##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended March 31, 2010

OR



| |  ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ----------------------------------------------------------------------------------------

For the transition period from
                     to

Commission file number 0-21321

CYMER, INC.

(Exact name of registrant as specified in its charter)

|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Nevada                                                         |  | 33-0175463                       
|(State or other jurisdiction of
incorporation or organization) |  | (IRS Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|17075 Thornmint Court, San Diego, CA     |  | 92127     
|(Address of principal executive offices) |  | (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. Yes
x  No  ̈

Indicate by
check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ̈  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 definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



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

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

The total number of shares of Common Stock, with $0.001 par value, outstanding on April 23, 2010 was 30,086,577.









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##### Table of Contents

CYMER, INC.

FORM 10-Q

Three Months Ended March 31, 2010

INDEX



|           |  |                                                                                              |  |     
|---------- |  | -------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                              |  | Page
|           |  |                                                                                             
|PART 1.    |  | FINANCIAL INFORMATION                                                                        |  |     
|           |  |                                                                                             
|ITEM 1.    |  | Financial Statements (unaudited)                                                             |  | 3   
|           |  |                                                                                             
|           |  | Consolidated Balance Sheets - March 31, 2010 and December 31, 2009                           |  | 3   
|           |  |                                                                                             
|           |  | Consolidated Statements of Operations - Three Months Ended March 31, 2010 and 2009           |  | 4   
|           |  |                                                                                             
|           |  | Consolidated Statements of Comprehensive Income  Three Months Ended March 31, 2010 and 2009 |  | 5   
|           |  |                                                                                             
|           |  | Consolidated Statements of Equity - Three Months Ended March 31, 2010                        |  | 6   
|           |  |                                                                                             
|           |  | Consolidated Statements of Cash Flows - Three Months Ended March 31, 2010
and 2009           |  | 7   
|           |  |                                                                                             
|           |  | Notes to Unaudited Consolidated Financial Statements                                         |  | 8   
|           |  |                                                                                             
|ITEM 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations        |  | 19  
|           |  |                                                                                             
|ITEM 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                   |  | 25  
|           |  |                                                                                             
|ITEM 4.    |  | Controls and Procedures                                                                      |  | 26  
|           |  |                                                                                             
|PART II.   |  | OTHER INFORMATION                                                                            |  |     
|           |  |                                                                                             
|ITEM 1.    |  | Legal Proceedings                                                                            |  | 27  
|           |  |                                                                                             
|ITEM 1A.   |  | Risk Factors                                                                                 |  | 27  
|           |  |                                                                                             
|ITEM 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                  |  | 39  
|           |  |                                                                                             
|ITEM 3.    |  | Defaults Upon Senior Securities                                                              |  | 40  
|           |  |                                                                                             
|ITEM 5.    |  | Other Information                                                                            |  | 40  
|           |  |                                                                                             
|ITEM 6.    |  | Exhibits                                                                                     |  | 40  
|           | 
|SIGNATURES |  | 41                                                                                          



2



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##### Table of Contents

ITEM 1. Financial Statements

CYMER, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)



|                                                                                                                                                                                                                             |  |               |           |                  |   |          
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | ---------------- | - | ---------
|                                                                                                                                                                                                                             |  | March 31,2010 |           | December 31,2009
|ASSETS                                                                                                                                                                                                                       |  |               |           |                  |   |          
|                                                                                                                                                                                                                             |  |              
|Current assets:                                                                                                                                                                                                              |  |               |           |                  |   |          
|Cash and cash equivalents                                                                                                                                                                                                    |  | $             | 116,919   |                  | $ | 118,381  
|Restricted cash                                                                                                                                                                                                              |  |               | 2,261     |                  |   | 1,200    
|Short-term investments                                                                                                                                                                                                       |  |               | 52,332    |                  |   | 62,895   
|Accounts receivable - net of allowance for doubtful accounts of $1,663 and $2,297, respectively                                                                                                                              |  |               | 101,367   |                  |   | 76,792   
|Accounts receivable - related party                                                                                                                                                                                          |  |               | -         |                  |   | 732      
|Inventories                                                                                                                                                                                                                  |  |               | 188,561   |                  |   | 185,077  
|Deferred and prepaid income taxes                                                                                                                                                                                            |  |               | 49,935    |                  |   | 45,689   
|Prepaid expenses and other assets                                                                                                                                                                                            |  |               | 11,707    |                  |   | 12,121   
|                                                                                                                                                                                                                             |  |               |           |                  |   |          
|Total current assets                                                                                                                                                                                                         |  |               | 523,082   |                  |   | 502,887  
|                                                                                                                                                                                                                             |  |              
|Property and equipment - net of accumulated depreciation of $182,757 and $179,686, respectively                                                                                                                              |  |               | 106,333   |                  |   | 106,755  
|Long-term investments                                                                                                                                                                                                        |  |               | -         |                  |   | 5,167    
|Deferred income taxes                                                                                                                                                                                                        |  |               | 27,762    |                  |   | 26,998   
|Goodwill                                                                                                                                                                                                                     |  |               | 8,833     |                  |   | 8,833    
|Intangible assets - net of accumulated amortization of $18,976 and $18,806, respectively                                                                                                                                     |  |               | 8,156     |                  |   | 8,327    
|Other assets                                                                                                                                                                                                                 |  |               | 5,679     |                  |   | 5,951    
|                                                                                                                                                                                                                             |  |               |           |                  |   |          
|Total assets                                                                                                                                                                                                                 |  | $             | 679,845   |                  | $ | 664,918  
|                                                                                                                                                                                                                             |  |               |           |                  |   |          
|                                                                                                                                                                                                                             |  |              
|LIABILITIES                                                                                                                                                                                                                  |  |               |           |                  |   |          
|                                                                                                                                                                                                                             |  |              
|Current liabilities:                                                                                                                                                                                                         |  |               |           |                  |   |          
|Accounts payable                                                                                                                                                                                                             |  | $             | 31,023    |                  | $ | 21,756   
|Accounts payable - related party                                                                                                                                                                                             |  |               | -         |                  |   | 9,284    
|Accrued warranty                                                                                                                                                                                                             |  |               | 16,240    |                  |   | 16,640   
|Accrued payroll and benefits                                                                                                                                                                                                 |  |               | 14,068    |                  |   | 16,434   
|Deferred and accrued income taxes                                                                                                                                                                                            |  |               | 10,632    |                  |   | 12,363   
|Deferred revenue                                                                                                                                                                                                             |  |               | 21,997    |                  |   | 22,339   
|Accrued and other current liabilities                                                                                                                                                                                        |  |               | 8,979     |                  |   | 4,807    
|                                                                                                                                                                                                                             |  |               |           |                  |   |          
|Total current liabilities                                                                                                                                                                                                    |  |               | 102,939   |                  |   | 103,623  
|                                                                                                                                                                                                                             |  |              
|Accrued income taxes                                                                                                                                                                                                         |  |               | 10,414    |                  |   | 11,562   
|Deferred revenue                                                                                                                                                                                                             |  |               | 837       |                  |   | 525      
|Other liabilities                                                                                                                                                                                                            |  |               | 7,009     |                  |   | 7,570    
|                                                                                                                                                                                                                             |  |               |           |                  |   |          
|Total liabilities                                                                                                                                                                                                            |  | $             | 121,199   |                  | $ | 123,280  
|                                                                                                                                                                                                                             |  |               |           |                  |   |          
|                                                                                                                                                                                                                             |  |              
|Commitments and contingencies - Note 9                                                                                                                                                                                       |  |               |           |                  |   |          
|Subsequent events - Note 12                                                                                                                                                                                                  |  |               |           |                  |   |          
|                                                                                                                                                                                                                             |  |              
|EQUITY                                                                                                                                                                                                                       |  |               |           |                  |   |          
|Cymer, Inc. stockholders equity:                                                                                                                                                                                            |  |               |           |                  |   |          
|Preferred stock - authorized 5,000,000 shares; $.001 par value; no shares issued or outstanding                                                                                                                              |  |               | -         |                  |   | -        
|Common stock - authorized 100,000,000 shares; $.001 par value; 42,950,000 shares issued and 30,052,000 shares outstanding at
March 31, 2010; 42,751,000 shares issued and 29,899,000 shares outstanding at December 31, 2009 |  |               | 43        |                  |   | 43       
|Additional paid-in capital                                                                                                                                                                                                   |  |               | 602,579   |                  |   | 598,314  
|Treasury stock at cost (12,852,000 common shares at March 31, 2010 and December 31, 2009)                                                                                                                                    |  |               | (473,580) |                  |   | (473,580)
|Accumulated other comprehensive loss                                                                                                                                                                                         |  |               | (9,151)   |                  |   | (8,280)  
|Retained earnings                                                                                                                                                                                                            |  |               | 438,755   |                  |   | 422,750  
|                                                                                                                                                                                                                             |  |               |           |                  |   |          
|Total Cymer, Inc. stockholders equity                                                                                                                                                                                       |  |               | 558,646   |                  |   | 539,247  
|Noncontrolling interest                                                                                                                                                                                                      |  |               | -         |                  |   | 2,391    
|                                                                                                                                                                                                                             |  |               |           |                  |   |          
|Total equity                                                                                                                                                                                                                 |  |               | 558,646   |                  |   | 541,638  
|                                                                                                                                                                                                                             |  |               |           |                  |   |          
|Total liabilities and equity                                                                                                                                                                                                 |  | $             | 679,845   |                  | $ | 664,918  
|                                                                                                                                                                                                                             |  |               |           |                  |   |          

See Notes to Unaudited Consolidated Financial
Statements.



3



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CYMER, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



|                                                               |  |                             |         |      |   |         
|-------------------------------------------------------------- |  | --------------------------- | ------- | ---- | - | --------
|                                                               |  | Three Months EndedMarch 31,
|                                                               |  | 2010                        |         | 2009
|Revenues:                                                      |  |                             |         |      |   |         
|Product sales                                                  |  | $                           | 113,781 |      | $ | 56,295  
|Product sales - related party                                  |  |                             | -       |      |   | 204     
|                                                               |  |                             |         |      |   |         
|Total revenues                                                 |  |                             | 113,781 |      |   | 56,499  
|                                                               |  |                             |         |      |   |         
|                                                               |  |                            
|Cost of revenues                                               |  |                             | 56,965  |      |   | 34,958  
|                                                               |  |                             |         |      |   |         
|                                                               |  |                            
|Gross profit                                                   |  |                             | 56,816  |      |   | 21,541  
|                                                               |  |                             |         |      |   |         
|                                                               |  |                            
|Operating Expenses:                                            |  |                             |         |      |   |         
|Research and development                                       |  |                             | 19,885  |      |   | 18,443  
|Sales and marketing                                            |  |                             | 5,134   |      |   | 3,963   
|General and administrative                                     |  |                             | 9,211   |      |   | 7,244   
|Restructuring                                                  |  |                             | -       |      |   | 8,407   
|                                                               |  |                             |         |      |   |         
|                                                               |  |                            
|Total operating expenses                                       |  |                             | 34,230  |      |   | 38,057  
|                                                               |  |                             |         |      |   |         
|                                                               |  |                            
|Operating income (loss)                                        |  |                             | 22,586  |      |   | (16,516)
|                                                               |  |                             |         |      |   |         
|                                                               |  |                            
|Other income (expense):                                        |  |                             |         |      |   |         
|Foreign currency exchange gain (loss)                          |  |                             | 104     |      |   | (1,933) 
|Interest and other income                                      |  |                             | 140     |      |   | 603     
|Interest and other expense                                     |  |                             | (177)   |      |   | (763)   
|                                                               |  |                             |         |      |   |         
|                                                               |  |                            
|Total other income (expense) - net                             |  |                             | 67      |      |   | (2,093) 
|                                                               |  |                             |         |      |   |         
|                                                               |  |                            
|Income (loss) before income tax expense (benefit)              |  |                             | 22,653  |      |   | (18,609)
|                                                               |  |                            
|Income tax expense (benefit)                                   |  |                             | 6,796   |      |   | (6,513) 
|                                                               |  |                             |         |      |   |         
|                                                               |  |                            
|Net income (loss)                                              |  | $                           | 15,857  |      | $ | (12,096)
|                                                               |  |                             |         |      |   |         
|Net loss attributable to noncontrolling interest in subsidiary |  |                             | 148     |      |   | 609     
|                                                               |  |                             |         |      |   |         
|                                                               |  |                            
|Net income (loss) attributable to Cymer, Inc.                  |  | $                           | 16,005  |      | $ | (11,487)
|                                                               |  |                             |         |      |   |         
|                                                               |  |                            
|Earnings per share:                                            |  |                             |         |      |   |         
|Basic earnings (loss) per share                                |  | $                           | 0.53    |      | $ | (0.39)  
|                                                               |  |                             |         |      |   |         
|                                                               |  |                            
|Weighted average common shares outstanding - basic             |  |                             | 29,997  |      |   | 29,640  
|                                                               |  |                             |         |      |   |         
|Diluted earnings (loss) per share                              |  | $                           | 0.53    |      | $ | (0.39)  
|                                                               |  |                             |         |      |   |         
|Weighted average common shares outstanding - diluted           |  |                             | 30,325  |      |   | 29,640  
|                                                               |  |                             |         |      |   |         

See Notes to Unaudited Consolidated Financial
Statements.



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CYMER, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)



|                                                                                                           |  |                              |        |      |   |         
|---------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | ---- | - | --------
|                                                                                                           |  | Three Months EndedMarch 
31,
|                                                                                                           |  | 2010                         |        | 2009
|Net income (loss)                                                                                          |  | $                            | 15,857 |      | $ | (12,096)
|Other comprehensive income (loss)                                                                          |  |                              |        |      |   |         
|Foreign currency translation adjustments                                                                   |  |                              | (888)  |      |   | (6,150) 
|Unrealized losses) on available-for-sale investments, net of income tax benefit of $15 and $29             |  |                              | (23)   |      |   | (48)    
|Unrealized gains on foreign currency forward exchange contracts, net of income tax expense of $27 and $164 |  |                              | 40     |      |   | 241     
|Unrealized pension gains                                                                                   |  |                              | -      |      |   | 8       
|                                                                                                           |  |                              |        |      |   |         
|Total other comprehensive loss                                                                             |  |                              | (871)  |      |   | (5,949) 
|                                                                                                           |  |                              |        |      |   |         
|Comprehensive income (loss)                                                                                |  | $                            | 14,986 |      | $ | (18,045)
|Comprehensive loss attributable to noncontrolling interest in subsidiary                                   |  |                              | 148    |      |   | 609     
|                                                                                                           |  |                              |        |      |   |         
|Comprehensive income (loss) attributable to Cymer, Inc.                                                    |  | $                            | 15,134 |      | $ | (17,436)
|                                                                                                           |  |                              |        |      |   |         

See Notes to Unaudited Consolidated Financial
Statements.



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CYMER, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(in thousands)

(unaudited)



|                                                              |  |              |  |        |                |                           |        |         |                  |          |   |  |                        |                                            |       |  |   |         |   |  |   |         |  |   |         |  |   |         |  |   |        
|------------------------------------------------------------- |  | ------------ |  | ------ | -------------- | ------------------------- | ------ | ------- | ---------------- | -------- | - |  | ---------------------- | ------------------------------------------ | ----- |  | - | ------- | - |  | - | ------- |  | - | ------- |  | - | ------- |  | - | -------
|                                                              |  |              |  |        |                |                           |        |         |                  |          |   |  |                        | AccumulatedOtherComprehensiveIncome (loss) |       |  |   |         |   |  |   |         | 
|                                                              |  |              |  |        |                | AdditionalPaid-in
Capital |        |         |                  |          |   |  |                        |                                            |       |  |   |        
|                                                              |  | Common Stock |  |        | Treasury Stock |                           |        |         | RetainedEarnings |          |   |  | NoncontrollingInterest |                                            |      
|                                                              |  | Shares       |  | Amount |                |                           | Shares |         |                  | Amount   |   |  |                        |                                            | Total |  |   | Total  
|BALANCE, DECEMBER 31, 2009                                    |  | 42,751       |  | $      | 43             |                           | $      | 598,314 |                  | (12,852  | ) |  | $                      | (473,580                                   | )     |  | $ | (8,280  | ) |  | $ | 422,750 |  | $ | 539,247 |  | $ | 2,391   |  | $ | 541,638
|                                                              |  |              |  |        |                |                           |        |         |                  |          |   |  |                        |                                            |       |  |   |         |   |  |   |         |  |   |         |  |   |         |  |   |        
|Exercise of common stock options                              |  | 48           |  |        | -              |                           |        | 1,430   |                  | -        |   |  |                        | -                                          |       |  |   | -       |   |  |   | -       |  |   | 1,430   |  |   | -       |  |   | 1,430  
|Issuance of restricted stock awards                           |  | 105          |  |        | -              |                           |        | -       |                  | -        |   |  |                        | -                                          |       |  |   | -       |   |  |   | -       |  |   | -       |  |   | -       |  |   | -      
|Employee stock-based compensation                             |  | -            |  |        | -              |                           |        | 2,304   |                  | -        |   |  |                        | -                                          |       |  |   | -       |   |  |   | -       |  |   | 2,304   |  |   | -       |  |   | 2,304  
|Income tax windfall from stock option exercises               |  | -            |  |        | -              |                           |        | 474     |                  | -        |   |  |                        | -                                          |       |  |   | -       |   |  |   | -       |  |   | 474     |  |   | -       |  |   | 474    
|Acquisition of noncontrolling interest in subsidiary          |  | -            |  |        | -              |                           |        | 57      |                  | -        |   |  |                        | -                                          |       |  |   | -       |   |  |   | -       |  |   | 57      |  |   | (2,391) |  |   | (2,334)
|Net income                                                    |  | -            |  |        | -              |                           |        | -       |                  | -        |   |  |                        | -                                          |       |  |   | -       |   |  |   | 16,005  |  |   | 16,005  |  |   | -       |  |   | 16,005 
|Other comprehensive income:                                   |  | -            |  |        | -              |                           |        | -       |                  | -        |   |  |                        | -                                          |       |  |   | -       |   |  |   | -       |  |   | -       |  |   | -       |  |   | -      
|Translation adjustment                                        |  | -            |  |        | -              |                           |        | -       |                  | -        |   |  |                        | -                                          |       |  |   | (888)   |   |  |   | -       |  |   | (888)   |  |   | -       |  |   | (888)  
|Unrealized loss on available-for-sale investments, net of tax |  | -            |  |        | -              |                           |        | -       |                  | -        |   |  |                        | -                                          |       |  |   | (23)    |   |  |   | -       |  |   | (23)    |  |   | -       |  |   | (23)   
|Unrealized loss on forward exchange contracts, net of tax     |  | -            |  |        | -              |                           |        | -       |                  | -        |   |  |                        | -                                          |       |  |   | 40      |   |  |   | -       |  |   | 40      |  |   | -       |  |   | 40     
|BALANCE, MARCH 31, 2010                                       |  | 42,904       |  | $      | 43             |                           | $      | 602,579 |                  | (12,852) |   |  | $                      | (473,580)                                  |       |  | $ | (9,151) |   |  | $ | 438,755 |  | $ | 558,646 |  | $ | -       |  | $ | 558,646
|                                                              |  |              |  |        |                |                           |        |         |                  |          |   |  |                        |                                            |       |  |   |         |   |  |   |         |  |   |         |  |   |         |  |   |        

See Notes to Unaudited Consolidated Financial Statement



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CYMER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                     |  |                             |          |      |   |          
|------------------------------------------------------------------------------------ |  | --------------------------- | -------- | ---- | - | ---------
|                                                                                     |  | Three Months EndedMarch 31,
|                                                                                     |  | 2010                        |          | 2009
|Operating activities:                                                                |  |                             |          |      |   |          
|Net income (loss)                                                                    |  | $                           | 15,857   |      | $ | (12,096) 
|Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |                             |          |      |   |          
|Depreciation and amortization                                                        |  |                             | 4,988    |      |   | 6,180    
|Stock-based compensation                                                             |  |                             | 2,304    |      |   | 837      
|Bad debt expense                                                                     |  |                             | (412)    |      |   | 1,049    
|Excess tax benefits from stock option exercises                                      |  |                             | (502)    |      |   | (5)      
|Provision for deferred income taxes                                                  |  |                             | (4,585)  |      |   | 1,155    
|Loss on disposal and impairment of property and equipment                            |  |                             | 61       |      |   | 583      
|Change in assets and liabilities:                                                    |  |                             |          |      |   |          
|Restricted cash                                                                      |  |                             | (1,061)  |      |   | -        
|Accounts receivable                                                                  |  |                             | (23,907) |      |   | 12,393   
|Accounts receivable  related party                                                  |  |                             | 732      |      |   | 214      
|Inventories                                                                          |  |                             | (3,518)  |      |   | 10,642   
|Prepaid expenses and other assets                                                    |  |                             | 662      |      |   | 1,808    
|Income taxes receivable                                                              |  |                             |         |      |   | (11,707) 
|Accounts payable                                                                     |  |                             | 11,119   |      |   | (6,932)  
|Accounts payable  related party                                                     |  |                             | (9,284)  |      |   | (846)    
|Accrued expenses and other liabilities                                               |  |                             | (550)    |      |   | (10,277) 
|Deferred revenue                                                                     |  |                             | (30)     |      |   | (598)    
|Income taxes payable and accrued income taxes                                        |  |                             | (2,919)  |      |   | (1,511)  
|                                                                                     |  |                             |          |      |   |          
|Net cash used in operating activities                                                |  |                             | (11,045) |      |   | (9,111)  
|                                                                                     |  |                             |          |      |   |          
|Investing activities:                                                                |  |                             |          |      |   |          
|Acquisition of property and equipment                                                |  |                             | (6,737)  |      |   | (1,002)  
|Purchases of investments                                                             |  |                             | (7,697)  |      |   | (1,517)  
|Proceeds from sold or matured investments                                            |  |                             | 23,389   |      |   | 13,605   
|                                                                                     |  |                             |          |      |   |          
|Net cash provided by investing activities                                            |  |                             | 8,955    |      |   | 11,086   
|                                                                                     |  |                             |          |      |   |          
|Financing activities:                                                                |  |                             |          |      |   |          
|Proceeds from issuance of common stock                                               |  |                             | 942      |      |   | 296      
|Purchase of noncontrolling interest                                                  |  |                             | (728)    |      |   | -        
|Repayment of convertible subordinated notes                                          |  |                             | -        |      |   | (140,722)
|Excess tax benefit from stock option exercises                                       |  |                             | 502      |      |   | 5        
|                                                                                     |  |                             |          |      |   |          
|Net cash provided by (used in) financing activities                                  |  |                             | 716      |      |   | (140,421)
|                                                                                     |  |                             |          |      |   |          
|Effect of exchange rate changes on cash and cash equivalents                         |  |                             | (88)     |      |   | (2,830)  
|                                                                                     |  |                             |          |      |   |          
|Net decrease in cash and cash equivalents                                            |  |                             | (1,462)  |      |   | (141,276)
|Cash and cash equivalents at beginning of the period                                 |  |                             | 118,381  |      |   | 252,391  
|                                                                                     |  |                             |          |      |   |          
|Cash and cash equivalents at end of the period                                       |  | $                           | 116,919  |      | $ | 111,115  
|                                                                                     |  |                             |          |      |   |          
|Supplemental disclosure of cash flow information:                                    |  |                             |          |      |   |          
|Interest paid                                                                        |  | $                           | 59       |      | $ | 2,568    
|                                                                                     |  |                             |          |      |   |          
|Income taxes paid                                                                    |  | $                           | 10,992   |      | $ | 5,381    
|                                                                                     |  |                             |          |      |   |          

See Notes to Unaudited Consolidated Financial
Statements.



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CYMER, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended March 31, 2010

1. BASIS OF PRESENTATION

Nature of Operations

Cymer, Inc., together with its wholly-owned subsidiaries, is engaged primarily in the development, manufacturing and marketing of
excimer light sources for sale to customers who manufacture photolithography tools in the semiconductor equipment industry. We sell replacement parts and support to our lithography tool manufacturer customers as well as directly to our chipmaker
customers. Through our TCZ reporting segment, we are developing and will integrate, market, sell, and support laser crystallization systems used in the manufacture of organic light emitting diode (OLED) flat panel displays. References to
Cymer, the Company, we, us, our and other similar words refer to Cymer, Inc. and its consolidated subsidiaries, unless the context suggests otherwise.

We manufacture our products primarily at our San Diego headquarters, and we also conduct refurbishment manufacturing activities for
replacement parts at our subsidiary office located in Korea. We sell our products to customers primarily in the United States, Europe, Japan, Taiwan, Korea and other Asian countries. We provide customer support from our San Diego headquarters, and
from our field offices located throughout the United States, Europe, Japan, Korea, Singapore, China, and Taiwan.

Unaudited
Interim Financial Statements

The accompanying unaudited consolidated financial information has been prepared by Cymer,
without audit, in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. The unaudited consolidated balance sheet at December 31, 2009 was derived from the audited consolidated 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 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 consolidated financial statements and notes
hereto should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009. 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 year ending December 31, 2010.

Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of Cymer and the financial position and results of
operations of TCZ. On January 15, 2010, we purchased the remaining 40% ownership interest in TCZ, which increased our ownership in TCZ from 60% to 100% for cash consideration of $2.2 million which approximates the carrying value of the net
assets. Prior to January 15, 2010 we reflected the noncontrolling interest of TCZ in our unaudited consolidated financial statements with any earnings or losses distributed in accordance with the respective percentage interests of the joint
owners. The acquisition resulted in an increase in our additional paid-in capital of $57,000. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The unaudited 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 unaudited
consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates.

Recently Issued Accounting Standards

In January 2010, the Financial Accounting Standards Board (FASB) issued guidance to require additional disclosures for fair
value measurements including the following: (1) amounts transferred in and out of Level 1 and 2 fair value measurements, which is effective for interim and annual reporting periods beginning after December 15, 2009 (Part I),
and (2) activities in Level 3 fair value measurements including purchases, sales, issuances, and settlements, which is effective for interim and annual reporting periods beginning after December 15, 2010 (Part II). We adopted
Part I of the revised guidance for fair value measurements disclosures on January 1, 2010, which did not have a significant effect on our unaudited consolidated financial statements.



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In January 2010, the FASB issued additional guidance to clarify the scope of the decrease in
ownership provisions in the existing guidance for consolidation. The new guidance is effective in the first annual or interim reporting period ending on or after December 15, 2009 for an entity that previously adopted the FASB authoritative
guidance for consolidations. We adopted the guidance as of January 1, 2010 which did not have a significant effect on our unaudited consolidated financial statements.

2. INVENTORIES

Inventories consisted of the following (in thousands):



|                 |  |               |         |                  |   |        
|---------------- |  | ------------- | ------- | ---------------- | - | -------
|                 |  | March 31,2010 |         | December 31,2009
|Raw materials    |  | $             | 61,814  |                  | $ | 59,189 
|Work-in-progress |  |               | 51,989  |                  |   | 41,014 
|Finished goods   |  |               | 74,758  |                  |   | 84,874 
|                 |  |               |         |                  |   |        
|                 |  | $             | 188,561 |                  | $ | 185,077
|                 |  |               |         |                  |   |        

3. FAIR VALUE MEASUREMENTS

Per the authoritative guidance for fair value instruments, assets and liabilities recorded at fair value in our unaudited 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 the authoritative guidance for fair value instruments are as follows:



|        |  |   |  |                                                                                                                                                                                                             
|------- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1 |  |  |  | Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.                                                                                         
|Level 2 |  |  |  | Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly at the measurement
date.                                              
|Level 3 |  |  |  | Inputs are unobservable for the asset or liability and usually reflect the reporting entitys best estimate of what market participants would use in pricing the asset or
liability at the measurement date.

Financial Assets and Liabilities

We analyze our financial assets and liabilities measured at fair value and categorize them within the fair value hierarchy based on the
level of judgment associated with the inputs used to measure their fair value in accordance with the authoritative guidance for fair value instruments and the fair value option for financial assets and financial liabilities.

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.

Preferred Stock. We hold preferred stock which is valued at zero, as we believe it is unlikely we will receive any future cash
flow from this preferred stock.

Derivative Instruments. Our foreign currency forward exchange contracts are
valued using an income approach which includes observable Level 2 market inputs at the measurement date and uses a standard valuation technique to convert future foreign currency amounts to a single discounted present amount assuming
participants are motivated, but not compelled, to transact. Level 2 inputs are limited to quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability. Key
inputs in this discounted calculation include spot currency exchange rates at the measurement date, interest rates, and credit default swap rates at standard quoted intervals. Credit default swaps on us are not available, so we



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estimated our credit risk premium based on a financing arrangement that was offered to us during the three month period ended March 31, 2010 by a third party. The principal market in which
we execute our foreign currency forward exchange contracts is the retail market. Mid market pricing is used as a practical expedient for fair value measurements. 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.

We did not
have any transfers in or transfers out of Level 1 or Level 2 fair value measurements during the three months ended March 31, 2010. Our financial assets and financial liabilities measured at fair value on a recurring basis are as follows (in
thousands):



|                                                  |  |    |   |  |                   |         |                                                  |   |         |  |         |        |  |   |  
|------------------------------------------------- |  | -- | - |  | ----------------- | ------- | ------------------------------------------------ | - | ------- |  | ------- | ------ |  | - | -
|                                                  |  |    |   |  | March 31, 2010    |         | Fair Value Measurements 
atReporting Date Using:
|                                                  |  |    |   |  |                   |         | Level 1                                          |   | Level 2 |  | Level 3
|Assets:                                           |  |    |   |  |                   |         |                                                  |   |         |  |         |        |  |   |  
|Investment securities:                            |  |    |   |  |                   |         |                                                  |   |         |  |         |        |  |   |  
|Cash and cash equivalents                         |  |    |   |  | $                 | 116,919 |                                                  | $ | 116,919 |  | $       | -      |  | $ | -
|Restricted cash                                   |  |    |   |  |                   | 2,261   |                                                  |   | 2,261   |  |         | -      |  |   | -
|Short-term investments:                           |  |    |   |  |                   |         |                                                  |   |         |  |         |        |  |   |  
|U.S. government securities                        |  |    |   |  |                   | 34,877  |                                                  |   | -       |  |         | 34,877 |  |   | -
|Corporate debt securities                         |  |    |   |  |                   | 17,455  |                                                  |   | -       |  |         | 17,455 |  |   | -
|Foreign currency forward exchange contracts       |  | (1 | ) |  |                   | 447     |                                                  |   | -       |  |         | 447    |  |   | -
|                                                  |  |    |   |  |                   |         |                                                  |   |         |  |         |        |  |   |  
|Total assets                                      |  |    |   |  | $                 | 171,959 |                                                  | $ | 119,180 |  | $       | 52,779 |  | $ | -
|                                                  |  |    |   |  |                   |         |                                                  |   |         |  |         |        |  |   |  
|Liabilities:                                      |  |    |   |  |                   |         |                                                  |   |         |  |         |        |  |   |  
|Foreign currency forward exchange contracts       |  | (2 | ) |  | $                 | 363     |                                                  | $ | -       |  | $       | 363    |  | $ | -
|                                                  |  |    |   |  |                   |         |                                                  |   |         |  |         |        |  |   |  
|Total liabilities                                 |  |    |   |  | $                 | 363     |                                                  | $ | -       |  | $       | 363    |  | $ | -
|                                                  |  |    |   |  |                   |         |                                                  |   |         |  |         |        |  |   |  
|                                                  |  |    |  
|                                                  |  |    |   |  | December 31, 2009 |         | Fair Value Measurements 
atReporting Date Using:
|                                                  |  |    |   |  |                   |         | Level 1                                          |   | Level 2 |  | Level 3
|Assets:                                           |  |    |   |  |                   |         |                                                  |   |         |  |         |        |  |   |  
|Investment securities:                            |  |    |   |  |                   |         |                                                  |   |         |  |         |        |  |   |  
|Cash and cash equivalents                         |  |    |   |  | $                 | 118,381 |                                                  | $ | 112,751 |  | $       | 5,630  |  | $ | -
|Restricted cash                                   |  |    |   |  |                   | 1,200   |                                                  |   | 1,200   |  |         | -      |  |   | -
|Short-term investments:                           |  |    |   |  |                   |         |                                                  |   |         |  |         |        |  |   |  
|U.S. government securities                        |  |    |   |  |                   | 32,430  |                                                  |   | -       |  |         | 32,430 |  |   | -
|Corporate debt securities                         |  |    |   |  |                   | 30,465  |                                                  |   | -       |  |         | 30,465 |  |   | -
|Long-term investments - Corporate debt securities |  |    |   |  |                   | 5,167   |                                                  |   | -       |  |         | 5,167  |  |   | -
|Foreign currency forward exchange contracts       |  | (1 | ) |  |                   | 208     |                                                  |   | -       |  |         | 208    |  |   | -
|                                                  |  |    |   |  |                   |         |                                                  |   |         |  |         |        |  |   |  
|Total assets                                      |  |    |   |  | $                 | 187,851 |                                                  | $ | 113,951 |  | $       | 73,900 |  | $ | -
|                                                  |  |    |   |  |                   |         |                                                  |   |         |  |         |        |  |   |  
|Liabilities:                                      |  |    |   |  |                   |         |                                                  |   |         |  |         |        |  |   |  
|Foreign currency forward exchange contracts       |  | (2 | ) |  | $                 | 182     |                                                  | $ | -       |  | $       | 182    |  | $ | -
|                                                  |  |    |   |  |                   |         |                                                  |   |         |  |         |        |  |   |  
|Total liabilities                                 |  |    |   |  | $                 | 182     |                                                  | $ | -       |  | $       | 182    |  | $ | -
|                                                  |  |    |   |  |                   |         |                                                  |   |         |  |         |        |  |   |  



|(1) | Included in prepaid expenses and other assets on the accompanying unaudited consolidated balance sheets.
|--- | --------------------------------------------------------------------------------------------------------



|(2) | Included in accrued and other current liabilities on the accompanying unaudited consolidated balance sheets.
|--- | ------------------------------------------------------------------------------------------------------------

Non Financial Assets and Liabilities

We apply fair value techniques on a non-recurring basis associated with: (1) valuing potential impairment losses related to goodwill
which are accounted for pursuant to the authoritative guidance for intangiblesgoodwill and other; and (2) valuing potential impairment losses related to long-lived assets which are accounted for pursuant to the authoritative guidance for
property, plant and equipment.

We currently have two separate reporting units: (1) our primary business to design,
manufacture and sell excimer light source systems and installed base products for use in lithography systems used in the manufacture of semiconductors; and (2) TCZ, which is currently developing and producing a system for use in the manufacture
of OLED flat panel displays. We test for goodwill impairment



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at the reporting unit level. All of our goodwill is associated with our primary business unit, and we determine the fair value of this reporting unit based on a combination of inputs including
the market capitalization of the company, as well as Level 3 inputs such as discounted cash flows which are not observable from the market, directly or indirectly. We conduct our goodwill impairment analysis annually as of
November 30 each year, or upon the occurrence of certain triggering events. No such triggering events occurred during the three month period ended March 31, 2010. Historically, the fair value of our primary business reporting
unit has significantly exceeded its carrying value.

We test for the impairment of our long-lived assets when triggering
events occur and such impairment, if any, is measured at fair value. The inputs for fair value of our long lived assets would be based on Level 3 inputs as data used for such fair value calculations would be based on discounted cash flows which
are not observable from the market, directly or indirectly. During the three months ended March 31, 2010, there have been no triggering events associated with our long-lived assets; therefore, no impairment analysis was conducted during the
period.

4. INVESTMENTS

Investments at March 31, 2010 consisted of the following (in thousands):



|                                                                            |  |               |        |                      |   |                       |  |             |    |  |   |       
|--------------------------------------------------------------------------- |  | ------------- | ------ | -------------------- | - | --------------------- |  | ----------- | -- |  | - | ------
|                                                                            |  | AmortizedCost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | MarketValue
|Short-term:                                                                 |  |               |        |                      |   |                       |  |             |    |  |   |       
|Corporate debt securities                                                   |  | $             | 17,471 |                      | $ | -                     |  | $           | 16 |  | $ | 17,455
|U.S. government agencies                                                    |  |               | 34,869 |                      |   | 9                     |  |             | 1  |  |   | 34,877
|                                                                            |  |               |        |                      |   |                       |  |             |    |  |   |       
|Total                                                                       |  | $             | 52,340 |                      | $ | 9                     |  | $           | 17 |  | $ | 52,332
|                                                                            |  |               |        |                      |   |                       |  |             |    |  |   |       
|                                                                           
|Investments at December 31, 2009 consisted of the following (in thousands):
|                                                                            |  |               |        |                     
|                                                                            |  | AmortizedCost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | MarketValue
|Short-term:                                                                 |  |               |        |                      |   |                       |  |             |    |  |   |       
|Corporate debt securities                                                   |  | $             | 30,404 |                      | $ | 63                    |  | $           | 2  |  | $ | 30,465
|U.S. government agencies                                                    |  |               | 32,443 |                      |   | 1                     |  |             | 14 |  |   | 32,430
|                                                                            |  |               |        |                      |   |                       |  |             |    |  |   |       
|Total                                                                       |  | $             | 62,847 |                      | $ | 64                    |  | $           | 16 |  | $ | 62,895
|                                                                            |  |               |        |                      |   |                       |  |             |    |  |   |       
|Long-term:                                                                  |  |               |        |                      |   |                       |  |             |    |  |   |       
|Corporate debt securities                                                   |  | $             | 5,181  |                      | $ | -                     |  | $           | 14 |  | $ | 5,167 
|                                                                            |  |               |        |                      |   |                       |  |             |    |  |   |       
|Total                                                                       |  | $             | 5,181  |                      | $ | -                     |  | $           | 14 |  | $ | 5,167 
|                                                                            |  |               |        |                      |   |                       |  |             |    |  |   |       

As of March 31, 2010, the contractual maturities
of our investments were all less than one year and classified as short-term. We did not have any investments in individual securities that have been in a continuous unrealized loss position deemed to be temporary for more than 12 months at
March 31, 2010.

5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We conduct business in several currencies through our global operations and, as a result, are exposed to foreign currency risks
associated with our international subsidiary offices, particularly those located in Japan, Korea, the Netherlands and Taiwan. Our foreign currency risk falls into two primary categories.

First, our gross profit margins are subject to change when we sell our products in one currency and the product costs are denominated in
a different currency. To mitigate this risk, we enter into derivative financial instruments, principally forward contracts, which we designate as cash flow hedges to mitigate fluctuations in the gross profit margins of these forecasted transactions.
Designated hedging instruments qualify for cash flow hedge accounting treatment if certain criteria are met. For example, at the inception of the hedge, we must have formal documentation of the hedging relationship and our management objective and
strategy for undertaking the hedge, including identification of the hedging instrument, the hedged transaction, the nature of the risk being hedged, and how the hedging instruments effectiveness will be assessed. The hedging relationship must
be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the hedge. We record changes in the fair value of the



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effective portion of these hedges in accumulated other comprehensive income (loss), and subsequently reclassify the gain or loss to cost of revenues in the same period that the related sale is
made to the third party. Interest charges or forward points on our forward contracts are excluded from the assessment of hedge effectiveness and are recorded in cost of revenues in the unaudited consolidated statements of operations.

As mentioned above, gains and losses on cash flow hedges are recorded in accumulated other comprehensive income (loss) until
the hedged transaction is recorded in the unaudited consolidated financial statements. Once the underlying transaction is recorded in the unaudited consolidated financial statements, we de-designate the derivative, reclassify the accumulated gain or
loss on the derivative into cost of revenues and cease to apply hedge accounting treatment. Once the derivative has been de-designated, any further gains or losses are recorded to other income (expense). If all or a portion of the forecasted
transaction were cancelled, this would render all or a portion of the cash flow hedge ineffective, and we would reclassify the ineffective portion of the hedge into other income (expense). We generally do not experience ineffectiveness of our cash
flow hedges as a result of cancelled transactions, and the accompanying unaudited consolidated financial statements do not include such gains or losses.

The second category of foreign currency risk occurs when transactions are recorded in our unaudited consolidated financial statements in
a currency other than the applicable subsidiarys functional currency and the cash settlement of the transaction occurs at some point in the future. When transactions in non-functional currency are recorded to our unaudited consolidated
financial statements, changes in the recorded amounts resulting from fluctuations in the value of that currency are recorded to other income (expense). In order to mitigate these remeasurement gains and losses, we enter into derivative financial
instruments, principally forward contracts. The forward contracts that hedge these transactions that have been recorded to our unaudited consolidated financial statements are not designated as hedges and, therefore, we record changes in their fair
value to other income (expense). See Note 3, Fair Value Measurements for further discussion of our derivative instruments during the period ended March 31, 2010.

The derivatives that we enter into generally have maturity dates of no more than twelve months. We adjust the level and use of
derivatives as soon as practicable after learning that an exposure has changed, and we review all exposures and derivative positions on a regular basis.

At March 31, 2010, we had outstanding forward contracts to buy $16.1 million in exchange for Japanese Yen, $5.5 million in
exchange for Korean Won, $2.0 million in exchange for Taiwanese Dollars, and to sell $10.6 million in exchange for Euros. The fair value of all of our forward contracts totaled to an asset of $84,000 at March 31, 2010. The deferred gain, net of
tax, for those that qualified for hedge accounting treatment was $102,000 as of March 31, 2010. We expect that this unrealized gain will be reclassified from accumulated other comprehensive income into earnings at the then-current values over
the next twelve months as the underlying hedged transactions occur.

We do not enter into derivative instruments for
speculative purposes.

The fair value of derivative instruments in our unaudited consolidated balance sheet was as follows (in
thousands):



|                                                                            |                        |                                       |           |                   |                        |  |                                       |  |   |    
|--------------------------------------------------------------------------- | ---------------------- | ------------------------------------- | --------- | ----------------- | ---------------------- |  | ------------------------------------- |  | - | ---
|                                                                            |                        | Asset Derivatives                    
|                                                                            |                        | March 31, 2010                        |           | December 31, 2009
|                                                                            | Balance sheet
location |                                       | FairValue |                   | Balance sheet
location |  | FairValue                            
|Derivatives designated as hedging instrumentsForeign exchange contracts     |                        | Prepaid expenses and other assets     |           | $                 | 171                    |  | Prepaid expenses and other assets     |  | $ | 103
|                                                                            |                        |                                       |           |                   |                        |  |                                       |  |   |    
|Derivatives not designated as hedging instrumentsForeign exchange contracts |                        | Prepaid expenses and other assets     |           | $                 | 338                    |  | Prepaid expenses and other assets     |  | $ | 444
|                                                                            |                        |                                       |           |                   |                        |  |                                       |  |   |    
|Total derivatives                                                           |                        |                                       |           | $                 | 509                    |  |                                       |  | $ | 547
|                                                                            |                        |                                       |           |                   |                        |  |                                       |  |   |    
|                                                                            |                       
|                                                                            |                        | Liabilities Derivatives
(1)          
|                                                                            |                        | March 31, 2010                        |           | December 31, 2009
|                                                                            | Balance sheetlocation  |                                       | FairValue |                   | Balance sheetlocation  |  | FairValue                            
|Derivatives not designated as hedging instrumentsForeign exchange contracts |                        | Accrued and other current liabilities |           | $                 | 425                    |  | Accrued and other current liabilities |  | $ | 521
|                                                                            |                        |                                       |           |                   |                        |  |                                       |  |   |    
|Total derivatives                                                           |                        |                                       |           | $                 | 425                    |  |                                       |  | $ | 521
|                                                                            |                        |                                       |           |                   |                        |  |                                       |  |   |    



|(1) | There were no liabilities derivatives designated as derivative hedging instruments at March 31, 2010 or December 31, 2009.
|--- | --------------------------------------------------------------------------------------------------------------------------



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The effect of derivative instruments on our unaudited consolidated statement of operations
was as follows (in thousands):



|                                              |  |                                                                                        |     |                                                                                   |                  |                                                                        |   |     |                                                                                                                        |  |                                                                                                                 |  |   |   
|--------------------------------------------- |  | -------------------------------------------------------------------------------------- | --- | --------------------------------------------------------------------------------- | ---------------- | ---------------------------------------------------------------------- | - | --- | ---------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------- |  | - | --
|                                              |  | Three Months Ended March 31, 2010                                                     
|Derivative in
cash flow hedging
relationships |  | Gain (loss)recognizedin othercomprehensiveincome(OCI)on
derivative(effectiveportion) |     | Location ofgain (loss)reclassifiedfromaccumulatedOCI intoincome(effectiveportion) |                  | Gain (loss)reclassifiedfromaccumulatedOCI
intoincome(effectiveportion) |   |     | Location ofgain (loss)recognized inincome onderivative(ineffectiveportionsand
amountexcluded fromeffectivenesstesting) |  | Gain (loss)recognized inincome onderivative(ineffective portionand amountexcluded
fromeffectivenesstesting)(1) 
|Foreign exchange contracts                    |  | $                                                                                      | 68  |                                                                                   | Cost of revenues |                                                                        | $ | (44 | )                                                                                                                      |  | Cost of revenues                                                                                                |  | $ | 2 
|                                              |  |                                                                                        |     |                                                                                   |                  |                                                                        |   |     |                                                                                                                        |  |                                                                                                                 |  |   |   
|Total                                         |  | $                                                                                      | 68  |                                                                                   |                  |                                                                        | $ | (44 | )                                                                                                                      |  |                                                                                                                 |  | $ | 2 
|                                              |  |                                                                                        |     |                                                                                   |                  |                                                                        |   |     |                                                                                                                        |  |                                                                                                                 |  |   |   
|                                              | 
|                                              |  | Three Months Ended March 31, 2009                                                     
|Derivative in
cash flow hedging
relationships |  | Gain (loss)recognizedin othercomprehensiveincomeon
derivative(effectiveportion)        |     | Location ofgain
(loss)reclassifiedfromaccumulatedOCI intoincome(effectiveportion) |                  | Gain (loss)reclassifiedfromaccumulatedOCI
intoincome(effectiveportion) |   |     | Location ofgain
(loss)recognized inincome onderivative(ineffectiveportionsand amountexcluded fromeffectivenesstesting) |  | Gain (loss)recognized inincome onderivative(ineffective portionand
amountexcluded fromeffectivenesstesting) (2)
|Foreign exchange contracts                    |  | $                                                                                      | 385 |                                                                                   | Cost of revenues |                                                                        | $ | (98 | )                                                                                                                      |  | Cost of revenues                                                                                                |  | $ | 19
|                                              |  |                                                                                        |     |                                                                                   |                  |                                                                        |   |     |                                                                                                                        |  |                                                                                                                 |  |   |   
|Total                                         |  | $                                                                                      | 385 |                                                                                   |                  |                                                                        | $ | (98 | )                                                                                                                      |  |                                                                                                                 |  | $ | 19
|                                              |  |                                                                                        |     |                                                                                   |                  |                                                                        |   |     |                                                                                                                        |  |                                                                                                                 |  |   |   



|(1) | The amount of gain recorded in income was zero related to the ineffective portion of the hedging relationship and $2,000 related to the amount excluded from the
assessment of hedge effectiveness.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | The amount of gain recorded in income was zero related to the ineffective portion of the hedging relationship and $19,000 related to the amount excluded from the
assessment of hedge effectiveness.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                  |  |                                                    |  |                                        |      |  
|------------------------------------------------- |  | -------------------------------------------------- |  | -------------------------------------- | ---- | -
|                                                  |  | Three Months Ended March 31,
2010                  | 
|Derivatives Not Designated as
Hedging Instruments |  | Location of lossrecognized in income on derivative |  | Loss recognizedin income on derivative |     
|Foreign exchange contracts                        |  | Foreign currency exchange loss                     |  | $                                      | (935 | )
|                                                  |  |                                                    |  |                                        |      |  
|Total                                             |  |                                                    |  | $                                      | (935 | )
|                                                  |  |                                                    |  |                                        |      |  
|                                                  | 
|                                                  |  | Three Months Ended March 31,
2009                  | 
|Derivatives Not Designated as
Hedging Instruments |  | Location of gainrecognized in income on derivative |  | Gain recognized inincome on derivative |     
|Foreign exchange contracts                        |  | Foreign currency exchange gain                     |  | $                                      | 774  |  
|                                                  |  |                                                    |  |                                        |      |  
|Total                                             |  |                                                    |  | $                                      | 774  |  
|                                                  |  |                                                    |  |                                        |      |  

We are exposed to credit losses in the event of nonperformance by the banks with which we transact foreign
currency hedges. We manage this credit risk by transacting foreign currency hedging with more than one institution, only executing hedges with counterparties that meet our minimum requirements, monitoring the credit ratings of our counterparties on
a regular basis and negotiating contractual master netting provisions that allow us to record and offset liabilities to a counterparty against amounts due from that counterparty in an event of default. We do not receive collateral from our hedging
counterparties. Our maximum credit exposure from nonperformance of foreign exchange hedging counterparties was $447,000 as of March 31, 2010.

6. EQUITY

Equity
Awards

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.

Stock Options, Restricted Stock Unit Awards (RSUs) and
Performance-Based Restricted Stock Unit Awards (PRSUs).

The majority of our equity awards are granted
annually to our executive officers and certain key management under our long-term incentive program (LTIP) pursuant to our Incentive Plan.

The table below summarizes the total number of shares granted:



|                  |  |                             |  |        
|----------------- |  | --------------------------- |  | -------
|                  |  | Three Months EndedMarch 31,
|                  |  | 2010                        |  | 2009   
|Stock options (1) |  | 20,000                      |  | 5,000  
|RSUs (2)          |  | 212,419                     |  | 230,118
|PRSUs (3)(4)      |  | 252,100                     |  | 108,110
|                  |  |                             |  |        
|                  |  | 484,519                     |  | 343,228
|                  |  |                             |  |        



| | (1) | Stock options vest over a four-year period with 25% of the shares vesting on the one-year anniversary of the participants date of hire, and the balance vesting in
36 equal monthly installments thereafter, subject to the participants continued service through the applicable vesting dates.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | RSUs vest over a three-year period with 33% of the shares vesting on or about the first business day of each of the next three years following the date of grant,
subject to the participants continued service through the applicable vesting dates.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | (3) | The number of PRSUs granted in 2010 represents the target award under the grant. The number of shares ultimately issued will be determined based on our relative
performance related to revenue, net income and market share compared to a specified company or group of peer companies over a one-year performance period. The shares, if any, will be issued following the end of the one-year performance period. The
shares issued will vest over a three-year period, with 33% of the shares vesting on or about the first business day of each of the next three years following the date of grant, subject to the participants continued service through the
applicable vesting dates. A participant must be employed on the last day of the performance period in order to be eligible for any shares subject to the PRSU award to vest and become issuable to the participant.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | The number of PRSUs granted in 2009 represents the target award under the grant. The number of shares ultimately issued will be determined based on our relative
performance related to revenue and net income compared to a specified group of peer companies over a three-year performance period and the eligible individuals management by objectives achievement during the same three-year performance period.
The shares, if any, will be issued and fully vested following the end of the three-year performance period. A participant must be employed on the last day of the performance period in order to be eligible for any shares subject to the PRSU award to
become issuable to the participant.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We value the stock unit awards which are issued to our non-employee
directors, executive officers and certain key employees based on the fair value of our common stock on the date that the stock unit award is granted. Compensation expense related to RSUs is recognized over the service period. We adjust compensation
expense related to PRSUs throughout the service period based upon the expected achievement of the underlying performance conditions.

The following weighted average assumptions were used for stock options granted during the periods:



|                        |  |                              |   |  |       |  
|----------------------- |  | ---------------------------- | - |  | ----- | -
|                        |  | Three Months EndedMarch 
31, |  
|                        |  | 2010                         |   |  | 2009  |  
|Dividend yield          |  | None                         |   |  | None  |  
|Volatility rate         |  | 43.03                        | % |  | 52.72 | %
|Risk free interest rate |  | 2.3                          | % |  | 1.9   | %
|Expected life in years  |  | 2.92                         |   |  | 3.14  |  

Share-Based Compensation

The components of share-based compensation expense were as follows (in thousands):



|                               |  |                             |       |      |   |      
|------------------------------ |  | --------------------------- | ----- | ---- | - | -----
|                               |  | Three Months EndedMarch 31,
|                               |  | 2010                        |       | 2009
|Stock options                  |  | $                           | 391   |      | $ | 783  
|RSUs                           |  |                             | 865   |      |   | 537  
|PRSUs                          |  |                             | 1,048 |      |   | (483)
|                               |  |                             |       |      |   |      
|Total share-based compensation |  | $                           | 2,304 |      | $ | 837  
|                               |  |                             |       |      |   |      

Stock Repurchase Program

In April 2008, our board of directors authorized us to repurchase up to $100 million of our common stock. The program does not have
a fixed expiration date and may be discontinued at any time. We did not repurchase any shares of our common stock under this program during the three month period ended March 31, 2010, and approximately $77.1 million remains available for
purchases under this program.

Comprehensive Income (Loss)

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



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



|                                                                                |  |           |         |              |   |        
|------------------------------------------------------------------------------- |  | --------- | ------- | ------------ | - | -------
|                                                                                |  | March 31, |         | December 31,
|                                                                                |  | 2010      |         | 2009        
|Foreign currency translation adjustments                                        |  | $         | (9,070) |              | $ | (8,182)
|Unrealized gains (losses) on available-for-sale investments, net of tax         |  |           | (21)    |              |   | 2      
|Net unrealized gains on foreign currency forward exchange contracts, net of tax |  |           | 102     |              |   | 62     
|Unrealized pension loss, net of tax                                             |  |           | (162)   |              |   | (162)  
|                                                                                |  |           |         |              |   |        
|Accumulated other comprehensive loss                                            |  | $         | (9,151) |              | $ | (8,280)
|                                                                                |  |           |         |              |   |        

7. EARNINGS (LOSS) PER SHARE

Basic earnings (loss) 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 period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Potential
dilutive securities include our stock options, RSUs, and PRSUs. 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 EndedMarch 31,
|                                                   |  | 2010                        |        | 2009
|Numerator:                                         |  |                             |        |      |   |         
|Net income (loss) attributable to Cymer, Inc.      |  | $                           | 16,005 |      | $ | (11,487)
|Denominator:                                       |  |                             |        |      |   |         
|Weighted average shares used to compute basic EPS  |  |                             | 29,997 |      |   | 29,640  
|Effect of dilutive options and stock unit awards   |  |                             | 328    |      |   | -       
|                                                   |  |                             |        |      |   |         
|Diluted weighted average common shares outstanding |  |                             | 30,325 |      |   | 29,640  
|                                                   |  |                             |        |      |   |         
|Earnings per share:                                |  |                             |        |      |   |         
|Basic                                              |  | $                           | 0.53   |      | $ | (0.39)  
|                                                   |  |                             |        |      |   |         
|Diluted                                            |  | $                           | 0.53   |      | $ | (0.39)  
|                                                   |  |                             |        |      |   |         

For the three months ended March 31, 2010 and
2009, weighted average options, restricted stock units, and performance restricted stock unit awards totaling 1.0 million shares and 3.1 million shares, respectively, were not included in the computation of diluted earnings per share as
their effect was anti-dilutive. For the three months ended March 31, 2009, weighted average common stock of 1.5 million shares attributable to convertible subordinated notes was not included in the computation of diluted earnings per share
as its effect was anti-dilutive.

8. INCOME TAXES

We calculate our interim tax provision in accordance with the guidance for accounting for income taxes in interim periods. At the end of
each interim period, we estimate the annual effective tax rate and apply that tax rate to our ordinary quarterly pre-tax income. The tax expense or benefit related to significant, unusual or extraordinary discrete events during the interim period is
recognized in the interim period in which those events occurred. In addition, the effect of changes in enacted tax laws or rates or tax status is recognized in the interim period in which the change occurs.

The tax expense of $6.8 million and tax benefit of $6.5 million reflect effective tax rates of 30% and 35% for the three months
ended March 31, 2010 and 2009, respectively. Our effective tax rate for the three months ended March 31, 2010 was less than the United States federal statutory rate of 35% due primarily to our estimate of the outcome of a foreign tax audit
that resulted in a net tax benefit in the United States of $1.2 million recorded as a discrete item during the three months ended March 31, 2010. We are currently negotiating settlement of this audit with the foreign tax authority and the
United States Treasury Department, and our estimated benefit could change as negotiations evolve. Final resolution of this audit may not be known for several years.



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As of March 31, 2010, the balance of our net unrecognized tax benefits is $15.2
million, a decrease of $5.4 million from December 31, 2009. This decrease is due primarily to a settlement made to the Internal Revenue Service (IRS) related to an audit and a decrease in reserves relating to the foreign tax audit noted above.

We are subject to taxation in the United States and in various states and foreign jurisdictions. Our tax years 2007 and
forward are subject to examination by the IRS, our tax years 2000 and forward are subject to examination by material state jurisdictions, and our tax years 2003 and forward are subject to examination by material foreign jurisdictions.

Several of our subsidiaries are currently under audit or appeal. It is reasonably possible that the examination phase of these audits or
appeals may conclude in the next 12 months, and that the related tax reserves or unrecognized tax benefits for uncertain tax positions may change, potentially having a material effect on our effective tax rate. However, based on the status of the
various examinations or appeals in multiple jurisdictions, an estimate of the range of reasonably possible outcomes cannot be made at this time.

9. COMMITMENTS AND CONTINGENCIES

TCZ

Due to the acquisition of the remaining 40% interest in TCZ effective January 15, 2010, we are obligated to pay our former partner
in TCZ approximately $2.2 million, in three equal installments, by September 30, 2010. As of March 31, 2010, approximately $1.5 million is still payable and is included in accrued and other current liabilities within the accompanying
consolidated balance sheet.

Guarantees and Warranties

In the ordinary course of business, we are not subject to potential obligations under guarantees that fall within the scope of the
authoritative guidance for guarantees with the exception of our 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.

We record a provision for warranty, which is included in cost of revenues and is recorded at the
time that the related revenue is recognized. The warranty period and terms for light source systems and replacement parts varies by light source system model. We review our warranty provision using a statistical financial model which calculates
actual historical expenses, product failure rates, and potential risks associated with our different product models. We then use this financial model to calculate the future probable expenses related to warranty and the required level of the
warranty provision. Throughout the year, we review the risk levels, historical cost information and failure rates used within this model and update them as information changes over the products life cycle. If actual warranty expenditures
differ substantially from our estimates, revisions to the warranty provision would be required. Actual warranty expenditures are recorded against the warranty provision as they are incurred. The following table provides the changes in the product
warranty accrual (in thousands):



|                                                        |  |                                  |        
|------------------------------------------------------- |  | -------------------------------- | -------
|                                                        |  | Three Months EndedMarch 31, 2010
|Balance as of January 1                                 |  | $                                | 16,640 
|Accruals for warranties issued during the period        |  |                                  | 4,702  
|Changes in liability related to pre-existing warranties |  |                                  | (2,707)
|Warranty expenditures during the period                 |  |                                  | (2,395)
|                                                        |  |                                  |        
|Balance as of March 31                                  |  | $                                | 16,240 
|                                                        |  |                                  |        

Intellectual Property Indemnifications

We agree to indemnify certain of our customers in the general purchase agreements with our three lithography tool
manufacturer customers, ASML, Canon and Nikon, and under certain of our development and supply agreements. These indemnifications generally include both general and intellectual property indemnification provisions that provide we defend these
parties against certain infringement claims directed against our products. Under the indemnification provisions, we would pay costs and damages attributable to the infringement claims, including attorneys fees associated with settlements or
defenses in respect of such claims, provided that certain conditions are satisfied. As of March 31, 2010, we were not subject to any pending general or intellectual property-related litigation. We have not received any requests for nor have we
been required to make any payments under these indemnification provisions.



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Contingencies Related to Third-Party Review and Legal Actions

From time to time, we are subject to potential claims and assessments from third parties. We are also subject to various governmental
audits and reviews. We continually assess whether or not such claims have merit and warrant accrual. Where appropriate, we accrue estimates of anticipated liabilities in the unaudited consolidated financial statements. Such estimates are subject to
change and may affect our operating results, financial condition and cash flows.

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 effect on our operating results,
financial condition and cash flows.

10. SEGMENT OPERATIONS

We develop, manufacture and market our products within two reportable business segments, Cymer and TCZ. Cymers primary business is
to design, manufacture and sell excimer light source systems and installed base products for use in photolithography systems used in the manufacture of semiconductors. TCZ is developing and producing a system for use in the manufacture of OLED flat
panel displays.

Our chief operating decision maker is our chief operating officer, who uses this information in order to make
decisions on resources needed for our light source systems and the OLED flat panel display systems businesses and to assess the overall performance of these components of our business. The accounting policies to derive our consolidated financial
results are substantially the same as those used for our segment reporting.

Information related to our Cymer and TCZ
operating segments is as follows (in thousands):



|                                                                          |  |                                       |          |     |   |                          |  |   |         |   |  |   |         
|------------------------------------------------------------------------- |  | ------------------------------------- | -------- | --- | - | ------------------------ |  | - | ------- | - |  | - | --------
|                                                                          |  | Three Months Ended March 31, 2010 (1)
|                                                                          |  | Cymer                                 |          | TCZ |   | Consolidationadjustments |  |   | Total  
|Revenue                                                                   |  | $                                     | 113,873  |     | $ | -                        |  | $ | (92     | ) |  | $ | 113,781 
|                                                                          |  |                                       |          |     |   |                          |  |   |         |   |  |   |         
|Operating Income                                                          |  | $                                     | 26,550   |     | $ | (3,990)                  |  | $ | 26      |   |  | $ | 22,586  
|                                                                          |  |                                       |          |     |   |                          |  |   |         |   |  |   |         
|                                                                          | 
|                                                                          |  | Three Months Ended March 31, 2009 (1)
|                                                                          |  | Cymer                                 |          | TCZ |   | Consolidationadjustments |  |   | Total  
|Revenue                                                                   |  | $                                     | 56,499   |     | $ | -                        |  | $ | -       |   |  | $ | 56,499  
|                                                                          |  |                                       |          |     |   |                          |  |   |         |   |  |   |         
|Operating Loss                                                            |  | $                                     | (15,510) |     | $ | (1,069)                  |  | $ | 63      |   |  | $ | (16,516)
|                                                                          |  |                                       |          |     |   |                          |  |   |         |   |  |   |         
|                                                                          |  |                                       |          |     |   |                          |  |   |         |   |  |   |         
|(1)    TCZ operating loss is presented excluding noncontrolling interest.
|                                                                          | 
|                                                                          |  | March 31, 2010                       
|                                                                          |  | Cymer                                 |          | TCZ |   | Consolidationadjustments |  |   | Total  
|Total Assets                                                              |  | $                                     | 664,885  |     | $ | 15,952                   |  | $ | (992)   |   |  | $ | 679,845 
|                                                                          |  |                                       |          |     |   |                          |  |   |         |   |  |   |         
|                                                                          | 
|                                                                          |  | December 31, 2009                    
|                                                                          |  | Cymer                                 |          | TCZ |   | Consolidationadjustments |  |   | Total  
|Total Assets                                                              |  | $                                     | 648,911  |     | $ | 18,157                   |  | $ | (2,150) |   |  | $ | 664,918 
|                                                                          |  |                                       |          |     |   |                          |  |   |         |   |  |   |         



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11. SUBSEQUENT EVENTS

We have evaluated any events or transactions occurring after March 31, 2010, the balance sheet date, and found that no such events
or transactions occurred which would affect our unaudited consolidated financial statements for the three month period ended March 31, 2010.

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
consolidated financial statements and notes thereto included in Item 1. Financial Statements of this Quarterly Report on Form 10-Q and the audited 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 year ended December 31, 2009, filed with the Securities Exchange Commission on
February 26, 2010.

FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q that are not strictly historical in nature are forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include, but are not limited to, references to the outlook
for the semiconductor industry and us; expected timeline for the adoption of new photolithography and flat panel display technologies by customers; 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. In addition, statements regarding backlog and book-to-bill ratios should not be
read as predictions or projections of future performance. 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 involve a
number of risks and uncertainties 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 are the worlds leading supplier of light sources used in the photolithography process for semiconductor, or chip, manufacturing.
We provide state-of-the-art light sources designed to help enable the performance of leading edge wafer steppers and wafer scanners built by our lithography tool manufacturers. Additionally, we provide installed base products in support of chipmaker
customers who use our light sources in their advanced wafer patterning production processes. We currently supply deep ultraviolet (DUV) light sources to our lithography tool manufacturer customers ASML, Canon and Nikon, who integrate the
light source into their wafer steppers and scanners which they then provide to chipmakers. In addition, we sell replacement parts and support to lithography tool manufacturers as well as directly to chipmakers, who include all of the worlds
largest semiconductor manufacturers. Our light source systems constitute a substantial majority of all DUV light sources incorporated in lithography stepper and scanner tools at chipmakers worldwide. As the leading supplier of these light sources,
the majority of consumer electronics devices manufactured in the last several years contain a semiconductor manufactured using our light sources. We are currently developing extreme ultraviolet (EUV) source technology for chip
manufacturing and expect to record our first sale of an EUV pilot source system in 2010. Also, through our TCZ reporting segment, we are developing and will integrate, market and sell, and support, laser crystallization tools used in the manufacture
of organic light emitting diode (OLED) flat panel displays.

Revenue of $113.8 million in the first quarter of
2010 represented a 101% increase over the first quarter of 2009 and an 18% increase over the fourth quarter of 2009. The increase is due to growth in both installed base products and light source revenues during the quarter. Semiconductor fabs are
operating at significantly higher utilization levels as compared to this time last year, and investment in ArF immersion lithography is being driven by technology transition purchases in all three chipmaking sectors. During the first quarter, the
majority of our light source shipments continued to be ArF sources in support of 45nm and below immersion lithography, and we also delivered several KrF sources. Traditionally in the first quarter, we have seen a seasonal dip in gross pulses as
chipmakers have historically reduced utilization after the holiday season. However, gross pulse utilization rose again this quarter, up over 3%, as demand for PCs, netbooks, smart phones and other consumer electronics continued to be strong. We
estimate that by the end of the first quarter, gross pulses were approximately 91% of the June 2008 peak, rising more quickly than we had projected. ArF immersion pulses also continued to increase as a percentage of the total. We also delivered a
higher level of gross margin as we continued to realize the benefits of the 2008 and 2009 sustainable operational improvements. As expected, 2010 is shaping up to be a growth and investment year for the company. The growth is being driven by our
market leading DUV light sources and customer focused installed base products. This growth is helping to fund our strategic investments in EUV and TCZ, which we believe will extend our lithography light source technology leadership and enable the
development of an exciting adjacent market in OLED flat panel display manufacturing.



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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

General

The discussion
and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.
For a summary of significant accounting policies, see Note 1 to the Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2009. 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. 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. As future events and their effects cannot be determined with precision, particularly those related to the condition of the economy, actual results could differ significantly from these
estimates.

There have been no changes to the items disclosed as critical accounting policies and estimates in
Management Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2009.

RESULTS OF OPERATIONS

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



|                                                               |  |                              |  |   |  |        |  |  
|-------------------------------------------------------------- |  | ---------------------------- |  | - |  | ------ |  | -
|                                                               |  | Three months ended
March 31, |  |  
|                                                               |  | 2010                         |  |   |  | 2009   |  |  
|Revenues:                                                      |  |                              |  |   |  |        |  |  
|Product sales                                                  |  | 100.0                        |  | % |  | 99.6   |  | %
|Product sales - related party                                  |  | -                            |  |   |  | 0.4    |  |  
|                                                               |  |                              |  |   |  |        |  |  
|Total revenues                                                 |  | 100.0                        |  |   |  | 100.0  |  |  
|Cost of revenues                                               |  | 50.0                         |  |   |  | 61.9   |  |  
|                                                               |  |                              |  |   |  |        |  |  
|Gross profit                                                   |  | 50.0                         |  |   |  | 38.1   |  |  
|                                                               |  |                              |  |   |  |        |  |  
|Operating expenses:                                            |  |                              |  |   |  |        |  |  
|Research and development                                       |  | 17.5                         |  |   |  | 32.6   |  |  
|Sales and marketing                                            |  | 4.5                          |  |   |  | 7.0    |  |  
|General and administrative                                     |  | 8.1                          |  |   |  | 12.8   |  |  
|Restructuring                                                  |  | -                            |  |   |  | 14.9   |  |  
|                                                               |  |                              |  |   |  |        |  |  
|Total operating expenses                                       |  | 30.1                         |  |   |  | 67.3   |  |  
|                                                               |  |                              |  |   |  |        |  |  
|Operating income (loss)                                        |  | 19.9                         |  |   |  | (29.2) |  |  
|Total other expense - net                                      |  | -                            |  |   |  | (3.7)  |  |  
|                                                               |  |                              |  |   |  |        |  |  
|Income (loss) before income tax provision (benefit)            |  | 19.9                         |  |   |  | (32.9) |  |  
|Income tax provision (benefit)                                 |  | 6.0                          |  |   |  | (11.5) |  |  
|                                                               |  |                              |  |   |  |        |  |  
|Net income (loss)                                              |  | 13.9                         |  |   |  | (21.4) |  |  
|                                                               |  |                              |  |   |  |        |  |  
|Net loss attributable to noncontrolling interest in subsidiary |  | 0.1                          |  |   |  | 1.1    |  |  
|                                                               |  |                              |  |   |  |        |  |  
|Net income (loss) attributable to Cymer, Inc.                  |  | 14.0                         |  |   |  | (20.3) |  |  
|                                                               |  |                              |  |   |  |        |  |  

We currently operate within two reportable segments, Cymer and TCZ. The Cymer segment of our
business consists of products including lithography light sources and installed base products. The TCZ segment is targeting the growing market for low-temperature poly-silicon (LTPS) processing used in the manufacture of OLED flat panel
displays. The discussion which follows for cost of revenues, operating expenses and other income and expenses includes our consolidated expenses and identifies expenses associated with the TCZ segment, which are included in the consolidated amounts,
for the three months ended March 31, 2010 and 2009. Additional information regarding our reporting segments is contained in Note 10 to our unaudited consolidated financial statements in Part I, Item 1 of this report.



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##### Table of Contents

Three Months Ended March 31, 2010 and 2009

Revenues. The following table summarizes the components of our revenue (in thousands, except units sold):



|                               |  |                             |         |      |   |                    |  |         |        |  |     |  
|------------------------------ |  | --------------------------- | ------- | ---- | - | ------------------ |  | ------- | ------ |  | --- | -
|                               |  | Three Months EndedMarch 31, |         |      |  
|                               |  | 2010                        |         | 2009 |   | Increase(Decrease) |  | %Change |       
|                               |  |                             |        
|Light source systems:          |  |                             |         |      |   |                    |  |         |        |  |     |  
|Revenue                        |  | $                           | 38,916  |      | $ | 15,580             |  | $       | 23,336 |  | 150 | %
|                               |  |                             |         |      |   |                    |  |         |        |  |     |  
|Units sold                     |  |                             | 24      |      |   | 9                  |  |         | 15     |  | 167 | %
|                               |  |                             |         |      |   |                    |  |         |        |  |     |  
|Average selling price(1)       |  | $                           | 1,524   |      | $ | 1,681              |  |         | (157)  |  | -9  | %
|                               |  |                             |         |      |   |                    |  |         |        |  |     |  
|Installed base product revenue |  | $                           | 74,865  |      | $ | 40,919             |  | $       | 33,946 |  | 83  | %
|                               |  |                             |         |      |   |                    |  |         |        |  |     |  
|Total revenue                  |  | $                           | 113,781 |      | $ | 56,499             |  | $       | 57,282 |  | 101 | %
|                               |  |                             |         |      |   |                    |  |         |        |  |     |  



| | (1) | For purposes of calculating the average selling price, we have excluded the effect of deferred light source system revenue between periods in order to present the
actual average selling price per light source system sold.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Total revenue increased period to period primarily
due to higher demand for light source systems and installed base products. The increase in light source revenues was primarily due to a higher level of investment in ArF light sources in support of 45nm and below immersion lithography and an
increase in KrF source purchases. The average selling price of our light source systems decreased 9% due the product mix of light source systems sold period over period. Our installed base product revenue increased from period to period due to the
continued customer adoption of our OnPulse contracts and rise in pulse utilizations of our light source systems by chipmaker customers.

There were no revenues associated with our TCZ segment for the quarter ended March 31, 2010 or 2009. To date, TCZ has shipped one
system, but we have not yet recognized revenue since the agreement includes acceptance provisions which have not yet been satisfied.

Our backlog includes only those orders for DUV light source systems and replacement parts for which we have accepted a purchase order
from a customer, and that will be delivered to the customer within the following twelve months. In addition, our backlog does not include services or support which will be provided to our customers in the future or under service contracts. Although
we do expect to generate revenue from EUV light source systems and TCZ products in 2010, our backlog does not include orders for these products as they are still in evaluation stages at our customers. Because it is the practice in our industry that
customers may cancel or delay orders with little or no penalty, our backlog as of any particular date may not be a reliable indicator of actual sales for any succeeding period.

At March 31, 2010, we had a DUV backlog of $43.8 million compared with a DUV backlog of $25.5 million at March 31,
2009. DUV bookings for the quarter ended March 31, 2010 and 2009 were $111.6 million and $48.3 million, respectively. The DUV book-to-bill ratio for the quarter ended March 31, 2010 was 0.98 compared to 0.85 for the quarter ended
March 31, 2009. The increase in DUV bookings, backlog and book-to-bill ratio reflects an increase in demand for our light source systems in the first quarter of 2010.

We installed 18 light sources at chipmakers and other end-users for the quarter ended March 31, 2010 as compared to 20 light sources
during the quarter ended March 31, 2009.

Sales to ASML and Nikon, two of our three lithography tool manufacturing
customers, and Samsung, who purchases installed base products from us, amounted to 28%, 15% and 10%, respectively, of total revenue for the quarter ended March 31, 2010, and 7%, 30% and 11%, respectively, of total revenue for the quarter ended
March 31, 2009.

Our sales are generated primarily by shipments to customers in the United States, Japan, Korea and
Europe and, to a lesser extent, other Asian countries.



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|                                      |  |                             |         |      |   |          |  |          |        |  |     |  
|------------------------------------- |  | --------------------------- | ------- | ---- | - | -------- |  | -------- | ------ |  | --- | -
|                                      |  | Three Months EndedMarch 31, |         |      |  
|                                      |  | 2010                        |         | 2009 |   | $ Change |  | % Change |       
|U.S.                                  |  | $                           | 44,877  |      | $ | 13,368   |  | $        | 31,509 |  | 236 | %
|Japan                                 |  |                             | 22,925  |      |   | 19,784   |  |          | 3,141  |  | 16  | %
|Korea                                 |  |                             | 18,533  |      |   | 10,068   |  |          | 8,465  |  | 84  | %
|Other Asia (Taiwan, Singapore, China) |  |                             | 19,409  |      |   | 9,214    |  |          | 10,195 |  | 111 | %
|Europe                                |  |                             | 8,037   |      |   | 4,065    |  |          | 3,972  |  | 98  | %
|                                      |  |                             |         |      |   |          |  |          |        |  |     |  
|Total                                 |  | $                           | 113,781 |      | $ | 56,499   |  | $        | 57,282 |  |     |  
|                                      |  |                             |         |      |   |          |  |          |        |  |     |  

Approximately 88% and 83% of our revenue for the quarter ended March 31, 2010 and 2009,
respectively, were derived from customers outside the U.S. Our Japan subsidiary (Cymer Japan), which sells to our Japanese customers, accounted for 20% and 36% of total revenues for the quarter ended March 31, 2010 and 2009,
respectively. The activities of our Japan subsidiary are limited to sales and service of systems purchased by them from our corporate office. We anticipate that international sales will continue to account for a significant portion of our sales.

Cost of revenues. Cost of revenues includes direct material and labor, warranty expenses, license fees, manufacturing
and service overhead. Cost of revenues 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. Costs incurred for shipping and handling are included in cost of revenues at the time the related revenue is recognized. Amounts billed to a customer, if any, for shipping and handling are reported as revenue.

The cost of revenues increased 63.0% to $57.0 million for the quarter ended March 31, 2010 from $35.0 million
for the quarter ended March 31, 2009. Gross profit increased to $56.8 million with a 50.0% gross margin for the quarter ended March 31, 2010 from $21.5 million with a 38.1% gross margin for the quarter ended March 31, 2009.
The increase in gross profit and gross margin from period to period was primarily due to the higher level of sales, the realized benefits of previously implemented cost structure improvements and improved manufacturing absorption.

Included in cost of revenues for the quarter ended March 31, 2010 was $247,000 related to the TCZ segment for costs incurred to
install the first system at a customer site. This customer is currently evaluating this system, and TCZ is working with them to demonstrate the systems capabilities. There were no costs of revenues associated with the TCZ segment for the
quarter ended March 31, 2009.

Research and development. Research and development expenses include costs of
continuing product development projects, which consist primarily of employee and material costs, depreciation of equipment and other engineering related costs. Research and development expenses increased 7.8% to $19.9 million for the quarter
ended March 31, 2010 from $18.4 million for the quarter ended March 31, 2009. Research and development spending increased as we raised our level of investment in EUV source development, and reinstated various variable compensation
programs that are closely linked to improvements in business levels and company performance. In the first quarter of 2009, research and development was negatively impacted by the reductions in workforce conducted during the period, including a
reduction in variable compensation costs. In addition, research and development expenses included $2.9 million and $977,000 for the quarter ended March 31, 2010 and 2009, respectively, for our TCZ segment as we supported our first system
delivery and assumed full ownership of the joint venture in January of this year having acquired the 40% interest in TCZ from our former partner. As a percentage of total revenues, research and development expenses decreased to 17.5% for the quarter
ended March 31, 2010 from 32.6% for the quarter ended March 31, 2009.

Sales and marketing. Sales and
marketing expenses include sales, marketing, customer support staff and other marketing expenses. Sales and marketing expenses increased 29.5% to $5.1 million for the quarter ended March 31, 2010 from $4.0 million for the quarter
ended March 31, 2009. Included in sales and marketing expenses were $495,000 and $463,000 for the quarter ended March 31, 2010 and 2009, respectively, for our TCZ segment. The increase in sales and marketing expenses primarily reflects an
increase in variable compensation costs associated with our cash and equity incentive programs and advertising costs during the period. As a percentage of total revenues, sales and marketing decreased to 4.5% for the quarter ended March 31,
2010 compared to 7.0% for the quarter ended March 31, 2009.

General and administrative. General and
administrative expenses consist primarily of management and administrative personnel costs, professional services including external audit and consultant fees, and administrative operating costs. General and administrative expenses increased 27.2%
to $9.2 million for the quarter ended March 31, 2010 from $7.2 million for the quarter ended March 31, 2009 primarily due to an increase in variable compensation costs associated with our cash and equity incentive programs. These
increases were partially offset by a decline in bad debt expense as a result of improved risk profiles and payment histories of certain of our customers compared to the same period in 2009. Included in general and administrative expenses were
$519,000 and $239,000 for the quarter ended March 31, 2010 and 2009, respectively, for our TCZ segment. As a percentage of total revenues, general and administrative expenses decreased to 8.1% for the quarter ended March 31, 2010 compared
to 12.8% for the quarter ended March 31, 2009.



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Restructuring. There were no restructuring expenses for the quarter ended
March 31, 2010. In the first quarter of 2009, we reduced our worldwide workforce by approximately 26 percent or a total of 230 employees, as part of our cost reduction efforts in response to the continuing deterioration in the lithography
sector of the semiconductor capital equipment market at the time. These reductions in workforce affected only employees at our Cymer segment. As a result of these 2009 reductions in our workforce, we recorded charges to restructuring expense of
approximately $8.4 million for the quarter ended March 31, 2009 primarily associated with severance charges.

Total other income (expense)net. Net other income (expense) consists primarily of interest income earned on our investment
and cash portfolio, foreign currency exchange gains or 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 was $67,000 for the quarter ended March 31, 2010 compared to other expense, net of $2.1 million for the quarter ended March 31, 2009. Other income, net for the quarter ended March 31, 2010 relates primarily to
foreign currency gains as a result of the positive impact of our expanded hedging program, reduced interest income due to lower investments and reduced interest expense due to the repayment of our convertible subordinated notes when compared to the
quarter ended March 31, 2009. Other expense, net of $2.1 million for the quarter ended March 31, 2009 was primarily due to foreign currency exchange losses of $1.9 million due to fluctuations in the value of the Korean Won. We
started hedging the Korean Won and other currencies in February 2009 in order to mitigate the impacts of such volatility. Included in other income (expense), net related to our TCZ segment was $31,000 of expense for quarter ended March 31, 2010
and $113,000 of income for the quarter ended March 31, 2009 related primarily to foreign currency exchange gains and losses.

Income tax expense (benefit). The tax expense of $6.8 million and tax benefit of $6.5 million reflect an effective tax of 30% and
35% for the three months ended March 31, 2010 and 2009, respectively. The decrease in the effective tax rate for the three months ended March 31, 2010 was primarily due to our estimate of the outcome of a foreign tax audit that
resulted in a net tax benefit in the United States of $1.2 million recorded as a discrete item during the three months ended March 31, 2010. We are currently negotiating settlement of this audit with the foreign tax authority and the United States
Treasury Department and our estimated benefit could change as negotiations evolve. Final resolution of this audit may not be known for several years.

Our future 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 United States research and development tax credit is expected to be reinstated; however, it is unknown when this event will take place. In the quarter which this occurs, the tax benefit from the credit will be
recognized. Additionally, several of our subsidiaries are under audit or appeal. It is reasonably possible that the examination phase of these audits or appeals may conclude in the next 12 months, and that the related tax reserves or unrecognized
tax benefits for uncertain tax positions may change, potentially having a material effect on our effective tax rate.

LIQUIDITY AND CAPITAL RESOURCES

In recent years, we have funded our operations primarily from cash generated from operations, the proceeds from note offerings, and
proceeds from employee stock option exercises. We have also from time to time utilized cash to repurchase shares of our common stock. In summary, our cash flows were as follows:



|                                                             |  |                             |          |      |   |          
|------------------------------------------------------------ |  | --------------------------- | -------- | ---- | - | ---------
|                                                             |  | Three Months EndedMarch 31,
|                                                             |  | 2010                        |          | 2009
|Net cash used in operating activites                         |  | $                           | (11,045) |      | $ | (9,111)  
|Net cash provided by investing activities                    |  |                             | 8,955    |      |   | 11,086   
|Net cash provided by (used in) financing activities          |  |                             | 716      |      |   | (140,421)
|Effect of exchange rate changes on cash and cash equivalents |  |                             | (88)     |      |   | (2,830)  
|                                                             |  |                             |          |      |   |          
|Net decrease in cash and cash equivalents                    |  | $                           | (1,462)  |      | $ | (141,276)
|                                                             |  |                             |          |      |   |          

Operating Activities



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Net cash used in operating activities for the three months ended March 31, 2010
primarily reflects net earnings for the period, before depreciation, amortization, and stock-based compensation, offset primarily by changes in working capital, including a $23.9 million increase in accounts receivable as well as a $3.5 million
increase in inventory. The increase in accounts receivable reflects both the increase in revenue and a higher percentage of revenue generated in the third month of the quarter. Although inventory levels increased, DUV manufacturing and field
inventory continued to be optimized, resulting in a higher level of overall inventory turns.

Net cash used in operating
activities for the three months ended March 31, 2009 primarily reflects the net loss for the period, decreases in accrued expenses and other liabilities and accounts payable and changes in income taxes payable and receivable during the period.
This use of cash was partially offset by decreases in inventory and accounts receivable during the three months ended March 31, 2009. The decrease in inventory was due primarily to decreases in our spares inventory and work-in-progress
inventory during the three months ended March 31, 2009. The decrease in accounts receivable was due to lower sales and ongoing collection efforts, and the changes in the income tax accounts were primarily due to the tax benefit recorded for the
first quarter of 2009 and tax payments that were made during the period.

Days sales outstanding for the three months ended
March 31, 2010 decreased to 80 days compared to 85 days in the three months ended March 31, 2009.

Investing
Activities

Net cash provided by investing activities for the three months ended March 31, 2010 was due to sales of
matured investments of $23.4 million, offset by capital expenditures of $6.7 million primarily related to our investment in EUV and investment purchases of $7.7 million. Net cash provided by investing activities for the three months ended
March 31, 2009 was due primarily to the timing of short-term and long-term investments that matured and were reinvested during the period. As a result of our cost reduction efforts in 2009, our capital expenditures were approximately
$1.0 million for the first quarter of 2009. A portion of the proceeds from matured investments were used to redeem our convertible subordinated notes in February 2009.

Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2010 primarily reflects $942,000 of proceeds from the
issuance of common stock related to stock option exercises and excess tax benefits from stock option exercises of $502,000, offset by the first installment paid to our former partner in TCZ of $728,000. Net cash used in financing activities for the
three months ended March 31, 2009 primarily reflects the payment of $140.7 million for the redemption of our outstanding convertible subordinate notes that matured on February 15, 2009. This payment was partially offset by from the
issuance of common stock related to stock option exercises totaling $296,000 and excess tax benefits from stock option exercises of $5,000.

Effect of Exchange Rate Changes

Most of our foreign subsidiaries operate in currencies other than the U.S. Dollar, and the majority of their cash balances are
denominated in these foreign currencies. As a result, our cash and cash equivalent balances are subject to the effects of the fluctuations in these currencies against the U.S. Dollar at the end of each reporting period. The net effect of
exchange rate changes on cash and cash equivalents, when expressed in U.S. Dollar terms, was a reduction in cash and cash equivalents of $88,000 and $2.8 million for the three months ended March 31, 2010 and 2009, respectively. For the
three months ended March 31, 2010, the reduction in cash was primarily driven by a weakening of the Euro, partially offset by a strengthening of the Korean Won against the U.S. Dollar. For the three months ended March 31, 2009, the
reduction in cash was driven primarily by a weakening of the Korean Won and Japanese Yen against the U.S. Dollar.

Prospective Capital Needs

We require substantial resources to fund the operations of our business, particularly to fund our investment in new technologies,
including inventory and capital in support of these technologies. We expect purchases of property and equipment in 2010 to be approximately $20.0 million, a significant portion of which will relate to purchases of equipment associated with EUV
research and development, as well as purchases of software and equipment. In addition, we require resources to fund our normal operations. Due to the acquisition of the remaining 40% interest in TCZ, effective January 15, 2010, we are obligated
to pay our former partner in TCZ approximately $2.2 million, in three equal installments by September 30, 2010. As of March 31, 2010, approximately $1.5 million is still payable and is included in accrued and other current liabilities
within the accompanying consolidated balance sheet.



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We believe that our current cash, cash equivalents and marketable securities and, to a
lesser extent, cash from the exercise of employee stock options and the purchase by our employees of common stock through our employee stock purchase plan, will be sufficient to cover our working capital needs for our normal operations, and our
investments in our new technologies, including EUV and OLED display manufacturing, for at least the next 12 months. It is possible that we may need to raise additional funds to finance our activities or to acquire assets, products or new
technologies beyond the next 12 months. We may also decide that it is prudent in the current business and economic environment to secure commitments to access additional capital, including equity or debt securities, to protect our long term
liquidity position. In April 2008, our board of directors authorized us to repurchase up to $100.0 million of our common stock. As of March 31, 2010, we have $77.1 million remaining of this authorization.

Our future capital requirements may vary materially from those currently planned. We anticipate that the amount of capital we will need
in the future will depend on many factors, including:



| |  |  | the required investments in our new technologies such as EUV and OLED display manufacturing;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | the market acceptance of our products;
| | - |  | --------------------------------------



| |  |  | the overall levels of sales of our products and gross profit margins;
| | - |  | ---------------------------------------------------------------------



| |  |  | general economic and political conditions and specific conditions in the markets in which we operate, including the volatility in the semiconductor
industry, and trends in the semiconductor markets in various geographic regions, including seasonality in sales of consumer products into which our products are incorporated;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing and requirements of spending to support product development efforts for our current technologies and other operating costs;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our competitors responses to our products and our anticipation of and responses to their products;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | our manufacturing activity;
| | - |  | ---------------------------



| |  |  | the levels of inventory and accounts receivable that we maintain;
| | - |  | -----------------------------------------------------------------



| |  |  | the inability of certain of our customers who depend on credit to have access to their traditional sources of credit to finance the purchase of
products from us, particularly during changing or adverse global economic conditions, which may lead them to reduce their level of purchases or to seek credit or other accommodations from us;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | competitive labor market compensation requirements;
| | - |  | ---------------------------------------------------



| |  |  | acquisitions of assets, products or new technologies;
| | - |  | -----------------------------------------------------



| |  |  | repurchases of our common stock;
| | - |  | --------------------------------



| |  |  | capital improvements for new and existing facilities;
| | - |  | -----------------------------------------------------



| |  |  | our relationships with suppliers and customers; and
| | - |  | ---------------------------------------------------



| |  |  | the level of exercises of stock options and stock purchases by our employees under our employee stock purchase plan.
| | - |  | --------------------------------------------------------------------------------------------------------------------

OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

As of March 31, 2010, 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 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.

There have been no material changes to our contractual obligations from the information provided in Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the year ended December 31, 2009.

RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 1 to our unaudited consolidated financial statements in Part I, Item 1 of this report for a description of recently issued
accounting standards, including our expected dates of adoption and estimated effects on our results of operations and financial condition.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

FOREIGN CURRENCY RISK

We conduct business in several international currencies through our global operations. Our foreign currency hedging program manages
fluctuations in the value of the Japanese Yen, the Korean Won, the Euro and the Taiwanese Dollar. Our foreign currency risk falls into two primary categories.



25



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First, we are subject to uncertain gross profit margins when we forecast selling products in
one currency and the product costs are denominated in a different currency. In this instance we enter into derivative financial instruments, principally forward contracts, which we designate as cash flow hedges in order to mitigate fluctuations in
the gross profit margins of these forecasted transactions.

Forward contracts on forecasted transactions that hedge uncertain
gross profit margins generally qualify for cash flow hedge accounting treatment. Gains and losses on cash flow hedges are recorded in accumulated other comprehensive income (loss) until the hedged transaction is recorded in the financial statements.
Once the underlying transaction is recorded in the financial statements, we de-designate the derivative, reclassify the accumulated gain or loss on the derivative into cost of revenues and cease to apply hedge accounting treatment. Once the
derivative has been de-designated, any further gains or losses are recorded to other income (expense). If all or a portion of the forecasted transaction were cancelled, this would render all or a portion of the cash flow hedge ineffective and we
would reclassify the ineffective portion of the hedge into other income (expense). We generally have not experienced ineffectiveness of cash flow hedges from cancelled transactions. The fair value of all our forward contracts totaled to an asset of
$84,000 at March 31, 2010. The deferred gain, net of tax, for those that qualified for hedge accounting treatment was $102,000 as of March 31, 2010.

At March 31, 2010, we had outstanding forward contracts to buy $16.1 million in exchange for Japanese Yen, $5.5 million in
exchange for Korean Won, $2.0 million in exchange for Taiwanese Dollars and to sell $10.6 million in exchange for Euros. These contracts expire on various dates through November 2010.

The second category of foreign currency risk occurs when transactions are recorded to our consolidated financial statements in a currency
other than the applicable entitys functional currency and the cash settlement of the transaction occurs at some point in the future. When transactions in non-functional currency are recorded to our consolidated financial statements, any
changes in the recorded amounts resulting from fluctuations in the value of that currency will be recorded to other income (expense). In order to mitigate these revaluation gains and losses, we enter into derivative financial instruments,
principally forward contracts. The forward contracts that hedge transactions that have been recorded to our consolidated financial statements are not designated as hedges and we record changes in their fair value to other income (expense) in order
to attempt to offset gains and losses on the underlying transactions.

We considered the historical trends in currency
exchange rates and determined that it was reasonably possible that adverse changes in exchange rates of 20% for all currencies could be experienced in the near term. These changes would have resulted in an adverse impact on income before income
taxes of approximately $1.2 million and $743,000 at March 31, 2010 and 2009, respectively. The adverse impact at March 31, 2010 and 2009 is after consideration of the offsetting effect of approximately $4.8 million and
$5.6 million from forward exchange contracts in place for March 31, 2010 and 2009, respectively. These reasonably possible adverse changes in foreign currency exchange rates of 20% were applied to net assets and liabilities denominated in
currencies other than the functional currencies at the balance sheet dates to compute the adverse impact these changes would have had on our income before taxes in the near term.

INVESTMENT AND DEBT RISK

We maintain an investment portfolio consisting primarily of government and corporate fixed income securities, commercial paper and money
market funds. 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. If interest rates were to increase instantaneously and uniformly by 100 basis points, the fair market value of our investment portfolio as of March 31, 2010 would decrease by an immaterial amount.

ITEM 4. Controls and Procedures

Evaluation of disclosure controls and procedures. For the first quarter of 2010, our chief executive officer and our chief
financial officer, after evaluating 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,
2010, have 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 and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required disclosure.

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, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.



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Inherent Limitations on the Effectiveness of Internal Control. There are inherent
limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurances with respect to
financial statement preparation. Further, because of changes in conditions, the effectiveness of internal controls may vary over time.

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 believe 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, 2009. If any of the events or circumstances described in the following risks occur, our business, financial condition, results of
operations or cash flows could suffer, and the trading price of our common stock and our market capitalization 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:



| |  |  | cyclicality in the market for semiconductor manufacturing equipment;
| | - |  | --------------------------------------------------------------------



| |  |  | rates at which our chipmaker customers take delivery of photolithography tools from our lithography tool manufacturer customers;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | rates at which lithography tool manufacturer customers take delivery of light source systems from us;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | timing and size of orders from our customers;
| | - |  | ---------------------------------------------



| |  |  | the ability of our customers to pay for products purchased from us;
| | - |  | -------------------------------------------------------------------



| |  |  | our abilities to manage customer satisfaction and product reliability, and to provide effective field support to our customers;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | global demand for semiconductors in general and, in particular, for leading edge devices with smaller circuit geometries;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | utilization rates of light sources by our chipmaker customers and pulse usage which affect our installed base products revenues and costs;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | variability in the amount and timing of parts replacement costs under our OnPulse contracts;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | changing or adverse global economic conditions, including their potential effects on our customers, suppliers, ability to sell products, and
investments, and on energy prices, inflation, deflation, recession, unemployment, consumer confidence and demand, turmoil in the credit markets and financial services industry, and credit availability;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | improved or reduced market penetration by our competitors;
| | - |  | ----------------------------------------------------------



| |  |  | demand for reduced product lead time from our customers;
| | - |  | --------------------------------------------------------



| |  |  | the mix of light source models, and the level of installed base products revenues in our total revenues;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | changes in the price and profitability of our products;
| | - |  | -------------------------------------------------------



| |  |  | our ability to develop and implement new technologies and introduce new products that meet our customers needs;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | research and development costs incurred to develop new technologies;
| | - |  | --------------------------------------------------------------------



| |  |  | demand for TCZs production tool for low-temperature poly-silicon processing in the manufacture of flat panel displays;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | global demand for flat panel displays in general and, in particular, for organic light emitting diode displays;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | our ability to manage our manufacturing and inventory requirements, including our inventory levels and controls at our widely dispersed operations;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the financial condition of our suppliers which, if negative, could affect their ability to supply us with the parts that we need to manufacture our
products;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | foreign currency exchange rate fluctuations and possible protectionist measures in the countries in which we do business;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | our investments in marketable securities;
| | - |  | -----------------------------------------



27



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| |  |  | changes in our effective tax rate;
| | - |  | ----------------------------------



| |  |  | worldwide political instability;
| | - |  | --------------------------------



| |  |  | intellectual property protection; and
| | - |  | -------------------------------------



| |  |  | potential impairments to our goodwill or long-lived assets.
| | - |  | -----------------------------------------------------------

Prior to 2007, we derived the majority of our revenues from selling light source systems used in semiconductor manufacturing. In 2007,
2008 and 2009, our light source systems revenue represented 47%, 34% and 22% of total revenue, respectively. In recent years, chipmakers have been controlling the number of new tools they need to purchase by improving their manufacturing efficiency,
utilization and repurposing of existing tools. For those reasons, we anticipate ongoing increases in utilization rates of our growing installed base. As our installed base of light source systems grows, the product revenues generated by the
operation of these light sources have a significant effect on our business operations. The revenues from the operation of our installed base of light source systems depend on the rate at which our customers use these light source systems. Our
operating results for a particular period may be adversely affected if our customers reduce usage rates, or change their buying patterns, or if we incur higher parts replacement costs.

Because we sell a limited number of light source system products, the precise timing for recognizing revenue from an order may have a
significant effect 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. Our light source systems used in a production environment generate product revenues based on system usage, which may
also vary period to period. Additionally, accounting guidance may require us to defer revenue associated with contracts that contain multiple deliverables.

We manage our expense levels based, in large part, on expected future revenues. As a result, if our actual revenue decreases below the
level we expect, or we are not successful in aligning our manufacturing cost structure with decreasing production levels, 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 and gross margin, 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 the majority 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 installed base products directly from us in support of
their light source systems. Like us, our OEM customers depend on market demand for their products from the chipmakers who supply the many products using semiconductors. This market demand can be volatile and unpredictable and can affect our ability
to accurately predict future 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 actions may
be necessary in order for us to remain competitive and financially stable. During a down cycle or slowdown, we must adjust our cost and expense structure to prevailing market conditions while maintaining our longer term strategies and motivating and
retaining our key employees. In contrast, during periods of rapid growth, we must quickly 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 installed base products.
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 maintain extensive ongoing worldwide customer support capabilities to meet our customers needs and to remain competitive. Continued spending to further 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.

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



28



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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 affected, which may adversely affect our operating results, financial condition and cash flows.

A significant percentage of our revenue is derived from sales to a limited number of customers, and if we are not able to retain these customers, or
they reschedule, reduce or cancel orders, or delay or default on payments, we may experience material adverse effects on our operating results, financial condition and cash flows.*

Two large companies, ASML and Nikon, dominate the photolithography tool business. ASML, Nikon and Samsung, one of our chipmaker customers
that purchase our installed base products, accounted for the following percentages of our revenues during the periods indicated:



|        |  |                              |  |     
|------- |  | ---------------------------- |  | ----
|        |  | Three Months EndedMarch 
31,
|        |  | 2010                         |  | 2009
|ASML    |  | 28%                          |  | 7%  
|Nikon   |  | 15%                          |  | 30% 
|Samsung |  | 10%                          |  | 11% 
|        |  |                              |  |     
|Total   |  | 53%                          |  | 48% 
|        |  |                              |  |     

We expect that sales 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:



| |  |  | changes in global economic or market conditions affecting the semiconductor or the photolithography tool industries;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | a change in a customers competitive position in its industry;
| | - |  | --------------------------------------------------------------



| |  |  | a customer experiencing production problems;
| | - |  | --------------------------------------------



| |  |  | a decision to purchase light sources or related products from other suppliers;
| | - |  | ------------------------------------------------------------------------------



| |  |  | a change in a customers production or utilization rate; and
| | - |  | ------------------------------------------------------------



| |  |  | a decline in a customers financial condition.
| | - |  | ----------------------------------------------

These companies accounted for the following percentages of our total accounts receivable at the dates indicated:



|        |  |               |  |                 
|------- |  | ------------- |  | ----------------
|        |  | March 31,2010 |  | December 31,2009
|ASML    |  | 26%           |  | 14%             
|Nikon   |  | 12%           |  | 12%             
|Samsung |  | 5%            |  | 6%              
|        |  |               |  |                 
|Total   |  | 43%           |  | 32%             
|        |  |               |  |                 

Although our overall risk is greater due to the
downturn in the global economy, we believe there is limited credit risk exposure for us with these companies who continue to demonstrate sound creditworthiness. However, our ability to generate future revenue and collect accounts receivable from
them is dependent on their ongoing financial condition and liquidity.

The loss of any significant business from, or
production problems for, any one of these customers may have a material adverse effect on our operating results, financial condition and cash flows.



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Our revenue is derived from the sale of our light source systems and of products in support of the
installed base of light source systems being used in production.

We expect sales of our excimer light source systems,
including KrF and ArF systems, and the products in support of the installed base of light source systems to continue to account for a majority of our revenues in the near term. Continued market acceptance of our light source systems and installed
base products is, therefore, critical to our future success. The rate at which chipmakers adopt excimer light sources may vary, for reasons including:



| |  |  | performance of ArF immersion-specific resists;
| | - |  | ----------------------------------------------



| |  |  | potential shortages of specialized materials used in deep ultraviolet (DUV) optics;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | the productivity of double-patterning ArF lithography tools;
| | - |  | ------------------------------------------------------------



| |  |  | consolidation of chipmakers; and
| | - |  | --------------------------------



| |  |  | the level of demand for chips with ever-smaller feature sizes.
| | - |  | --------------------------------------------------------------

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



| |  |  | a decline in demand for our customers DUV photolithography tools;
| | - |  | ------------------------------------------------------------------



| |  |  | a failure to achieve continued market acceptance of our products;
| | - |  | -----------------------------------------------------------------



| |  |  | a failure to manage customer satisfaction, product reliability, or maintain the effectiveness of direct field support;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | a failure to release enhanced versions of our products on a timely basis;
| | - |  | -------------------------------------------------------------------------



| |  |  | a decline in chipmaker light source utilization rates or retirement of light sources in our installed base;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | a deterioration in global economic conditions;
| | - |  | ----------------------------------------------



| |  |  | the introduction of one or more improved versions of DUV light sources by our one competitor; and
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | technological changes that we are unable to address with our products.
| | - |  | ----------------------------------------------------------------------

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 systems and installed base 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 and installed base products, we currently utilize a single supplier. To reduce the risk
associated with this single supplier, we have supply agreements in place and carry a 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 for 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 fluctuations and subject to the same risks and
uncertainties regarding their ability to respond to changing market and global economic conditions.

Because many of these
suppliers reduce their workforce in an industry downturn and rehire 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. These suppliers may also be adversely affected by economic conditions, which could result in a lack of available capital and limit their ability to access such capital, if
needed, to fund their operations. In addition, 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 may
have a material adverse effect on our business, operating results, financial condition and cash flows.

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 which enable such processes. We believe that our future success depends in part upon our ability to develop,
manufacture, 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 established products. 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, 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.



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To provide our customers with more productive and lower cost of operation systems, 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 and to continue to grow our business. We cannot guarantee that we will be able
to manage our business growth effectively. 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. Development of new products and enhancements to existing products represent significant investments of our resources, and there is no guarantee that we will realize a return on these investments. Further, we may not be able to
effectively integrate new products and applications into our current operations. Any of these risks could have a material adverse effect on our operating results, financial condition and cash flows.

Current technologies that are still being developed and commercialized, such as EUV, and future technologies such as nano-imprint
lithography and certain maskless lithography techniques may render our KrF and ArF excimer light source products obsolete. We must manage product transitions, as the introduction of new products could have a negative adverse affect our sales of
existing products.

EUV sources could fail to meet customer specifications or not be delivered on time.*

We are investing significant financial and other resources to develop EUV source technology for chip manufacturing. In the third quarter
of 2009, we shipped the first prototype EUV source to ASML. We are currently integrating the prototype source into an ASML EUV lithography scanner, which is undergoing testing. We are also currently building a small number of pilot EUV sources for
our own use and for customers. If we are not able to meet customer specifications, or have reliability or quality problems, or if the pilot sources and eventually commercial systems do not meet customer specifications or are not introduced on time,
we may experience the recording of impairment charges, reduced orders, higher manufacturing costs, delays in acceptance of and payment for new products, and additional service and warranty expenses. Any of these risks could have a material adverse
effect on our operating results, financial condition and cash flows.

TCZ could fail to penetrate the flat panel display market and may not
achieve profitability.

Effective January 15, 2010, we acquired full ownership of TCZ. The manufacture of flat panel
displays is a new market for us and involves numerous risks. TCZ has shipped, installed and is currently testing its first production system for flat panel display fabrication. If this system does not meet customer specifications or the customer
decides not to place follow-on orders for additional systems, there is no guarantee that TCZ will be able to materially penetrate this market or ever achieve profitability. To the extent TCZ is unable to achieve profitability, or we are obligated to
provide increasing financial resources to support TCZs operations, our business, operating results, financial condition and cash flows could be materially adversely affected.

Global economic conditions could affect our revenues and operating results.

We cannot predict either the depth or the duration of an economic downturn or the speed and sustainability of an economic recovery in the
United States or other key global markets. A general weakening of, or declining corporate or consumer confidence in, the global economy, or a reduction in corporate or consumer spending, could delay or significantly decrease purchases of our
products by our customers, which are driven in part by indirect consumer demand for the electronic devices that contain semiconductor chips. It could also decrease revenues from our installed base products by causing our chipmaker customers to
reduce their usage rates. Our revenues and operating results will be affected by uncertain or changing economic and market conditions including inflation, deflation, prolonged weak consumer demand or other changes which may affect the principal
markets in which we conduct business. If economic or market conditions in the United States or other key global markets deteriorate, we may experience material adverse effects on our business, operating results, financial condition and cash flows.

Adverse economic and market conditions could also harm our business by negatively affecting the parties with whom we do
business, including our business partners, our customers and our suppliers. These conditions could impair the ability of our customers to pay for products they have purchased from us. As a result, allowances for doubtful accounts and write-offs of
accounts receivable from our customers may increase. In addition, our suppliers may experience financial difficulties that could negatively affect their operations and their ability to supply us with the parts we need to manufacture our products.

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

Our future performance depends, in part, upon our ability to continue to compete successfully worldwide. The
principal elements of competition in our markets are the technical performance characteristics of light source products and the operating efficiency of the system, which is based on availability, reliability, performance efficiency, cost of
ownership, and overall quality.



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We currently have one competitor, Gigaphoton, that sells light sources for DUV
photolithography applications. Gigaphoton is a joint venture between two large companies, Komatsu and Ushio, and is headquartered in Japan. Our customers have purchased products from Gigaphoton and have qualified Gigaphotons light sources for
use with their products. Additionally, Gigaphoton has been qualified by a number of chipmakers in Europe, Japan, other regions in Asia, and the United States, and has an installed base of light sources at chipmakers in these regions.

Future competitors may develop systems and products that are competitive to our products. This competition may affect our ability to sell
our 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 significant revenue stream for us, and they may attempt to supply replacement parts to our customer base. If any existing or future competitors gain market acceptance, we
could lose market share and our growth could slow or decline, which could have a material adverse effect on our business, operating results, financial condition and cash flows.

We must effectively manage changes in our business.

In order to respond to the business cycles of the semiconductor industry and overall economic conditions, we must constantly adjust our
plans and cost structure. As the semiconductor equipment industry cycle moves between contraction and growth and the condition of the global economy changes, we need to:



| |  |  | quickly adapt to changing sales and marketing channels;
| | - |  | -------------------------------------------------------



| |  |  | effectively manage our inventory levels;
| | - |  | ----------------------------------------



| |  |  | closely manage our global operations and cost structure;
| | - |  | --------------------------------------------------------



| |  |  | attract, train, retain and motivate key personnel;
| | - |  | --------------------------------------------------



| |  |  | improve our product reliability through quality control, order fulfillment and customer support capabilities; and
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | improve our processes and other internal management systems.
| | - |  | ------------------------------------------------------------

If we fail to effectively manage changes in our business, we may experience a material adverse effect on our operating results, financial
condition and cash flows.

Any failure to manage our inventory levels and our inventory controls at our widely dispersed operations could
adversely affect our business, operating results, financial condition and cash flows.*

We need to continually evaluate
and monitor the adequacy of our inventory levels. We also need to closely manage the levels of obsolete and excess parts. We have inventory located at warehouses at our corporate office in the United States and at bonded warehouses near our
subsidiaries in Korea, Taiwan and Europe. The success of our business depends to a significant degree on our ability to maintain or increase the sales of our products in the markets in which we do business. If we overestimate demand for our products
or the overall condition of the global economy, we could experience excess inventory levels and use unnecessary cash. As a result of such excess inventory, we may be required to significantly write down the value of our inventory, which would
negatively affect our operating results and financial condition.

We could also sustain a loss in the event of a catastrophe
in any of the locations where we maintain our inventory if our insurance is inadequate to cover such losses. We will be required to continually analyze the sufficiency of our inventory distribution systems in order to support our operations. We may
not adequately anticipate all of the changing demands that will be imposed on these systems. An inability or failure to update our internal inventory distribution systems or procedures, as required, could have a material adverse effect on our
business, operating results and financial condition.

International operations expose us to foreign currency exchange rate fluctuations for
all foreign currencies in which we do business, and we may be materially adversely affected by these fluctuations.*

We
have international subsidiaries that operate in foreign currencies. All of our international subsidiaries purchase inventory in U.S. Dollars from either our manufacturing facility in San Diego or from our Korean subsidiary and, in many cases, resell
these products to their customers in their local currency. In addition, our TCZ subsidiary purchases certain inventory in Euros. We hedge the foreign currency risks associated with these intercompany transactions by entering into forward contracts.
Although we enter into such forward contracts, they may not be adequate to eliminate the risk of foreign currency exchange rate exposures.

We have taken steps to mitigate our foreign currency exchange risks; however, these steps may fail to sufficiently hedge or otherwise
manage our foreign currency risks properly and could have a material adverse effect on our operating results and financial condition.



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International operations also expose us to currency fluctuations as we translate the
financial statements of our international subsidiaries to U.S. Dollars.

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

We believe it is critical for us to provide quick and
responsive support directly to our chipmaker and direct customers who use our light source products in their photolithography systems. It is also essential to have well trained field service engineers to provide the high level of support that our
customers have come to expect. Accordingly, we have an ongoing effort to develop our direct support system with service locations in Europe, Korea, Japan, China, Singapore, Taiwan and the United States This requires us to do the following:



| |  |  | recruit and train qualified support service personnel; and
| | - |  | ----------------------------------------------------------



| |  |  | maintain effective and highly trained resources who can provide support to our customers in various countries.
| | - |  | --------------------------------------------------------------------------------------------------------------

We may not be able to attract and train qualified personnel to maintain our direct support operations successfully. Further, we may incur
significant costs in providing this support. Failure to implement our direct support operation effectively could harm our operating results, financial condition and cash flows.

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

Operations at our primary manufacturing facility in San Diego and our refurbishment facility in Korea and operations at our suppliers 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. Our San
Diego facility, where we build our light source systems and replacement parts, poses the greatest risk. 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, particularly 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:



| |  |  | research and development;
| | - |  | -------------------------



| |  |  | engineering;
| | - |  | ------------



| |  |  | sales and marketing;
| | - |  | --------------------



| |  |  | direct service support;
| | - |  | -----------------------



| |  |  | manufacturing; and
| | - |  | ------------------



| |  |  | management or leadership roles.
| | - |  | -------------------------------

In particular, there are a limited number of experts in excimer light source technology, EUV lithography, and the laser crystallization
process for flat panel display fabrication, 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. We believe that our future growth and operating results will depend on:



| |  |  | the continued services of our research and development, engineering, sales and marketing, direct service support, manufacturing, and management
personnel;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to attract, train and retain highly-skilled key personnel; and
| | - |  | --------------------------------------------------------------------------



| |  |  | the ability of key management to continue to expand, motivate and manage our employee base.
| | - |  | -------------------------------------------------------------------------------------------

Stock option grants may not be viewed by key employees as a financial incentive during periods when stock price volatility could cause
our stock price to fall below the options exercise price, reducing the effectiveness of stock options as a means to retain and incentivize these employees. Grants to our key employees have an exercise price per share at least equal to the fair
market value of our common stock on the date of grant.

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.



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

We serve a global market and a large portion of our revenue is derived
from customers outside of the United States. We expect our international sales to continue to account for the majority of our total revenues. In order to support our foreign customers, we maintain a refurbishment facility in Korea as well as field
support facilities in Japan, the Netherlands, 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 be viably competitive in the global market, or we may not be able to meet the support or manufacturing levels required by our global
customers. Additionally, we are subject to risks inherent in doing business globally, including but not limited to:



| |  |  | fluctuations in exchange rates and currency controls;
| | - |  | -----------------------------------------------------



| |  |  | political and economic conditions and instability, including economic turmoil in many parts of the world;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | imposition of trade barriers and restrictions, such as the Foreign Corrupt Practices Act, including changes in tariff and freight rates, foreign
customs and duties;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulty in coordinating our management and operations in different countries;
| | - |  | --------------------------------------------------------------------------------



| |  |  | difficulties in staffing and managing foreign subsidiary and branch operations;
| | - |  | -------------------------------------------------------------------------------



| |  |  | limited intellectual property protection in some countries;
| | - |  | -----------------------------------------------------------



| |  |  | potentially adverse tax consequences in some countries;
| | - |  | -------------------------------------------------------



| |  |  | the possibility of challenging accounts receivable collections;
| | - |  | ---------------------------------------------------------------



| |  |  | the risk of business interruption as a result of natural disasters or supply chain disruptions;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | the effect of acts of terrorism and war;
| | - |  | ----------------------------------------



| |  |  | the burdens of complying with foreign laws, including regulatory structures and unexpected changes in regulatory environments; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | distribution costs, disruptions in shipping or reduced availability of freight transportation.
| | - |  | ----------------------------------------------------------------------------------------------

A significant portion of our customers are located in Asia. Political turmoil, economic problems and currency fluctuations affecting Asia
could increase our risk in that region. It has not been difficult for us to comply with United States export controls; however, changes to these controls in the future could make it more difficult or impossible for us to export our products to many
countries. There are certain risks for which we purchase limited or no insurance, including earthquake risk. Any of these vulnerabilities could have a material adverse effect on our business, operating results, financial condition and cash flows.
Currently, none of our United States or international employees are members of a labor union; however if such employees decide to join a union, our cost of doing business could increase, and we could experience contract delays, difficulty in
adapting to a changing regulatory and economic environment, cultural conflicts between unionized and non-unionized employees, strikes and work stoppages, any of which could have a material adverse effect on our business, financial condition and
operating results.

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 United States and various foreign countries covering certain aspects of technology related to light sources and piezoelectric techniques. These patents will expire at various times through
2028.

Our pending patent applications and any future applications might not be approved. Our patents may 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 United States 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 United States Therefore, 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.



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Other companies or persons may file or have filed patent applications that are similar or
identical to ours. As a result, 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:



| |  |  | trade secret protection;
| | - |  | ------------------------



| |  |  | employee nondisclosure agreements;
| | - |  | ----------------------------------



| |  |  | third-party nondisclosure agreements; and
| | - |  | -----------------------------------------



| |  |  | other intellectual property protection methods.
| | - |  | -----------------------------------------------

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



| |  |  | develop substantially the same proprietary information or techniques independently;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | gain access to our trade secrets from unrelated third parties and/or without obligation of confidentiality; or
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | disclose our technology following expiration of their confidentiality obligation.
| | - |  | ---------------------------------------------------------------------------------

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.

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 from our primary business efforts, 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, it may have a material adverse effect on our business, operating
results, financial condition and cash flows. 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 legal proceedings. Any adverse determination in a legal proceeding could result in one or more of the following:



| |  |  | loss of our proprietary rights;
| | - |  | -------------------------------



| |  |  | exposure to significant liabilities by other third parties;
| | - |  | -----------------------------------------------------------



| |  |  | a requirement that we get a license from third parties on terms that are not favorable to us or not available at all; or
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | an injunction that prohibits us from manufacturing or selling our products.
| | - |  | ---------------------------------------------------------------------------

Any of these actions could be costly and would divert the efforts and attention of our management and technical personnel, which could
have a material adverse effect on our business, operating results, financial condition and cash flows.

Disputes may arise over the
ownership of intellectual property resulting from our research and development activities that are partially funded by other parties.

Funds from research and development arrangements with third parties have been used to pay for a portion of our research and development
costs associated with the design and development of specific products. Additionally, funds from lithography tool manufacturers and chipmaker customers have been used to fund a portion of our light source research and development efforts. In
connection with providing these research and development services, we try to make contractually clear who owns the intellectual property that results from such activities. Disputes over the ownership or rights to use or market the resulting
intellectual property could 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.

If our goodwill, definite lived intangible assets or our property, plant and equipment become impaired, we may be required to record a
significant charge to earnings.

We review our amortizable intangible assets, which are primarily patents, and our
property, plant and equipment, for impairment when events or changes in circumstances indicate that their carrying value may not be recoverable. Goodwill is also tested for impairment at least annually and more often if certain triggering events or
circumstances occur. Factors that may be considered to be a change in circumstances that would indicate the carrying value of our goodwill, amortizable intangible assets or our property, plant and equipment may not be recoverable include reduced
future cash flow estimates for our company, a decline in our stock price



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and market capitalization, slower growth rates in our industry and adverse global economic conditions. If, as a result of our impairment test, it is determined that our goodwill, amortizable
intangible assets or property plant and equipment is impaired, we may be required to record a significant charge in our financial statements during the period in which such impairment is determined, which may have a material adverse affect on our
operating results.

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

The value of our investments in marketable securities may be adversely affected by changes in interest rates, downgrades
in the creditworthiness of bonds we hold, turmoil in the credit markets and financial services industry 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, which could have a material adverse effect on our operating results and financial position.

Changes in our effective tax rate may have a material adverse effect on our operating results, financial position and cash flows.

Our future effective tax rate may be adversely affected by a number of factors including:



| |  |  | changes in available tax credits, particularly the federal research and development tax credit, which expired at the end of 2009 and has yet to be
reinstated for 2010 and later years;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the resolution of issues arising from tax audits with various tax authorities;
| | - |  | ------------------------------------------------------------------------------



| |  |  | the jurisdictions in which profits are determined to be earned and taxed;
| | - |  | -------------------------------------------------------------------------



| |  |  | changes in the valuation of our deferred tax assets and liabilities;
| | - |  | --------------------------------------------------------------------



| |  |  | adjustments to estimated taxes upon finalization of various tax returns;
| | - |  | ------------------------------------------------------------------------



| |  |  | increases in expenses not deductible for tax purposes;
| | - |  | ------------------------------------------------------



| |  |  | changes in tax laws or the interpretation of such tax laws, such as the Internal Revenue Service (IRS) Code Section 199 manufacturing
deduction which currently provides a tax benefit; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the repatriation of non-U.S. earnings for which we have not previously provided for United States taxes.
| | - |  | --------------------------------------------------------------------------------------------------------

An adverse change in our future effective tax rate could in turn, adversely affect our operating results, financial position and cash
flows.

We may not have sufficient cash to fund our current operations and future growth plans.

We believe that our cash resources remain sufficient for our planned operations; however, if global economic conditions deteriorate, our
business conditions worsen, our plans change or other unanticipated events occur, we may need to raise additional cash through the establishment of financing facilities or the sale of equity or debt securities to fund our operations. Depending on
market conditions, it could be difficult for us to raise the additional cash needed without incurring significant dilution of our existing stockholders or agreeing to significant restrictions on our ability to operate as currently planned. If we
were unable to raise additional cash in such circumstances, we could be required to reduce costs further through the delay, reduction or curtailment of our operating plan, including further reductions in our global workforce or other cost reduction
actions, any of which could have a material adverse effect on our operating results, financial condition or cash flows.

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 mergers, acquisitions and joint ventures or entering a new market include the following:



| |  |  | diversion of managements attention and resources to integrate the new business opportunity;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | failure to retain key personnel;
| | - |  | --------------------------------



| |  |  | customer dissatisfaction or performance problems with the acquired company or new product in a new market;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | costs associated with acquisitions and joint ventures and the integration of acquired operations;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | costs associated with developing, marketing, introducing and supporting a new product in a new market;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | failure to commercialize purchased technologies;
| | - |  | ------------------------------------------------



| |  |  | ability of the acquired companies, joint ventures or new markets to meet their financial projections;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | assumption of unknown liabilities or other unanticipated events or circumstances; and
| | - |  | -------------------------------------------------------------------------------------



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| |  |  | compliance with the Sarbanes-Oxley Act of 2002, new SEC regulations, NASDAQ Stock Market rules and new accounting standards as they relate to the new
company or joint venture.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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. 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,
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 operating results, 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. We also regularly upgrade our information systems hardware and software to better meet the information requirements needed to effectively
manage our business. If we encounter unforeseen problems with regard to our ERP system or other critical information systems, including those encountered during system upgrades, our business could be adversely affected.

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 new SEC
regulations, new NASDAQ Stock Market rules, new accounting requirements and the expected future requirement to transition to international financial reporting standards 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 of 2002 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 United States 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:



| |  |  | supplies of raw materials and components for the manufacture of our products or our customers products may be disrupted;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | we may not be able to deliver our products to our customers in a timely manner;
| | - |  | -------------------------------------------------------------------------------



| |  |  | we may not be able to provide timely service of or support for installed light sources for chipmakers; and
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | our sales and marketing efforts may be disrupted.
| | - |  | -------------------------------------------------

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.



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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 effect on our business.

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 meet other requirements 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. This could have a material adverse effect
on our business, operating results, financial condition and cash flows.

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, operating results, financial condition and cash flows.

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 in the United States
and in some other countries. We are also trying to register additional trademarks in the United States and in other countries. These registrations in other countries, or any new registrations we may undertake in the United States, could be
unsuccessful.

We use these trademarks in the course of our business and in advertising materials, which are distributed
throughout the world. While we take precautions against trademark infringement before using our trademarks in new markets, we may be subject to claims of trademark infringement. The process of negotiating a settlement or coexistence agreement to
allow us to continue using our trademarks in a particular market could be expensive or distract us from our primary business efforts, potentially adversely affecting our financial condition or operations. Furthermore, if we must undertake
negotiations, and the negotiations are ultimately unsuccessful, we would either need to discontinue using the trademarks in the new market, risk facing litigation or potentially pay damages. Even if we ultimately prevail, litigation could be
expensive or distract us from our primary business efforts.

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

The price of our common stock has historically been subject to significant fluctuations and could continue to
fluctuate significantly in response to a variety of factors, including the risk factors contained in this report.

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



| |  |  | the cyclical nature of the semiconductor industry;
| | - |  | --------------------------------------------------



| |  |  | actual or anticipated fluctuations in our operating results, including our net income, revenue and product gross margins;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | conditions and trends in the light source device and other technology industries;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | announcements of innovations in technology;
| | - |  | -------------------------------------------



| |  |  | new products offered by us or our competitor;
| | - |  | ---------------------------------------------



| |  |  | developments of patents or proprietary rights;
| | - |  | ----------------------------------------------



| |  |  | changes in financial estimates by securities analysts;
| | - |  | ------------------------------------------------------



| |  |  | global political, economic, and market conditions, including a recession or economic deterioration; and
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | failure to properly manage any single or combination of risk factors listed in this section.
| | - |  | --------------------------------------------------------------------------------------------



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Stock markets in the United States can experience extraordinary volatility. Severe price
fluctuations in a companys stock have frequently been followed by securities litigation. If such litigation were initiated against us, it may result in substantial costs and a diversion of managements attention and resources and,
therefore, could have a material adverse effect on our business, operating results, financial condition and cash flows.

Some anti-takeover
provisions contained in our articles of incorporation and bylaws, as well as provisions of Nevada law and our executive employment contracts, could impair a takeover attempt.

Our articles of incorporation and bylaws contain provisions which could have the effect (separately, or in combination) of rendering more
difficult or discouraging a merger, acquisition or other change of control deemed undesirable by our Board of Directors. These include provisions:



| |  |  | authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limiting the liability of, and providing indemnification to, our directors and officers;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for
election to our Board of Directors;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | controlling the procedures for conduct of stockholder meetings and election and removal of directors; and
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | specifying that stockholders may not take action by written consent.
| | - |  | --------------------------------------------------------------------

These provisions, alone or together, could deter or delay hostile takeovers, proxy contests and changes in control or management.

As a Nevada corporation, we are subject to Nevada law. Nevada law does not grant stockholders the authority to call a special
meeting unless the corporations articles of incorporation or bylaws otherwise provide; neither our articles of incorporation nor our bylaws contain such a provision. Nevada law may also limit the ability of certain stockholders to engage in
certain business combinations with us and may limit the voting rights of stockholders who acquire 20% or more of our outstanding shares. Either limitation could discourage or increase the difficulty of an attempted merger, acquisition or other
change of control.

Additionally, we have employment agreements with certain officers under which severance payments would
become payable in the event of specified terminations without cause or terminations under certain circumstances after a change in control. If such persons were terminated without cause or under certain circumstances after a change of control, and
the severance payments under the current employment agreements were to become payable, the officers would receive certain payments and other benefits which depend on the individual officers employment agreement but generally include continued
base salary and health insurance payments for a period of time, lump sum bonus payments and accelerated vesting of equity awards.

Any provision of our articles of incorporation, bylaws, employment agreements or Nevada law that has the effect of delaying or deterring
a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock in connection with such a transaction and also could affect the price that some investors are willing to pay for our
common stock.

Sales of additional common stock and securities convertible into our common stock may dilute the voting power of current
holders.

We may issue equity securities in the future the terms and rights of which are superior to those of our common
stock. Our articles of incorporation authorize the issuance of up to 5,000,000 shares of preferred stock. These are blank check preferred shares, meaning that our Board of Directors is authorized, from time to time, to issue the shares
and designate their voting, conversion and other rights, including rights superior, or preferential, to rights of already outstanding shares, all without stockholder consent. No preferred shares are outstanding, and we currently do not intend to
issue any shares of preferred stock. Any shares of preferred stock that may be issued in the future could be given voting and conversion rights that could dilute the voting power and equity of existing holders of shares of common stock and have
preferences over shares of common stock with respect to dividends and liquidation rights.

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



| | (a) | Not applicable
| | --- | --------------



| | (b) | Not applicable
| | --- | --------------



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| | (c) | On April 21, 2008, we announced that our board of directors authorized us to repurchase up to $100 million of our common stock. The purchases have been made
from time to time in the open market or in privately negotiated transactions. The program does not have a fixed expiration date and may be discontinued at any time. No shares were purchased by us during the three months ended March 31, 2010.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4.
(Removed and Reserved)

ITEM 5. Other Information



| | (a) | None.
| | --- | -----

| | (b) | There were no material changes to the procedures by which security holders may recommend nominees to our board of directors.
| | --- | ----------------------------------------------------------------------------------------------------------------------------

ITEM 6. Exhibits



|     |  |                                                                                                                                                               
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|10.1 |  | Summary description of Cymer, Inc. Long-Term Incentive Program.                                                                                               
|     | 
|10.2 |  | Summary description of Cymer, Inc. Short-Term Incentive Program.                                                                                              
|     | 
|10.3 |  | Form of Performance Restricted Stock Unit Grant Notice for use with the Long-Term Incentive Program under the Amended and Restated 2005 Equity Incentive Plan.
|     | 
|31.1 |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.                                                                   
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.                                                                   
|     | 
|32.1 |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act.                                                                   
|     | 
|32.2 |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.                                                                   



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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: April 29, 2010 |  | By:         |  | /s/ PAUL B. BOWMAN                               
|                     |  |             |  | Paul B. Bowman                                   
|                     |  |             |  | Senior Vice President and
Chief Financial Officer
|                     |  |             |  | (Principal Financial Officer)                    



41