that sales of our light source products to these customers will continue to account for a substantial portion of our revenue in the foreseeable future. None of our customers
are obligated to purchase a minimum number of our products in the aggregate or during any particular period. We can provide no assurance that any of our customers will continue to purchase our
products at past or current levels. Sales to any of these customers may be affected by many factors, some of which are beyond our control. These factors include:



At
varying degrees, the loss of any significant business from or production problems for any one of these customers would harm our business and financial condition.

*Our revenue is derived from the sale of a limited number of models of our light source systems, and replacement and support service products surrounding these systems.

We sell excimer light source systems, including KrF and ArF systems, and support, including replacement parts and service support. We expect these light source
systems and the related support to continue to account for a substantial majority of our revenues in the near term. Continued market

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acceptance
of our light source system products is, therefore, critical to our future success. Our excimer light sources are used in DUV photolithography equipment for the manufacture of semiconductor
devices with features of and smaller than 250 nm. The demand for our products depends in part on the rate at which chipmakers further adopt excimer light sources as the chosen light source for their
photolithography tools and the rate at which they continue to manufacture devices with progressively smaller features.

The
rate with which chipmakers adopt excimer light sources may vary for a variety of reasons, including:



We
cannot guarantee that these factors can or will be overcome or that the demand for our excimer light source products will not be materially reduced. The demand for our light source
products, and therefore our operating results, financial condition and cash flows, could be adversely affected by a number of factors, including:



We depend on the introduction of new products for our success, and we are subject to risks associated with rapid technological change.

Rapid technological changes in semiconductor manufacturing processes subject us to increased pressure to develop technological advances enabling such processes.
We believe that our future success depends in part upon our ability to develop, manufacture, timely introduce and support new light source products with improved capabilities on a timely basis and to
continue to enhance our existing light source systems and process capabilities. Due to the risks inherent in transitioning to new products, we must forecast accurate demand for new products while
managing the transition from older products.

In
early 2003, we effected our most significant product introduction in several years with the initial shipment of a light source based on a technology change from a
single-discharge-chamber excimer light source to a dual-discharge-chamber design called MOPA. The MOPA design represented a paradigm shift from previously accepted lithography technology
by offering our chipmaker customers higher power, tighter bandwidth and lower cost of operation for their current optical lithography applications. More recently, we introduced the next generation
advanced dual discharge chamber light source, the XLR 500i, that replaces the conventional power amplifier chamber with a regenerative ring amplifier. This light source provides our customers with a
step function improvement in performance and a significantly lower cost of operation. There are risks inherent in the MOPA and ring technologies,

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including
effective execution of our product development roadmap, continuing adoption of the product by lithography tool manufacturers and chipmakers, manufacturability, cost effectiveness, and
product performance in the field of the new products and the potential development of one or more comparable products by our competitor.

At
this time, chipmakers are continuing to expand their manufacturing capacity at 65 nm, and a growing number of manufacturers of certain types of memory chips are in production at 55 nm
and below. Some advanced logic chips are now in production at 45 nm, while some memory manufacturers have recently commenced production at about the 45 nm node. Additionally, other types of chipmakers
have a significant level of development underway at this node. These efforts, along with expanding use of ArF immersion lithography in production among certain memory manufacturers, are driving demand
for our most advanced ArF light sources. At the same time chipmakers also need tools for the less critical layers on wafers, and there remains strong demand for our KrF light source products for DUV
photolithography systems as well. After our chipmaker customers have built their capacity to levels appropriate to meet existing demand, their demand for our light source products will depend, in
part, on their sales forecasts and their estimates regarding the duration and magnitude of the current industry cycle and whether their projected manufacturing process yields will enable ongoing
investments at a suitable level of capacity.

Future
technologies such as EUV, nano-imprint lithography, and certain maskless lithography techniques may render our excimer light source products obsolete. We must manage
product transitions, as introduction of new products could adversely affect our sales of existing products. If new products are not introduced on time, or have reliability or quality problems, our
performance may be impacted by reduced orders, higher manufacturing costs, delays in acceptance of and payment for new products, and additional service and warranty expenses. We may not be able to
develop and introduce new products or enhancements to our existing products and processes in a timely or cost effective manner that satisfies customer needs or achieves market acceptance. Failure to
develop and introduce these new products and enhancements could materially adversely affect our operating results, financial condition and cash flows.

We
expect to face significant competition from current and future competitors. We believe that other companies are developing systems and products that are competitive to ours and are
planning to introduce new products to this market, which may affect our ability to sell our new products. Furthermore, new products represent significant investments of our resources and their
success, or lack thereof, could have a material effect on our financial results.

We face competition from one company and may face competition from additional competitors who enter the market.

We currently have one significant competitor that sells light sources for DUV photolithography applications. This competitor, Gigaphoton, is a joint venture
between two large companies, Komatsu and Ushio, and is headquartered in Japan. Over the last year, Gigaphoton has been successful in gaining market penetration in the DUV light source industry and is
continuing to aggressively try to gain additional market penetration. We know that our customers have purchased products from this competitor and that our customers have qualified this competitor's
light sources for use with their products.

Larger
companies with substantially greater resources, such as other manufacturers of industrial light sources for advanced lithography, may attempt to sell competitive products to our
customers. Potential competitors may also be attracted to our growing installed base of light sources which represents a steady and significant replacement parts and service revenue stream for us, and
they may attempt to supply replacement parts to that installed base. If any existing or future competitors gain

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market
acceptance, we could lose market share and our growth could slow or decline, which could have a material adverse effect on our operating results, financial condition and cash flows.

Failure to maintain effectively our direct field service and support organization could have a material adverse effect on our business.

We believe it is critical for us to provide quick and responsive service directly to our chipmaker customers throughout the world that use our light source
products in their photolithography systems, and that it is essential to maintain our own personnel or trained third-party resources to provide the high level of service our customers have come to
expect. Accordingly, we have an ongoing effort to develop our direct support system with locations in Europe, Korea, Japan, the People's Republic of China, Singapore, Taiwan and the U.S. This requires
us to do the following:



We
may not be able to attract and train qualified personnel to maintain our direct support operations successfully. We may not be able to find and engage qualified third-party resources
to supplement and enhance our direct support operations. Further, we may incur significant costs in providing these support services. Failure to implement our direct support operation effectively
could harm our operating results, financial condition and cash flows.

We must develop and manufacture enhancements to our existing products and introduce new products in order to benefit our customers and continue to grow our business. We may not
effectively manage our growth and integrate these new enhancements and products, which could materially harm our business.

To benefit our customers with more productive, lower cost systems and to continue to grow our business, our existing light source products and their process
capabilities must be enhanced, and we must develop and manufacture new products to serve other semiconductor applications. We cannot guarantee that we will be able to manage our business to grow
effectively. Nor can we guarantee that we will be able to accelerate the development of new enhancements to our existing products and create new products. Further, we may not be able to effectively
integrate new products and applications into
our current operations. Any of these risks could materially harm our business, financial condition and results of operations.

We must effectively manage changes in our business.

In order to respond to the business cycles of the semiconductor industry, over the past few years we have expanded and contracted the scope of our operations and
the number of employees in many of our locations and departments. As the semiconductor equipment industry cycle moves between growth and contraction we will need to:



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If
we fail to effectively manage changes in our business, our operating results, financial condition and cash flows will be adversely affected.

We depend on a few key suppliers for purchasing components and subassemblies that are included in our products.

We purchase a limited number of components and subassemblies included in our light source products from a single supplier or a small group of suppliers. For
certain optical, control system and pulse power components and subassemblies used in our light source systems, we currently utilize a single supplier. To reduce the risk associated with this single
supplier, we carry a significant strategic inventory of these components. Strategic inventories are managed as a percentage of future demand. We also have vendor-managed inventory of critical
components to further reduce the risk of a single supplier. In addition, we contract the manufacture of various subassemblies of our products and depend on our contract manufacturers to deliver to our
required specifications, schedule, and quality standards. Further, some of our suppliers have specialized in supplying equipment or manufacturing services to semiconductor equipment manufacturers and
therefore are susceptible to industry ups and downs and subject to the same risks and uncertainties regarding their ability to respond to changing market conditions. Because many of these suppliers
reduce the size of their workforce in an industry downturn and increase it in an upturn, they may not be able to meet our requirements or respond quickly enough as an upturn begins and gains momentum.
Due to the nature of our product development requirements, these key suppliers must rapidly advance their own technologies and production capabilities in order to support the introduction schedule of
our new products. These suppliers may not be able to provide new modules and subassemblies when they are needed to satisfy our manufacturing and delivery schedules. If we cannot purchase enough of
these materials, components or subassemblies, or if these items do not meet our quality standards, there could be delays or reductions in our product shipments, which would harm our operating results,
financial condition and cash flows.

We are dependent on our limited manufacturing facilities and on our subcontractors to assemble and test our products.

Operations at our two manufacturing facilities and at our subcontractors are subject to disruption for a variety of reasons, including work stoppages, terrorism,
fire, earthquake, energy shortages, flooding or other natural disasters. Such disruptions could cause delays in shipments of our products to our customers. We provide no assurance that alternate
production capacity would be available if a major disruption were to occur or that, if it were available, it could be obtained on favorable terms, or at all. Such disruption could result in
cancellation of orders or loss of customers, which would have a material adverse effect on our operating results, financial condition and cash flows.

We depend on key personnel, especially management and technical personnel, who may be difficult to attract and retain.

We are highly dependent on the services of many key employees in various areas, including:



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In particular, there are a limited number of experts in excimer light source technology, and we require highly skilled hardware and software engineers. Competition for qualified
personnel is intense and we cannot guarantee that we will be able to continue to attract and retain qualified personnel as needed. We do not have employment agreements with most of our employees. We
believe that our future growth and operating results will depend on:



If
we are unable to hire, train and retain key personnel as required, our operating results, financial condition and cash flows could be adversely affected.

Economic, political, regulatory and other events in geographic areas where we have significant sales or operations could interfere with our business.

We serve an increasingly global market. A large portion of our total revenues is derived from customers located outside of the U.S. We expect our international
sales to continue to account for a very large portion of our total revenues. In order to support our foreign customers, we maintain a manufacturing and field service subsidiary in Korea as well as
field service and support subsidiaries in Japan, the Netherlands, the People's Republic of China, Singapore and Taiwan.

We
may not be able to manage our operations to address and support our global customers effectively. Further, our investments in these types of activities may not make us competitive in
the global market or we may not be able to meet the service, support, or manufacturing levels required by our global customers.

Additionally,
we are subject to the risks inherent in doing business globally, including:



Many
of our major customers and many of the chipmakers who use our light source products in their photolithography systems are located in Asia. Economic problems and currency
fluctuations affecting these regions in Asia could create a larger risk for us. Further, even though it has not been

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difficult
for us to comply with U.S. export controls, these export rules could change in the future and make it more difficult or impossible for us to export our products to many countries. Any of
these vulnerabilities could have a material adverse effect on our business, financial condition and results of operations.

Our ability to compete could be jeopardized if we are unable to protect our intellectual property rights. These types of claims could seriously harm our business or require us
to incur significant costs.

We believe our success and ability to compete depend in part upon protecting our proprietary technology. We rely on a combination of patent, trade secret,
copyright and trademark laws, nondisclosure and other contractual agreements and technical measures to protect our proprietary rights.

We
own and have numerous patents pending in the U.S. and various foreign countries covering certain aspects of technology related to light sources and piezo techniques. These patents
will expire at various times through September 2025.

Our
pending patent applications and any future applications might not be approved. Our patents might not provide us with a competitive advantage and may be successfully challenged by
third parties. In addition, third parties' patents might have an adverse effect on our ability to do business. Due to cost constraints, we do not seek international patent protection for all
inventions that are covered by U.S. patents and patent applications. As a result we do not have foreign patent protection for some of our inventions. Additionally, laws of some foreign countries in
which our products are or may be developed, manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights to the same extent as do the laws of
the U.S. Thus, the likelihood of piracy of our technology and products is greater in these countries. Further, third parties might independently develop similar products, duplicate our products, or
design around patents that are granted to us.

Other
companies or persons may have filed or may file in the future patent applications that are similar or identical to ours. We may have to participate in appropriate proceedings in
the courts or the patent offices to determine the priority of inventions. These proceedings may determine that these third-party patent applications have priority over our patent applications. Loss of
priority in these interference proceedings could result in substantial cost to us and loss of rights.

We
also rely on the following to protect our confidential information and our other intellectual property:



However,
we may not be successful in protecting our confidential information or intellectual property, particularly our trade secrets, because third parties may:



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The parties to whom we provide research and development services may dispute the ownership of the intellectual property that we develop while performing these services.

In the past, funds from research and development arrangements with third parties have been used to pay for a portion of our own research and development expenses.
We receive these funds from government-sponsored programs and from customers, in connection with our design and development of specific products. Periodically, funds from lithography tool
manufacturers and chipmakers are used to fund a small portion of our research and development expenses. In providing these research and development services to these manufacturers, we try to make
contractually clear who owns the intellectual property that results from the research and development services we perform. However, disputes over the ownership or rights to use or market this
intellectual property may arise between the funding organizations and us. Any dispute over ownership of the intellectual property we develop could restrict our ability to market our products and have
a material adverse effect on our business.

We may be subject to patent litigation to enforce patents issued to us or defend ourselves against claimed infringement by our competitor or any other third party.

Third parties have notified us in the past, and may notify us in the future, that we are infringing their intellectual property rights. Also, we have notified
third parties in the past, and may notify them in the future, that they may be infringing our intellectual property rights.

Specifically,
Komatsu notified us in 1996 that we may be infringing some of its Japanese patents. During our subsequent discussions, Komatsu also asserted that our former Japanese
manufacturing partner, Seiko, or we may be infringing on some of Komatsu's U.S. patents and a number of its
additional Japanese patents. Komatsu has also notified one of our customers, Nikon, of its belief that our light sources infringe several of Komatsu's Japanese and U.S. patents. As a result, we
started proceedings in the Japanese Patent Office to oppose certain patents and patent applications of Komatsu. The Japanese Patent Office has dismissed our opposition claims. Thus, litigation may
result in connection with Komatsu's Japanese patents or U.S. patents. Also, Komatsu might claim that we infringe other or additional patents. Komatsu notified Seiko that it intends to enforce its
rights against Seiko with respect to its Japanese patents if Seiko continued to engage in manufacturing activities for us. In connection with our former manufacturing agreement with Seiko, we agreed
to pay Seiko under certain conditions for damages associated with these types of claims. Seiko may not prevail in any litigation against Komatsu, and therefore, we may be required to pay Seiko for
such damages.

We
have notified our competitor and others of our U.S. patent portfolio. Specifically, we have notified Komatsu that it may be infringing some of our U.S. patents. We have discussed with
Komatsu our claims against each other. Komatsu challenged one of our U.S. patents in the United States Patent and Trademark Office ("USPTO") but our patent was subsequently re-issued by
the USPTO. Also, Komatsu transferred its lithography light source business to our competitor, Gigaphoton. We also have had discussions with a former competitor, Lambda-Physik (a subsidiary of
Coherent, Inc.), regarding allegations by each party against the other for possible patent infringement. Any of these discussions with our competitor or former competitor may not be successful
and litigation could result.

In
the future, patent litigation may result due to a claim of infringement by our competitor or any other third party or may be necessary to enforce patents issued to us. Any such
litigation could result in substantial cost to us and diversion of our effort, which would have an adverse effect on our business, financial condition and operating results. Furthermore, our customers
and the end-users of our products might assert other claims for indemnification that arise from infringement claims against them. If these assertions are successful, our business,
financial condition and operating results may be materially affected. Instead of litigation, or as a result thereof, we may seek a license from third parties to use their intellectual property.
However, we may not be able to obtain a license. Alternatively, we may design around the third party's intellectual property rights or we may challenge these claims in

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legal
proceedings. Any adverse determination in a legal proceeding could result in one or more of the following, any of which could harm our business, financial condition and operating results:



Any
of these actions could be costly and would divert the efforts and attention of our management and technical personnel, which would materially adversely affect our business, financial
condition and results of operations.

*We are exposed to foreign currency exchange rate fluctuations for all foreign currencies in which we do business and we may be adversely affected by these fluctuations or
declining economic conditions in the countries in which we operate.

We have international subsidiaries that operate in foreign currencies and sell our product in these foreign currencies. Although these subsidiary offices are
located in various countries in Asia and Europe, we currently only hedge these foreign currency exposures at our Japanese subsidiary since it accounts for the largest portion of our foreign
operations. When we sell products to our Japanese subsidiary, the sale is denominated in U.S. dollars. When our Japanese subsidiary sells our products directly to customers in Japan, the sale is
denominated in Japanese Yen. Thus, our results of operations may fluctuate based on the changing value of the Japanese Yen to the U.S. dollar. We manage the exposure of our Japanese subsidiary to
these fluctuations through forward contracts to hedge the subsidiary's purchase commitments. Although we enter into such forward contracts, they may not be adequate to eliminate the impact of our
exchange rate exposure.

We
will continue to monitor our exposure to foreign currency fluctuations in all countries in which we do business, and, when appropriate, use hedging transactions to minimize the effect
of these currency fluctuations. In the future, we may sell a more significant percentage of our products in foreign currencies other than the Japanese Yen or the currencies in which we do business may
become more volatile and the management of more currency fluctuations will be more difficult and expose us to greater risks in this area. Failure to sufficiently hedge or otherwise manage such foreign
currency risks properly could have a material adverse effect on our results of operations.

*Our investments in marketable securities are significant and are subject to market, interest and credit risk that may reduce their value.

We maintain a significant portfolio of investments in marketable securities, particularly in corporate and government fixed income securities and commercial
paper. Our earnings may be adversely affected by changes in the value of this portfolio. In particular, the value of our investments may be adversely affected by changes in interest rates, downgrades
in the corporate bonds included in the portfolio and by other factors which may result in other than temporary declines in the value of our investments. Each of these events may cause us to record
charges to reduce the carrying value of our investment portfolio.

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We may acquire a business or enter a new market that will involve numerous risks. We may not be able to address these risks successfully without substantial expense, delay or
other operational and financial challenges.

The risks involved with acquiring a new company, forming a joint venture, or entering a new market include the following:



Mergers,
acquisitions and joint ventures, as well as entry into new markets, are inherently subject to multiple significant risks, and the inability to effectively manage these risks
could have a material adverse effect on our business. In July 2005, we formed our TCZ joint venture with Zeiss to produce tools for the manufacture of flat panel displays. This is a new market for
both us and Zeiss and may involve numerous risks. Any of these risks could materially harm our business, financial condition and operating results. Further, any business that we acquire, any joint
venture that we form or new market we may enter may not achieve anticipated revenues or operating results.

We may experience difficulties with our enterprise resource planning ("ERP") system or other critical information systems that we use for the daily operations of our business.
System failure or malfunction or loss of data contained in these information systems may result in disruption of our operations and result in our inability to process transactions, and this could
adversely affect our financial results.

System failure or malfunction or loss of data which is housed in our critical information systems could disrupt our ability to timely and accurately process
transactions and produce key financial reports, including information on our results of operations, financial position and cash flows. Any disruptions or difficulties that may occur in connection with
our ERP system or other critical systems could also
adversely affect our ability to complete important business processes such as the evaluation of our internal controls and attestation activities pursuant to Section 404 of the Sarbanes-Oxley
Act of 2002. If we encounter unforeseen problems with regard to our ERP system or other critical information systems, our business could be adversely affected.

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*Compliance with changing regulations and standards for accounting, corporate governance and public disclosure may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations,
including accelerated SEC filing timelines and new Proxy rules, new NASDAQ Stock Market rules, and new accounting pronouncements are creating uncertainty and additional complexities for companies such
as ours. In particular, the Section 404 internal control evaluation requirements under the Sarbanes-Oxley Act have added complexity and costs to our business and require a significant
investment of our time and resources to complete each year. We take these requirements seriously and expect to continue to make every effort to ensure that we receive clean attestations on our
internal controls each year from our outside auditors, but there is no guarantee that our efforts to do so will be successful. To maintain high standards of corporate governance and public disclosure,
we intend to invest all reasonably necessary resources to comply with all other evolving standards. These investments may result in increased general and administrative expenses and a diversion of
management time and attention from strategic revenue generating and cost management activities.

*We are dependent on air transport to conduct our business and disruption of domestic and international air transport systems could adversely affect our business.

We depend on regular and reliable air transportation on a worldwide basis for many of our routine business functions. If civil aviation in the U.S. or abroad is
disrupted by terrorist activities or security responses to the threat of terrorism, regulatory compliance issues or for any other reason, our business could be adversely affected in the following
ways:



We are subject to many standards and regulations of foreign governments and, even though we intend to comply, we may not always be in compliance with these rules, or we may be
unable to design or redesign our products to comply with these rules.

Many foreign government standards and regulations apply to our products and these standards and regulations are frequently being amended. Although we intend to
meet all foreign standards and regulations, our products may not comply with all of them. Further, it might not be cost effective for us to redesign our products to comply with these foreign
government standards and regulations. Our inability to design products to fully comply with foreign standards therefore could have a material adverse effect on our business.

Our chipmaker customers' prolonged use of our products in high volume production may not produce the results they desire and, as a result, our reputation and that of our
customers who supply photolithography tools to the chipmakers could be damaged in the semiconductor industry.

Over time, our light source products may not meet our chipmaker customers' production specifications or operating cost requirements after the light source has
been used for a long period in high volume production. If any chipmaker cannot successfully achieve or sustain their volume production using our light sources, our reputation could be damaged with
them and with lithography tool manufacturers. This would have a negative impact on our business.

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Our operations are subject to environmental and other government regulations that may expose us to liabilities for noncompliance.

We are subject to federal, state and local regulations, such as regulations related to the environment, land use, public utility utilization and the fire code, in
connection with the storage, handling, discharge and disposal of substances that we use in our manufacturing process and in our facilities. We believe that our activities comply with current
government regulations that are applicable to our operations and current facilities. We may be required to purchase additional capital equipment or other requirements for our processes to comply with
these government regulations in the future if they change. Further, these government regulations may restrict us from expanding our operations. Adopting measures to comply with changes in the
government regulations, our failure to comply with environmental and land use regulations, or restrictions on our ability to discharge hazardous substances, could subject us to future liability or
cause our manufacturing operations to be reduced or stopped.

Our products are subject to potential product liability claims if personal injury or death results from their use.

We are exposed to significant risks for product liability claims if personal injury or death results from the use of our products. We may experience material
product liability losses in the future. We maintain insurance against product liability claims; however, our insurance coverage may not continue to be available on terms that are acceptable to us.
This insurance coverage also may not adequately cover liabilities that we incur. Further, if our products are defective, we may be required to recall or redesign these products. A successful claim
against us that exceeds our insurance coverage level, or any claim or product recall that results in adverse publicity against us, could have a material adverse effect on our business, financial
condition and results of operations.

Trademark infringement claims against our registered and unregistered trademarks would be expensive and we may have to stop using such trademarks and pay damages.

We have registered a number of trademarks including "CYMER" and "INSIST ON CYMER" in the U.S. and in some other countries. We are also trying to register
additional trademarks in the U.S. and in other countries. We use these trademarks and many other marks in our business and advertising materials, which are distributed throughout the world. We may be
subject to trademark infringement actions for using these marks and other marks on a worldwide basis which would be costly to defend. If an adverse trademark infringement action were successful, we
would have to stop using one or more of the marks and possibly pay damages.

The price of our common stock has fluctuated and may continue to fluctuate widely.

The price of our common stock has fluctuated in the past and will continue to be subject to significant fluctuations in the future in response to a variety of
factors, including the risk factors contained in this report.

Various
factors may significantly affect the market price of our common stock, including:



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In
addition, the stock market has experienced extreme price and volume fluctuations that have particularly affected the market price for many high technology companies. Such fluctuations
have in some cases been unrelated to the operating performance of these companies. Severe price fluctuations in a company's stock have frequently been followed by securities litigation. Any such
litigation can result in substantial costs and a diversion of management's attention and resources and therefore could have a material adverse effect on our business, financial condition and results
of operations.

ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3.    Defaults Upon Senior Securities

None.

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

None.

ITEM 5.    Other Information



ITEM 6.    Exhibits



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report on Form 10-Q to be
signed on its behalf by the undersigned thereunto duly authorized.

|                  |  | CYMER, INC.                                                                                                               
|----------------- |  | --------------------------------------------------------------------------------------------------------------------------
|Date: May 6, 2008 |  | By:                                                                                                                       
|                  |  | Nancy J. Baker
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)

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