##### 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 September 30, 2009

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 November 2, 2009 was 28,847,995.









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##### Table of Contents

CYMER, INC.

FORM 10-Q

For the Quarterly Period Ended September 30, 2009

INDEX



|           |  |                                                                                                                                              |  |     
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                                                              |  | Page
|           |  |                                                                                                                                             
|PART 1.    |  | FINANCIAL INFORMATION                                                                                                                        |  |     
|           |  |                                                                                                                                             
|ITEM 1.    |  | Financial Statements (unaudited)                                                                                                             |  | 3   
|           |  |                                                                                                                                             
|           |  | Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31,
2008                                                         |  | 3   
|           |  |                                                                                                                                             
|           |  | Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008                              |  | 4   
|           |  |                                                                                                                                             
|           |  | Condensed Consolidated Statements of Stockholders Equity for the nine months ended September 30, 2009 and
 the year ended December 31, 2008 |  | 5   
|           |  |                                                                                                                                             
|           |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 
2008                                       |  | 6   
|           |  |                                                                                                                                             
|           |  | Notes to Condensed Consolidated Financial Statements                                                                                         |  | 7   
|           |  |                                                                                                                                             
|ITEM 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                                                        |  | 19  
|           |  |                                                                                                                                             
|ITEM 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                   |  | 34  
|           |  |                                                                                                                                             
|ITEM 4.    |  | Controls and Procedures                                                                                                                      |  | 35  
|           |  |                                                                                                                                             
|PART II.   |  | OTHER INFORMATION                                                                                                                            |  | 36  
|           |  |                                                                                                                                             
|ITEM 1.    |  | Legal Proceedings                                                                                                                            |  | 36  
|           |  |                                                                                                                                             
|ITEM 1A.   |  | Risk Factors                                                                                                                                 |  | 36  
|           |  |                                                                                                                                             
|ITEM 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                  |  | 49  
|           |  |                                                                                                                                             
|ITEM 3.    |  | Defaults Upon Senior Securities                                                                                                              |  | 49  
|           |  |                                                                                                                                             
|ITEM 4.    |  | Submission of Matters to a Vote of Security Holders                                                                                          |  | 49  
|           |  |                                                                                                                                             
|ITEM 5.    |  | Other Information                                                                                                                            |  | 49  
|           |  |                                                                                                                                             
|ITEM 6.    |  | Exhibits                                                                                                                                     |  | 49  
|           | 
|SIGNATURES |  | 50                                                                                                                                          



2



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##### Table of Contents

ITEM 1. Financial Statements

CYMER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except
share data)



|                                                                                                                                                                                                                                 |  |                   |           |                  |   |          
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | ---------------- | - | ---------
|                                                                                                                                                                                                                                 |  | September 30,2009 |           | December 31,2008
|ASSETS                                                                                                                                                                                                                           |  |                   |           |                  |   |          
|                                                                                                                                                                                                                                 |  |                  
|CURRENT ASSETS:                                                                                                                                                                                                                  |  |                   |           |                  |   |          
|Cash and cash equivalents                                                                                                                                                                                                        |  | $                 | 111,590   |                  | $ | 252,391  
|Restricted cash                                                                                                                                                                                                                  |  |                   | 1,200     |                  |   | -        
|Short-term investments                                                                                                                                                                                                           |  |                   | 46,702    |                  |   | 30,900   
|Accounts receivable - net                                                                                                                                                                                                        |  |                   | 77,837    |                  |   | 64,296   
|Accounts receivable - related party                                                                                                                                                                                              |  |                   | 583       |                  |   | 818      
|Inventories                                                                                                                                                                                                                      |  |                   | 179,668   |                  |   | 194,746  
|Deferred and prepaid income taxes                                                                                                                                                                                                |  |                   | 45,955    |                  |   | 46,886   
|Income taxes receivable                                                                                                                                                                                                          |  |                   | 5,152     |                  |   | -        
|Prepaid expenses and other assets                                                                                                                                                                                                |  |                   | 8,690     |                  |   | 9,344    
|                                                                                                                                                                                                                                 |  |                   |           |                  |   |          
|Total current assets                                                                                                                                                                                                             |  |                   | 477,377   |                  |   | 599,381  
|                                                                                                                                                                                                                                 |  |                  
|PROPERTY AND EQUIPMENT - NET                                                                                                                                                                                                     |  |                   | 102,749   |                  |   | 114,390  
|LONG-TERM INVESTMENTS                                                                                                                                                                                                            |  |                   | -         |                  |   | 9,456    
|DEFERRED INCOME TAXES                                                                                                                                                                                                            |  |                   | 28,481    |                  |   | 29,168   
|GOODWILL                                                                                                                                                                                                                         |  |                   | 8,833     |                  |   | 8,833    
|INTANGIBLE ASSETS - NET                                                                                                                                                                                                          |  |                   | 8,497     |                  |   | 9,898    
|OTHER ASSETS                                                                                                                                                                                                                     |  |                   | 6,143     |                  |   | 6,318    
|                                                                                                                                                                                                                                 |  |                   |           |                  |   |          
|TOTAL ASSETS                                                                                                                                                                                                                     |  | $                 | 632,080   |                  | $ | 777,444  
|                                                                                                                                                                                                                                 |  |                   |           |                  |   |          
|                                                                                                                                                                                                                                 |  |                  
|LIABILITIES                                                                                                                                                                                                                      |  |                   |           |                  |   |          
|                                                                                                                                                                                                                                 |  |                  
|CURRENT LIABILITIES:                                                                                                                                                                                                             |  |                   |           |                  |   |          
|Accounts payable                                                                                                                                                                                                                 |  | $                 | 16,388    |                  | $ | 15,003   
|Accounts payable - related party                                                                                                                                                                                                 |  |                   | 3,324     |                  |   | 4,108    
|Accrued warranty                                                                                                                                                                                                                 |  |                   | 17,400    |                  |   | 23,565   
|Accrued payroll and benefits                                                                                                                                                                                                     |  |                   | 14,649    |                  |   | 12,682   
|Accrued patents, royalties and other fees                                                                                                                                                                                        |  |                   | 4,235     |                  |   | 3,795    
|Convertible subordinated notes                                                                                                                                                                                                   |  |                   | -         |                  |   | 140,722  
|Accrued income taxes                                                                                                                                                                                                             |  |                   | 9,059     |                  |   | 1,085    
|Deferred revenue                                                                                                                                                                                                                 |  |                   | 19,449    |                  |   | 15,344   
|Accrued and other current liabilities                                                                                                                                                                                            |  |                   | 2,376     |                  |   | 8,278    
|                                                                                                                                                                                                                                 |  |                   |           |                  |   |          
|Total current liabilities                                                                                                                                                                                                        |  |                   | 86,880    |                  |   | 224,582  
|                                                                                                                                                                                                                                 |  |                  
|ACCRUED INCOME TAXES                                                                                                                                                                                                             |  |                   | 9,695     |                  |   | 18,447   
|DEFERRED REVENUE                                                                                                                                                                                                                 |  |                   | 312       |                  |   | -        
|OTHER LIABILITIES                                                                                                                                                                                                                |  |                   | 8,033     |                  |   | 11,791   
|                                                                                                                                                                                                                                 |  |                   |           |                  |   |          
|Total liabilities                                                                                                                                                                                                                |  |                   | 104,920   |                  |   | 254,820  
|                                                                                                                                                                                                                                 |  |                   |           |                  |   |          
|                                                                                                                                                                                                                                 |  |                  
|COMMITMENTS AND CONTINGENCIES-Note 8                                                                                                                                                                                             |  |                   |           |                  |   |          
|SUBSEQUENT EVENTS-Note 13                                                                                                                                                                                                        |  |                   |           |                  |   |          
|                                                                                                                                                                                                                                 |  |                  
|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; 42,657,000 shares issued and 29,805,000 shares outstanding at
September 30, 2009; 42,461,000 shares issued and 29,609,000 shares outstanding at December 31, 2008 |  |                   | 43        |                  |   | 42       
|Additional paid-in capital                                                                                                                                                                                                       |  |                   | 593,471   |                  |   | 586,539  
|Treasury stock at cost (12,852,000 common shares) at September 30, 2009 and December 31, 2008                                                                                                                                    |  |                   | (473,580) |                  |   | (473,580)
|Accumulated other comprehensive loss                                                                                                                                                                                             |  |                   | (6,819)   |                  |   | (5,999)  
|Retained earnings                                                                                                                                                                                                                |  |                   | 410,597   |                  |   | 410,774  
|                                                                                                                                                                                                                                 |  |                   |           |                  |   |          
|Total Cymer, Inc. stockholders equity                                                                                                                                                                                           |  |                   | 523,712   |                  |   | 517,776  
|Noncontrolling interest                                                                                                                                                                                                          |  |                   | 3,448     |                  |   | 4,848    
|                                                                                                                                                                                                                                 |  |                   |           |                  |   |          
|Total equity                                                                                                                                                                                                                     |  |                   | 527,160   |                  |   | 522,624  
|                                                                                                                                                                                                                                 |  |                   |           |                  |   |          
|TOTAL LIABILITIES AND EQUITY                                                                                                                                                                                                     |  | $                 | 632,080   |                  | $ | 777,444  
|                                                                                                                                                                                                                                 |  |                   |           |                  |   |          

See Notes to Unaudited Condensed Consolidated Financial Statements.



3



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##### Table of Contents

CYMER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except per share data)



|                                                     |  |                                         |        |                                        |   |         |  |      |         |  |   |        
|---------------------------------------------------- |  | --------------------------------------- | ------ | -------------------------------------- | - | ------- |  | ---- | ------- |  | - | -------
|                                                     |  | For the three monthsended September
30, |        | For the nine monthsended September
30,
|                                                     |  | 2009                                    |        | 2008                                   |   | 2009    |  | 2008
|REVENUES:                                            |  |                                         |        |                                        |   |         |  |      |         |  |   |        
|Product sales                                        |  | $                                       | 92,110 |                                        | $ | 110,169 |  | $    | 210,724 |  | $ | 356,762
|Product sales - related party                        |  |                                         | 218    |                                        |   | 450     |  |      | 536     |  |   | 1,800  
|                                                     |  |                                         |        |                                        |   |         |  |      |         |  |   |        
|Total revenues                                       |  |                                         | 92,328 |                                        |   | 110,619 |  |      | 211,260 |  |   | 358,562
|                                                     |  |                                         |        |                                        |   |         |  |      |         |  |   |        
|                                                     |  |                                         |        |                                       
|COST OF REVENUES                                     |  |                                         | 47,827 |                                        |   | 58,715  |  |      | 121,096 |  |   | 186,132
|                                                     |  |                                         |        |                                        |   |         |  |      |         |  |   |        
|                                                     |  |                                         |        |                                       
|GROSS PROFIT                                         |  |                                         | 44,501 |                                        |   | 51,904  |  |      | 90,164  |  |   | 172,430
|                                                     |  |                                         |        |                                        |   |         |  |      |         |  |   |        
|                                                     |  |                                         |        |                                       
|OPERATING EXPENSES:                                  |  |                                         |        |                                        |   |         |  |      |         |  |   |        
|Research and development                             |  |                                         | 17,258 |                                        |   | 24,334  |  |      | 49,986  |  |   | 71,272 
|Sales and marketing                                  |  |                                         | 4,674  |                                        |   | 5,853   |  |      | 12,584  |  |   | 18,366 
|General and administrative                           |  |                                         | 7,165  |                                        |   | 7,997   |  |      | 20,839  |  |   | 27,090 
|Restructuring                                        |  |                                         | -      |                                        |   | -       |  |      | 8,407   |  |   | -      
|                                                     |  |                                         |        |                                        |   |         |  |      |         |  |   |        
|                                                     |  |                                         |        |                                       
|Total operating expenses                             |  |                                         | 29,097 |                                        |   | 38,184  |  |      | 91,816  |  |   | 116,728
|                                                     |  |                                         |        |                                        |   |         |  |      |         |  |   |        
|                                                     |  |                                         |        |                                       
|OPERATING INCOME (LOSS)                              |  |                                         | 15,404 |                                        |   | 13,720  |  |      | (1,652) |  |   | 55,702 
|                                                     |  |                                         |        |                                        |   |         |  |      |         |  |   |        
|                                                     |  |                                         |        |                                       
|OTHER INCOME (EXPENSE):                              |  |                                         |        |                                        |   |         |  |      |         |  |   |        
|Foreign currency exchange loss                       |  |                                         | (10)   |                                        |   | (6,359) |  |      | (1,488) |  |   | (6,428)
|Write-down of investment                             |  |                                         | (291)  |                                        |   | (270)   |  |      | (291)   |  |   | (5,103)
|Interest and other income                            |  |                                         | 322    |                                        |   | 2,014   |  |      | 1,343   |  |   | 7,722  
|Interest and other expense                           |  |                                         | (68)   |                                        |   | (1,645) |  |      | (921)   |  |   | (4,943)
|                                                     |  |                                         |        |                                        |   |         |  |      |         |  |   |        
|                                                     |  |                                         |        |                                       
|Total other expense - net                            |  |                                         | (47)   |                                        |   | (6,260) |  |      | (1,357) |  |   | (8,752)
|                                                     |  |                                         |        |                                        |   |         |  |      |         |  |   |        
|                                                     |  |                                         |        |                                       
|INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT)  |  |                                         | 15,357 |                                        |   | 7,460   |  |      | (3,009) |  |   | 46,950 
|                                                     |  |                                         |        |                                        |   |         |  |      |         |  |   |        
|                                                     |  |                                         |        |                                       
|INCOME TAX PROVISION (BENEFIT)                       |  |                                         | 5,429  |                                        |   | 2,612   |  |      | (632)   |  |   | 16,433 
|                                                     |  |                                         |        |                                        |   |         |  |      |         |  |   |        
|                                                     |  |                                         |        |                                       
|NET INCOME (LOSS)                                    |  | $                                       | 9,928  |                                        | $ | 4,848   |  | ($   | 2,377)  |  | $ | 30,517 
|                                                     |  |                                         |        |                                        |   |         |  |      |         |  |   |        
|Net loss attributable to noncontrolling interest     |  |                                         | 857    |                                        |   | 483     |  |      | 2,200   |  |   | 2,039  
|                                                     |  |                                         |        |                                        |   |         |  |      |         |  |   |        
|                                                     |  |                                         |        |                                       
|NET INCOME (LOSS) ATTRIBUTABLE TO CYMER, INC.        |  | $                                       | 10,785 |                                        | $ | 5,331   |  | ($   | 177)    |  | $ | 32,556 
|                                                     |  |                                         |        |                                        |   |         |  |      |         |  |   |        
|                                                     |  |                                         |        |                                       
|EARNINGS (LOSS) PER SHARE:                           |  |                                         |        |                                        |   |         |  |      |         |  |   |        
|Basic earnings (loss) per share                      |  | $                                       | 0.36   |                                        | $ | 0.18    |  | ($   | 0.01)   |  | $ | 1.08   
|                                                     |  |                                         |        |                                        |   |         |  |      |         |  |   |        
|                                                     |  |                                         |        |                                       
|Weighted average common shares outstanding - basic   |  |                                         | 29,762 |                                        |   | 29,665  |  |      | 29,697  |  |   | 30,034 
|                                                     |  |                                         |        |                                        |   |         |  |      |         |  |   |        
|Diluted earnings (loss) per share                    |  | $                                       | 0.36   |                                        | $ | 0.18    |  | ($   | 0.01)   |  | $ | 1.07   
|                                                     |  |                                         |        |                                        |   |         |  |      |         |  |   |        
|Weighted average common shares outstanding - diluted |  |                                         | 30,138 |                                        |   | 29,779  |  |      | 29,697  |  |   | 32,952 
|                                                     |  |                                         |        |                                        |   |         |  |      |         |  |   |        

See Notes to Unaudited Condensed Consolidated Financial Statements.



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CYMER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (UNAUDITED)



|                                                                                                                                                  |  |                                  |  |                |    |                |        |                                            |        |                  |  |       |           |                        |   |         |  |   |         |  |   |          |  |   |         |  |   |         
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- |  | -------------- | -- | -------------- | ------ | ------------------------------------------ | ------ | ---------------- |  | ----- | --------- | ---------------------- | - | ------- |  | - | ------- |  | - | -------- |  | - | ------- |  | - | --------
|                                                                                                                                                  |  | Cymer, Inc. Stockholders Equity |  |                |    |               
|                                                                                                                                                  |  | Common Stock                     |  | Paid-inCapital |    | Treasury Stock |        | AccumulatedOtherComprehensiveIncome (loss) |        | RetainedEarnings |  | Total |           | NoncontrollingInterest |   | Total  
|(In thousands)                                                                                                                                    |  | Shares                           |  | Amount         |    |                | Shares |                                            | Amount |                  |  |       |           |                       
|BALANCE, DECEMBER 31, 2007                                                                                                                        |  | 42,339                           |  | $              | 42 |                | $      | 579,711                                    |        | (12,049)         |  | $     | (450,704) |                        | $ | 214     |  | $ | 374,260 |  | $ | 503,523  |  | $ | 5,711   |  | $ | 509,234 
|Exercise of common stock options                                                                                                                  |  | 70                               |  |                |    |                |        | 1,630                                      |        |                  |  |       |           |                        |   |         |  |   |         |  |   | 1,630    |  |   |         |  |   | 1,630   
|Issuance of restricted stock awards                                                                                                               |  | 15                               |  |                |    |                |        |                                            |        |                  |  |       |           |                        |   |         |  |   |         |  |   | -        |  |   |         |  |   | -       
|Issuance of employee stock purchase plan shares                                                                                                   |  | 37                               |  |                |    |                |        | 876                                        |        |                  |  |       |           |                        |   |         |  |   |         |  |   | 876      |  |   |         |  |   | 876     
|Employee stock-based compensation                                                                                                                 |  |                                  |  |                |    |                |        | 5,597                                      |        |                  |  |       |           |                        |   |         |  |   |         |  |   | 5,597    |  |   |         |  |   | 5,597   
|Employee stock options - change in status                                                                                                         |  |                                  |  |                |    |                |        | 1                                          |        |                  |  |       |           |                        |   |         |  |   |         |  |   | 1        |  |   |         |  |   | 1       
|Non-employee stock options granted                                                                                                                |  |                                  |  |                |    |                |        | 32                                         |        |                  |  |       |           |                        |   |         |  |   |         |  |   | 32       |  |   |         |  |   | 32      
|Income tax shortfall from stock option exercises                                                                                                  |  |                                  |  |                |    |                |        | (1,308)                                    |        |                  |  |       |           |                        |   |         |  |   |         |  |   | (1,308)  |  |   |         |  |   | (1,308) 
|Repurchase of common stock into treasury                                                                                                          |  |                                  |  |                |    |                |        |                                            |        | (803)            |  |       | (22,876)  |                        |   |         |  |   |         |  |   | (22,876) |  |   |         |  |   | (22,876)
|Capital Contribution by minority shareholder                                                                                                      |  |                                  |  |                |    |                |        |                                            |        |                  |  |       |           |                        |   |         |  |   |         |  |   |          |  |   | 2,000   |  |   | 2,000   
|Net income                                                                                                                                        |  |                                  |  |                |    |                |        |                                            |        |                  |  |       |           |                        |   |         |  |   | 36,540  |  |   | 36,540   |  |   | (2,863) |  |   | 33,677  
|Other comprehensive income:                                                                                                                       |  |                                  |  |                |    |                |        |                                            |        |                  |  |       |           |                        |   |         |  |   |         |  |   |          |  |   |         |  |   |         
|Translation adjustment                                                                                                                            |  |                                  |  |                |    |                |        |                                            |        |                  |  |       |           |                        |   | (5,921) |  |   |         |  |   | (5,921)  |  |   |         |  |   | (5,921) 
|Unrealized loss on available-for-sale investments, net of tax                                                                                     |  |                                  |  |                |    |                |        |                                            |        |                  |  |       |           |                        |   | (68)    |  |   |         |  |   | (68)     |  |   |         |  |   | (68)    
|Unrealized loss on forward exchange contracts, net of tax                                                                                         |  |                                  |  |                |    |                |        |                                            |        |                  |  |       |           |                        |   | (254)   |  |   |         |  |   | (254)    |  |   |         |  |   | (254)   
|Unrealized pension gain, net of tax                                                                                                               |  |                                  |  |                |    |                |        |                                            |        |                  |  |       |           |                        |   | 30      |  |   |         |  |   | 30       |  |   |         |  |   | 30      
|Cumulative effect adjustment due to the adoption of the measurement date provisions of authoritative guidance for retirement
benefits, net of tax |  |                                  |  |                |    |                |        |                                            |        |                  |  |       |           |                        |   |         |  |   | (26)    |  |   | (26)     |  |   |         |  |   | (26)    
|                                                                                                                                                  |  |                                  |  |                |    |                |        |                                            |        |                  |  |       |           |                        |   |         |  |   |         |  |   |          |  |   |         |  |   |         
|BALANCE, DECEMBER 31, 2008                                                                                                                        |  | 42,461                           |  | $              | 42 |                | $      | 586,539                                    |        | (12,852)         |  | $     | (473,580) |                        | $ | (5,999) |  | $ | 410,774 |  | $ | 517,776  |  | $ | 4,848   |  | $ | 522,624 
|                                                                                                                                                  |  |                                  |  |                |    |                |        |                                            |        |                  |  |       |           |                        |   |         |  |   |         |  |   |          |  |   |         |  |   |         
|Exercise of common stock options                                                                                                                  |  | 148                              |  |                | 1  |                |        | 3,656                                      |        |                  |  |       |           |                        |   |         |  |   |         |  |   | 3,656    |  |   |         |  |   | 3,656   
|Issuance of restricted stock awards                                                                                                               |  | 37                               |  |                |    |                |        | -                                          |        |                  |  |       |           |                        |   |         |  |   |         |  |   | -        |  |   |         |  |   | -       
|Issuance of employee stock purchase plan shares                                                                                                   |  | 11                               |  |                |    |                |        | 310                                        |        |                  |  |       |           |                        |   |         |  |   |         |  |   | 310      |  |   |         |  |   | 310     
|Employee stock-based compensation                                                                                                                 |  |                                  |  |                |    |                |        | 3,714                                      |        |                  |  |       |           |                        |   |         |  |   |         |  |   | 3,714    |  |   |         |  |   | 3,714   
|Non-employee stock options granted                                                                                                                |  |                                  |  |                |    |                |        | 55                                         |        |                  |  |       |           |                        |   |         |  |   |         |  |   | 55       |  |   |         |  |   | 55      
|Income tax shortfall from stock option exercises                                                                                                  |  |                                  |  |                |    |                |        | (802)                                      |        |                  |  |       |           |                        |   |         |  |   |         |  |   | (802)    |  |   |         |  |   | (802)   
|Capital contribution from minority shareholder                                                                                                    |  |                                  |  |                |    |                |        |                                            |        |                  |  |       |           |                        |   |         |  |   |         |  |   |          |  |   | 800     |  |   | 800     
|Net loss                                                                                                                                          |  |                                  |  |                |    |                |        |                                            |        |                  |  |       |           |                        |   |         |  |   | (177)   |  |   | (177)    |  |   | (2,200) |  |   | (2,377) 
|Other comprehensive income:                                                                                                                       |  |                                  |  |                |    |                |        |                                            |        |                  |  |       |           |                        |   |         |  |   |         |  |   |          |  |   |         |  |   |         
|Translation adjustment                                                                                                                            |  |                                  |  |                |    |                |        |                                            |        |                  |  |       |           |                        |   | (559)   |  |   |         |  |   | (559)    |  |   |         |  |   | (559)   
|Unrealized loss on available-for-sale investments, net of tax                                                                                     |  |                                  |  |                |    |                |        |                                            |        |                  |  |       |           |                        |   | (86)    |  |   |         |  |   | (86)     |  |   |         |  |   | (86)    
|Unrealized loss on forward exchange contracts, net of tax                                                                                         |  |                                  |  |                |    |                |        |                                            |        |                  |  |       |           |                        |   | (184)   |  |   |         |  |   | (184)    |  |   |         |  |   | (184)   
|Unrealized pension gain, net of tax                                                                                                               |  |                                  |  |                |    |                |        |                                            |        |                  |  |       |           |                        |   | 9       |  |   |         |  |   | 9        |  |   |         |  |   | 9       
|                                                                                                                                                  |  |                                  |  |                |    |                |        |                                            |        |                  |  |       |           |                        |   |         |  |   |         |  |   |          |  |   |         |  |   |         
|BALANCE, SEPTEMBER 30, 2009                                                                                                                       |  | 42,657                           |  | $              | 43 |                | $      | 593,471                                    |        | (12,852)         |  | $     | (473,580) |                        | $ | (6,819) |  | $ | 410,597 |  | $ | 523,712  |  | $ | 3,448   |  | $ | 527,160 
|                                                                                                                                                  |  |                                  |  |                |    |                |        |                                            |        |                  |  |       |           |                        |   |         |  |   |         |  |   |          |  |   |         |  |   |         

See Notes to Unaudited Condensed Consolidated Financial Statements



5



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##### Table of Contents

CYMER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)



|                                                                                                   |  |                                        |           |      |   |         
|-------------------------------------------------------------------------------------------------- |  | -------------------------------------- | --------- | ---- | - | --------
|                                                                                                   |  | For the nine monthsended September 30,
|                                                                                                   |  | 2009                                   |           | 2008
|OPERATING ACTIVITIES:                                                                              |  |                                        |           |      |   |         
|Net income (loss) attributable to Cymer, Inc.                                                      |  | $                                      | (177)     |      | $ | 32,556  
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                                        |           |      |   |         
|Depreciation and amortization                                                                      |  |                                        | 16,661    |      |   | 20,198  
|Stock-based compensation                                                                           |  |                                        | 3,769     |      |   | 4,525   
|Bad debt expense (recovery)                                                                        |  |                                        | 893       |      |   | (54)    
|Noncontrolling interest                                                                            |  |                                        | (2,200)   |      |   | (2,039) 
|Provision for deferred income taxes                                                                |  |                                        | 632       |      |   | (3,615) 
|(Gain) loss on disposal or impairment of property and equipment                                    |  |                                        | 1,881     |      |   | (11)    
|Write-down of investments                                                                          |  |                                        | 291       |      |   | 5,103   
|Change in assets and liabilities:                                                                  |  |                                        |           |      |   |         
|Restricted cash                                                                                    |  |                                        | (1,200)   |      |   | -       
|Accounts receivable                                                                                |  |                                        | (13,920)  |      |   | 13,027  
|Accounts receivable  related party                                                                |  |                                        | 235       |      |   | 468     
|Income taxes receivable                                                                            |  |                                        | (5,036)   |      |   | (13,741)
|Inventories                                                                                        |  |                                        | 15,417    |      |   | (56,090)
|Prepaid expenses and other assets                                                                  |  |                                        | 654       |      |   | (5,231) 
|Accounts payable                                                                                   |  |                                        | 1,416     |      |   | (3,718) 
|Accounts payablerelated party                                                                     |  |                                        | (784)     |      |   | (3,072) 
|Accrued and other liabilities                                                                      |  |                                        | (13,419)  |      |   | (13,058)
|Deferred revenue                                                                                   |  |                                        | 4,516     |      |   | 5,309   
|Income taxes payable and accrued income taxes                                                      |  |                                        | (586)     |      |   | (9,104) 
|                                                                                                   |  |                                        |           |      |   |         
|Net cash provided by (used in) operating activities                                                |  |                                        | 9,043     |      |   | (28,547)
|                                                                                                   |  |                                        |           |      |   |         
|INVESTING ACTIVITIES:                                                                              |  |                                        |           |      |   |         
|Acquisition of property and equipment                                                              |  |                                        | (6,318)   |      |   | (19,174)
|Purchases of investments                                                                           |  |                                        | (39,138)  |      |   | (90,309)
|Proceeds from sold or matured investments                                                          |  |                                        | 32,363    |      |   | 81,184  
|                                                                                                   |  |                                        |           |      |   |         
|Net cash used in investing activities                                                              |  |                                        | (13,093)  |      |   | (28,299)
|                                                                                                   |  |                                        |           |      |   |         
|FINANCING ACTIVITIES:                                                                              |  |                                        |           |      |   |         
|Proceeds from issuance of common stock                                                             |  |                                        | 3,771     |      |   | 1,752   
|Redemption of convertible subordinated note                                                        |  |                                        | (140,722) |      |   | -       
|Cash investment in joint venture received from minority shareholder                                |  |                                        | 800       |      |   | 2,000   
|Excess tax benefits from stock option exercises                                                    |  |                                        | 199       |      |   | 37      
|Repurchase of common stock into treasury                                                           |  |                                        | -         |      |   | (22,876)
|                                                                                                   |  |                                        |           |      |   |         
|Net cash used in financing activities                                                              |  |                                        | (135,952) |      |   | (19,087)
|                                                                                                   |  |                                        |           |      |   |         
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                                       |  |                                        | (799)     |      |   | (7,020) 
|                                                                                                   |  |                                        |           |      |   |         
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                                          |  |                                        | (140,801) |      |   | (82,953)
|CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD                                               |  |                                        | 252,391   |      |   | 305,707 
|                                                                                                   |  |                                        |           |      |   |         
|CASH AND CASH EQUIVALENTS AT END OF THE PERIOD                                                     |  | $                                      | 111,590   |      | $ | 222,754 
|                                                                                                   |  |                                        |           |      |   |         
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                                  |  |                                        |           |      |   |         
|Interest paid                                                                                      |  | $                                      | 2,702     |      | $ | 5,336   
|                                                                                                   |  |                                        |           |      |   |         
|Income taxes paid                                                                                  |  | $                                      | 10,157    |      | $ | 43,888  
|                                                                                                   |  |                                        |           |      |   |         
|NONCASH OPERATING AND FINANCING ACTIVITIES:                                                        |  |                                        |           |      |   |         
|In transit funds from the issuance of common stock                                                 |  | $                                      | 195       |      | $ | -       
|                                                                                                   |  |                                        |           |      |   |         

See Notes to Unaudited Condensed Consolidated Financial Statements.



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##### Table of Contents

CYMER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Nine Months Ended September 30, 2009

(Unaudited)

1. BASIS OF PRESENTATION

Unaudited Interim Financial Statements The accompanying unaudited condensed consolidated financial information has been prepared by Cymer, Inc., and its wholly-owned subsidiaries and majority-owned joint venture, TCZ,
Pte. Ltd. (TCZ) (collectively, Cymer), without audit, in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. The unaudited condensed consolidated balance sheet at
December 31, 2008 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 condensed consolidated financial statements for the interim period presented reflect all
material adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations as of and for such periods indicated. These unaudited condensed consolidated financial
statements and notes hereto should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008. Results for the interim periods
presented herein are not necessarily indicative of results that may be reported for any other interim period or for the fiscal year ending December 31, 2009.

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

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

Significant Risk and Uncertainties When global economic conditions are changing or adverse, it is difficult for us to estimate future demand for our products, the likelihood of our customers
ability to meet their financial obligations to us and our future cash flows. All of these increase uncertainty inherent in our management estimates and assumptions. As future events and their effects cannot be determined with precision, particularly
those related to the condition of the economy, we believe actual results related to our inventory valuation, allowance for doubtful accounts and long-lives assets valuation presently pose our greatest risk and could differ significantly from our
current estimates.

Accounting Requirements Adopted

In September 2006, the Financial Accounting Standards Board (FASB) issued authoritative guidance for fair value measurements and
disclosures which defines fair value, establishes a framework for measuring fair value and expands disclosures related to assets and liabilities measured at fair value. In February 2008, the FASB issued additional authoritative guidance for fair
value measurements which delayed the effective date of the authoritative guidance for fair value measurements to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis. We adopted all of the provisions of the authoritative guidance for fair value measurements on January 1, 2008 with the exception of the application of the guidance to
non-recurring nonfinancial assets and nonfinancial liabilities which we adopted on January 1, 2009. Our disclosures on the use of fair value measurements for our nonfinancial assets and liabilities are included in Note 9, Fair Value
Measurements.

In December 2007, the FASB issued revised authoritative guidance for business combinations which
establishes principles and requirements for how an acquirer in a business combination transaction recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date. The provisions of the guidance also establish disclosure requirements which will enable financial statement users to evaluate the nature and financial effects of the business combination. In April 2009, the FASB
issued additional authoritative guidance for business combinations relating to the initial recognition and measurement, subsequent measurement and accounting and disclosures of assets and liabilities that arise from contingencies in a business
combination. The authoritative guidance for business combinations is effective for fiscal years beginning after December 15, 2008. We did not initiate any acquisitions during the nine months ended September, 2009, but we will apply the
requirements of this guidance to any acquisitions that we might commence subsequent to our adoption of it on January 1, 2009.



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In December 2007, the FASB issued authoritative guidance for consolidations which states
that accounting and reporting for minority interests will be recharacterized as noncontrolling interests and classified as a component of equity. The guidance also establishes reporting requirements that provide sufficient disclosures that clearly
identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The guidance applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect
only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. This guidance is effective for fiscal years beginning after December 15, 2008. We adopted this guidance as of
January 1, 2009 and have updated the format of our unaudited condensed consolidated financial statements to comply with this new reporting requirement.

In March 2008, the FASB issued authoritative guidance for derivatives and hedging which requires companies with derivative instruments to disclose information that should enable financial statement users
to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under the guidance, and how derivative instruments and related hedged items affect a companys financial
position, financial performance and cash. This guidance is effective for fiscal years and interim periods beginning after November 15, 2008. We adopted this guidance as of January 1, 2009 and have provided the required expanded disclosures
on our derivative instruments in Note 11, Derivative Instruments and Hedging Activities.

In May 2008, the
FASB issued authoritative guidance for debt which applies to all convertible debt instruments that have a net settlement feature, which means that such convertible debt instruments, by their terms, may be settled either wholly or
partially in cash upon conversion. The guidance requires issuers of convertible debt instruments that may be settled wholly or partially in cash upon conversion to separately account for the liability and equity components in a manner reflective of
the issuers nonconvertible debt borrowing rate. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. We adopted this guidance on
January 1, 2009, but it did not have an impact on our unaudited condensed consolidated financial statements as it did not apply to our convertible subordinated notes that were repaid on February 17, 2009.

In April 2008, the FASB issued authoritative guidance for intangibles  goodwill and other which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under the guidance. This guidance also requires enhanced disclosures concerning a companys treatment of costs incurred
to renew or extend the term of a recognized intangible asset. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008. We adopted this guidance on January 1, 2009, but it did not have
an impact on our unaudited condensed consolidated financial statements as we did not renew or extend any of the useful lives of our intangible assets during the nine month period ended September 30, 2009. We will comply with the requirements of
this guidance when and if we renew or extend the useful lives of any of our intangible assets.

In June 2008, the FASB issued
authoritative guidance for earnings per share. The guidance addresses whether instruments granted in share-based payment transactions may be participating securities prior to vesting and, therefore, need to be included in the earnings allocation in
computing basic earnings per share pursuant to the two-class method of the guidance for earnings per share. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within
those years. We adopted this guidance on January 1, 2009, but it did not have an impact on our unaudited condensed consolidated financial statements as our unvested stock awards are not participating securities as defined by this guidance. We
will comply with the provisions of this guidance in future periods should it become applicable to us.

In April 2009, the FASB
issued authoritative guidance for interim disclosures for financial instruments. This guidance amends prior authoritative guidance by requiring disclosures of the fair value of financial instruments included within the scope of the prior guidance
whenever a public company issues summarized financial information for interim reporting periods. This guidance is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009 under certain circumstances. We adopted this guidance for the quarter ended June 30, 2009, but it did not have an impact on our unaudited condensed consolidated financial statements.

In April 2009, the FASB issued authoritative guidance for investments which provided recognition guidance for other than temporary
impairments for debt securities classified as available-for-sale and held-to-maturity securities, and presentation and disclosure guidance for both debt and equity securities. This guidance is effective for interim reporting periods ending after
June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted this guidance for the quarter ended June 30, 2009, but it did not have an impact on our unaudited condensed consolidated financial
statements.

In April 2009, the FASB issued authoritative guidance for fair value measurements and disclosures. This guidance
provides companies with guidelines on how to determine fair value measurements when the volume and level of activity for an asset or liability have significantly decreased and how to identify transactions that are not orderly. This guidance is
effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted this guidance for the quarter ended June 30, 2009, which did not have any impact on
our unaudited condensed consolidated financial statements.



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In May 2009, the FASB issued authoritative guidance for subsequent events which provides
rules on recognition and disclosure for events and transactions occurring after the balance sheet date but before the financial statements are issued or available to be issued. In addition, the guidance requires a reporting entity to disclose the
date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements are issued or the date the financial statements are available to be issued. This guidance is effective for interim and annual
periods ending after June 15, 2009. We adopted this guidance for the quarter ended June 30, 2009 and have included the required additional disclosures in Note 13, Subsequent Events.

In June 2009, the FASB issued authoritative guidance on the Accounting Standards Codification (Codification) and the Hierarchy
of Generally Accepted Accounting Principles (U.S. GAAP), which establishes the Codification as the single source for nongovernmental financial statements prepared in accordance with U.S. GAAP, except for SEC rules and interpretive
releases, which is also authoritative guidance for SEC registrants. This guidance is effective for financial statements issued for interim and annual periods ending after September 15, 2009 and will supersede all then existing non-SEC
accounting and reporting standards. The guidance is not intended to change or alter existing U.S. GAAP and will only impact references to accounting guidance. Accordingly, we have removed references to legacy U.S. GAAP in our publicly issued
consolidated financial statements, starting with the accompanying unaudited condensed consolidated financial statements and disclosures for the period ended September 30, 2009.

Correction of an Immaterial Error The statements of operations for the three month and nine month periods ended September 30,
2008 include a correction of an immaterial error related to foreign currency translation of our foreign subsidiaries statements of income. This correction decreased previously reported revenue by $774,000, previously reported net income by
$404,000 and previously reported diluted earnings per share by $0.01 for the three and nine month periods ended September 30, 2009. This correction was disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008.

2. STOCKHOLDERS 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.

At our annual
meeting of stockholders held on May 21, 2009, our stockholders approved the amendment to our Incentive Plan to increase the number of shares of common stock authorized for issuance from a total of 2,000,000 shares to a total of 3,250,000
shares.

Restricted Stock Unit Awards and Performance-Based Restricted Stock Unit Awards. In October 2007, the
compensation committee of our board of directors (the Committee) approved the Long Term Incentive Bonus Program (LTIP) which became effective January 1, 2008 for our executive officers and certain key employees. Any
potential equity based bonuses awarded under the LTIP are calculated based on a target dollar amount which is divided into equity award components to be granted from our Incentive Plan. The Committee approved the target dollar amounts for awards
under the LTIP for the calendar year 2009 in January 2009, and in February 2009, the Committee approved the equity awards to be granted from the Incentive Plan for 2009. In consideration of the adverse economic conditions and in conjunction with our
cost reduction activities, these equity awards were granted at approximately 65% of the target dollar amounts for such awards. For 2009, the equity awards for our executive officers and certain key employees consist of time-based restricted stock
unit awards (RSUs) and performance based restricted stock units (PRSUs). The shares subject to the RSU awards will vest in three equal installments beginning January 1, 2010. The shares subject to the PRSU awards will
vest and become issuable following a three-year performance period that commences on January 1, 2009 only if our relative performance compared to specified peer companies over the three-year period meets or exceeds certain performance measures.
Vesting of the PRSU awards is subject to downward adjustment if the eligible participant fails to meet 100% of his or her individual management-by-objective goals during the three-year performance period. During the nine months ended
September 30, 2009, 204,470 RSUs and 111,790 PRSUs were granted under the LTIP for 2009.

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 straight
line over the service period. For those PRSUs that have performance-based conditions, we adjust the compensation expense over the service period based upon the expected achievement of the performance conditions.



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Share-Based CompensationThe components of share-based compensation expense for
employees, non-employee directors and non-employees for the three and nine months ended September 30, 2009 and 2008 are as follows (in thousands):



|                                                                           |  |                                 |       |                                |   |       |  |      |       |  |   |      
|-------------------------------------------------------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                                                                           |  | Three months endedSeptember 30, |       | Nine months endedSeptember 30,
|                                                                           |  | 2009                            |       | 2008                           |   | 2009  |  | 2008
|Stock options - employees                                                  |  | $                               | 907   |                                | $ | 904   |  | $    | 2,105 |  | $ | 2,671
|Stock options & restricted stock units - non-employees or change in status |  |                                 | 24    |                                |   | 4     |  |      | 55    |  |   | 32   
|Restricted stock unit awards - employees                                   |  |                                 | 377   |                                |   | 173   |  |      | 1,201 |  |   | 500  
|Restricted stock units - non-employee directors                            |  |                                 | 175   |                                |   | 175   |  |      | 525   |  |   | 554  
|Performance restricted stock unit awards - employees                       |  |                                 | 117   |                                |   | 63    |  |      | (117) |  |   | 768  
|                                                                           |  |                                 |       |                                |   |       |  |      |       |  |   |      
|Total share-based compensation                                             |  | $                               | 1,600 |                                | $ | 1,319 |  | $    | 3,769 |  | $ | 4,525
|                                                                           |  |                                 |       |                                |   |       |  |      |       |  |   |      

Stock Repurchase Program

In April 2008, our board of directors authorized us to repurchase up to $100 million of our common stock 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. As of September 30, 2009, we had purchased 803,500 shares for $22.9 million under this program, all of which were
purchased in 2008. We did not repurchase any shares of our common stock under this program during the nine month period ended September 30, 2009 and approximately $77.1 million remains available for purchases under this program.

Comprehensive Income (Loss)

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

Comprehensive income (loss) consisted of the following components, net of tax where applicable, (in thousands):



|                                                           |  |                                 |        |                                |   |         |  |      |         |  |   |         
|---------------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------- |  | ---- | ------- |  | - | --------
|                                                           |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                                                           |  | 2009                            |        | 2008                           |   | 2009    |  | 2008
|Net income (loss)                                          |  | $                               | 9,928  |                                | $ | 4,848   |  | $    | (2,377) |  | $ | 30,517  
|Other comprehensive income (loss)                          |  |                                 |        |                                |   |         |  |      |         |  |   |         
|Foreign currency translation adjustments                   |  |                                 | 964    |                                |   | (5,566) |  |      | (559)   |  |   | (14,301)
|Unrealized loss on available-for-sale investments          |  |                                 | (68)   |                                |   | (314)   |  |      | (86)    |  |   | (302)   
|Unrealized loss on foreign currency exchange contracts     |  |                                 | (306)  |                                |   | (69)    |  |      | (184)   |  |   | (176)   
|Unrealized pension gain                                    |  |                                 | 4      |                                |   | 16      |  |      | 9       |  |   | 26      
|                                                           |  |                                 |        |                                |   |         |  |      |         |  |   |         
|Total other comprehensive income (loss)                    |  |                                 | 594    |                                |   | (5,933) |  |      | (820)   |  |   | (14,753)
|                                                           |  |                                 |        |                                |   |         |  |      |         |  |   |         
|Comprehensive income (loss)                                |  | $                               | 10,522 |                                | $ | (1,085) |  | $    | (3,197) |  | $ | 15,764  
|Comprehensive loss attributable to noncontrolling interest |  |                                 | 857    |                                |   | 483     |  |      | 2,200   |  |   | 2,039   
|                                                           |  |                                 |        |                                |   |         |  |      |         |  |   |         
|Comprehensive income (loss) attributable to Cymer, Inc.    |  | $                               | 11,379 |                                | $ | (602)   |  | $    | (997)   |  | $ | 17,803  
|                                                           |  |                                 |        |                                |   |         |  |      |         |  |   |         



10



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



|                                                                                 |  |                   |         |                  |   |        
|-------------------------------------------------------------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                                                                                 |  | September 30,2009 |         | December 31,2008
|Foreign currency translation adjustments                                         |  | $                 | (6,443) |                  | $ | (5,884)
|Unrealized gains on available-for-sale investments, net of tax                   |  |                   | 75      |                  |   | 161    
|Net unrealized losses on foreign currency forward exchange contracts, net of tax |  |                   | (348)   |                  |   | (164)  
|Unrealized pension loss, net of tax                                              |  |                   | (103)   |                  |   | (112)  
|                                                                                 |  |                   |         |                  |   |        
|Accumulated other comprehensive loss                                             |  | $                 | (6,819) |                  | $ | (5,999)
|                                                                                 |  |                   |         |                  |   |        

3. 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 (convertible subordinated notes using the
if-converted method, and common stock options, restricted stock units, and employee stock purchase plan (ESPP) shares using the treasury stock method) were exercised or converted into common stock. Potential dilutive
securities are excluded from the diluted EPS computation in loss periods as their effect would be anti-dilutive.

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



|                                                                 |  |                                 |        |                                |   |        |  |      |        |  |   |       
|---------------------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                                                                 |  | Three months endedSeptember 30, |        | Nine months endedSeptember 30,
|                                                                 |  | 2009                            |        | 2008                           |   | 2009   |  | 2008
|NET INCOME (LOSS) ATTRIBUTABLE TO CYMER, INC.:                   |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Net income (loss), as reported                                   |  | $                               | 10,785 |                                | $ | 5,331  |  | $    | (177)  |  | $ | 32,556
|Interest expense on convertible subordinated notes, net of taxes |  |                                 | -      |                                |   | -      |  |      | -      |  |   | 2,692 
|                                                                 |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Net income (loss) available to common shareholders, diluted      |  | $                               | 10,785 |                                | $ | 5,331  |  | $    | (177)  |  | $ | 35,248
|                                                                 |  |                                 |        |                                |   |        |  |      |        |  |   |       
|WEIGHTED AVERAGE SHARES:                                         |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Basic weighted average common shares outstanding                 |  |                                 | 29,762 |                                |   | 29,665 |  |      | 29,697 |  |   | 30,034
|Effect of dilutive securities:                                   |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Options, stock units and ESPP                                    |  |                                 | 376    |                                |   | 114    |  |      | -      |  |   | 104   
|Assumed conversion of subordinated notes                         |  |                                 | -      |                                |   | -      |  |      | -      |  |   | 2,814 
|                                                                 |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Diluted weighted average common shares outstanding               |  |                                 | 30,138 |                                |   | 29,779 |  |      | 29,697 |  |   | 32,952
|                                                                 |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Earnings (loss) per share:                                       |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Basic                                                            |  | $                               | 0.36   |                                | $ | 0.18   |  | $    | (0.01) |  | $ | 1.08  
|                                                                 |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Diluted                                                          |  | $                               | 0.36   |                                | $ | 0.18   |  | $    | (0.01) |  | $ | 1.07  
|                                                                 |  |                                 |        |                                |   |        |  |      |        |  |   |       

For the three months ended September 30, 2009 and 2008, weighted average options
to purchase shares of common stock totaled approximately 1.4 million shares and 2.7 million shares, respectively, were not included in the computation of diluted earnings per share as their effect was anti-dilutive. There were no
anti-dilutive shares related to stock units for the three months ended September 30, 2009. The computation of diluted earnings per share for the three months ended September 30, 2008 did not include 139,000 weighted average stock units as
their effect was anti-dilutive. For the three months ended September 30, 2008, weighted average common stock attributable to convertible subordinated notes consisting of 2.8 million shares were not included in the computation of diluted
earnings per share as their effect was anti-dilutive.

For the nine months ended September 30, 2009 and 2008, weighted
average options to purchase shares of common stock, totaling approximately 2.4 million shares and 2.7 million shares, respectively, and 135,000 and 139,000 weighted average stock units, respectively, were not included in the computation of
diluted earnings per share as their effect was anti-dilutive. Additionally, for the nine months ended September 30, 2009 746,000 shares of weighted average common stock attributable to our convertible subordinated notes were not included in the
computation of diluted earnings per share as their effect was anti-dilutive.



11



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4. BALANCE SHEET DETAILS

Accounts receivable consisted of the following (in thousands):



|                                      |  |                   |         |                  |   |        
|------------------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                                      |  | September 30,2009 |         | December 31,2008
|ACCOUNTS RECEIVABLE:                  |  |                   |         |                  |   |        
|Trade                                 |  | $                 | 79,930  |                  | $ | 65,091 
|Other                                 |  |                   | 1,095   |                  |   | 1,500  
|                                      |  |                   |         |                  |   |        
|Subtotal                              |  |                   | 81,025  |                  |   | 66,591 
|Less: Allowance for doubtful accounts |  |                   | (3,188) |                  |   | (2,295)
|                                      |  |                   |         |                  |   |        
|Total                                 |  | $                 | 77,837  |                  | $ | 64,296 
|                                      |  |                   |         |                  |   |        

Inventories are recorded at the lower of cost, determined on a first in first out
basis, or estimated market value, which is defined in the authoritative guidance on inventory as the lower of the current replacement cost or net realizable value, if the market value is less than cost. Inventories consisted of the following (in
thousands):



|                  |  |                   |         |                  |   |        
|----------------- |  | ----------------- | ------- | ---------------- | - | -------
|                  |  | September 30,2009 |         | December 31,2008
|INVENTORIES:      |  |                   |         |                  |   |        
|Raw materials     |  | $                 | 55,313  |                  | $ | 51,621 
|Work-in-progress  |  |                   | 30,805  |                  |   | 29,177 
|Finished goods(1) |  |                   | 93,550  |                  |   | 113,948
|                  |  |                   |         |                  |   |        
|Total             |  | $                 | 179,668 |                  | $ | 194,746
|                  |  |                   |         |                  |   |        

| | 
| | 

| | (1) | Included in finished goods at September 30, 2009 are newly introduced systems at our customer sites which remain subject to customer acceptance and therefore did
not meet our revenue recognition criteria as set forth in Note 1 of our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5. CONVERTIBLE SUBORDINATED NOTES

In February 2002, we issued $250.0 million principal amount of unsecured fixed rate 3.50% convertible subordinated notes which became due in February 2009. Since the issuance of these notes, we had repurchased, at a discount to par, a
total of $109.3 million of the notes reducing the outstanding principal amount to $140.7 million at December 31, 2008. On February 17, 2009, we redeemed the outstanding notes at a price equal to 100% of the principal amount plus
accrued interest of $2.5 million.

6. 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. See Note 8, Commitments and Contingencies for further information regarding our indemnifications.

Product warranty provisions contained within our lithography tool manufacturer customer agreements are generally consistent with those prevalent in the semiconductor equipment industry. We record a provision for warranty for all products,
which is included in cost of revenues in the unaudited condensed consolidated statements of operations 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 monthly 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



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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 summarizes information related to our
warranty provision (in thousands):



|                                                                              |  |                                 |         |                                |   |         |  |      |         |  |   |         
|----------------------------------------------------------------------------- |  | ------------------------------- | ------- | ------------------------------ | - | ------- |  | ---- | ------- |  | - | --------
|                                                                              |  | Three Months EndedSeptember 30, |         | Nine Months EndedSeptember 30,
|                                                                              |  | 2009                            |         | 2008                           |   | 2009    |  | 2008
|Beginning balance                                                             |  | $                               | 15,785  |                                | $ | 26,410  |  | $    | 23,565  |  | $ | 24,350  
|Liabilities accrued for warranties issued, net of adjustments and expirations |  |                                 | 3,456   |                                |   | 3,163   |  |      | 1,636   |  |   | 15,288  
|Warranty expenditures incurred during the period                              |  |                                 | (1,841) |                                |   | (3,988) |  |      | (7,801) |  |   | (14,053)
|                                                                              |  |                                 |         |                                |   |         |  |      |         |  |   |         
|Ending balance                                                                |  | $                               | 17,400  |                                | $ | 25,585  |  | $    | 17,400  |  | $ | 25,585  
|                                                                              |  |                                 |         |                                |   |         |  |      |         |  |   |         

7. RELATED PARTY TRANSACTIONS

Carl Zeiss SMT AG and Carl Zeiss Laser Optics Beteiligungsgesellschaft mbH (Zeiss).As a result of the formation of our
TCZ joint venture and the terms of the joint venture agreement, Zeiss is a related party. In addition to transactions that occur among us, Zeiss and TCZ related to the joint venture, we also purchase certain optical parts directly from Zeiss and
periodically sell our light source system products to Zeiss. We recorded revenue associated with this related party of $218,000 and $450,000 for the three months ended September 30, 2009 and 2008, respectively, and $536,000 and
$1.8 million for the nine months ended September 30, 2009 and 2008, respectively. As of September 30, 2009 and December 31, 2008, we had an accounts receivable balance of $583,000 and $818,000, respectively, and an accounts
payable balance of $3.3 million and $4.1 million, respectively, all of which were associated with transactions with this related party.

A $2.0 million capital contribution was made to TCZ by us and Zeiss during the three month period ended September 30, 2009. This additional capital contribution was allocated according to the terms
of the joint venture agreement: 60% from us and 40% from Zeiss. Both parties made their portion of this contribution to TCZ prior to September 30, 2009.

During the three month period ended September 30, 2009, Cymer also purchased a tool from Zeiss for $2.1 million which it in turn sold to TCZ. Of the $2.1 million purchase price for this tool, Cymer
immediately paid Zeiss $800,000 and the remaining $1.3 million is due to Zeiss in February 2010. Immediately following Cymers payment of $800,000 to Zeiss, Zeiss made their $800,000 capital contribution to TCZ.

8. COMMITMENTS AND CONTINGENCIES

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 any currently known legal action in the normal course of business
to have a material impact on our financial position, liquidity, or results of operations.

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 September 30, 2009, 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.

9. FAIR VALUE MEASUREMENTS

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 levels as defined by the fair value hierarchy 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                                                   



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|        |  |   |  |                                                                                                                                                                                                             
|------- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |  |   |  | 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.

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. As a result of the turmoil in the credit market and the uncertainty of the U.S. and global economies, we have considered whether or not these Level 2 inputs are appropriate and are still reflective of fair value for
our available-for-sale securities. Based upon the types of holdings which are included in our investment portfolio, we determined that these Level 2 inputs were reflective of fair value for our available-for-sale securities as of
September 30, 2009.

Preferred Stock We hold preferred stock that was distributed to us when our sole
auction rate security was dissolved in April 2009. The auction rate security was purchased in October 2007 at a par value of $5.6 million and failed at every auction from November 2007 until its dissolution in April 2009. We recorded impairment
charges totaling $5.3 million in 2008 associated with this security. At June 30, 2009, the preferred stock held a carrying value of $291,000 equivalent to the most recent fair value determination of the auction rate security. During the three
month period ended September 30, 2009, we determined that there is no reasonable probability of receiving any future cash flow from this preferred stock. We concluded that it was appropriate for us to write off the remaining value of this
preferred stock and record an other-than-temporary impairment in the amount of $291,000. This final impairment was recorded to other income (expense), net in the accompanying unaudited condensed consolidated statements of operations during the three
months ended September 30, 2009.

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
estimated our credit risk premium based on a financing arrangement that was offered to us during the three month period ended September 30, 2009 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. As a result of turmoil in the credit market and the uncertain outlook for the U.S. and global economies, we have considered whether or not these Level 2 inputs are appropriate and are
still reflective of fair value for our derivative instruments. Based upon our review of our derivative instruments and the credit worthiness of the parties associated with them, we determined that the Level 2 inputs currently being used were
reflective of the fair value of our derivative instruments as of September 30, 2009.



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Our financial assets and financial liabilities measured at fair value on a recurring basis
are as follows (in thousands):



|                                                                        |  |                    |           |                                                  |           |         |           |   |        |  |   |  
|----------------------------------------------------------------------- |  | ------------------ | --------- | ------------------------------------------------ | --------- | ------- | --------- | - | ------ |  | - | -
|                                                                        |  | September 30, 2009 |           | Fair Value Measurements at Reporting Date Using:
|                                                                        |  |                    | (Level 1) |                                                  | (Level 2) |         | (Level 3)
|Assets:                                                                 |  |                    |           |                                                  |           |         |           |   |        |  |   |  
|Investment securities:                                                  |  |                    |           |                                                  |           |         |           |   |        |  |   |  
|Cash and cash equivalents                                               |  | $                  | 111,590   |                                                  | $         | 107,591 |           | $ | 3,999  |  | $ | -
|Restricted cash                                                         |  |                    | 1,200     |                                                  | $         | 1,200   |           |   | -      |  |   | -
|Available-for-sale securities:                                          |  |                    | -         |                                                  |           |         |           |   |        |  |   | -
|Debt securities issued by U.S. Treasury and other governmental agencies |  |                    | 10,003    |                                                  |           | -       |           |   | 10,003 |  |   | -
|Corporate debt securities                                               |  |                    | 36,699    |                                                  |           | -       |           |   | 36,699 |  |   | -
|Foreign currency forward exchange contracts(1)                          |  |                    | 95        |                                                  |           | -       |           |   | 95     |  |   | -
|                                                                        |  |                    |           |                                                  |           |         |           |   |        |  |   |  
|Total assets                                                            |  | $                  | 159,587   |                                                  | $         | 108,791 |           | $ | 50,796 |  | $ | -
|                                                                        |  |                    |           |                                                  |           |         |           |   |        |  |   |  
|Liabilities:                                                            |  |                    |           |                                                  |           |         |           |   |        |  |   |  
|Foreign currency forward exchange contracts(2)                          |  | $                  | 1,198     |                                                  | $         | -       |           | $ | 1,198  |  | $ | -
|                                                                        |  |                    |           |                                                  |           |         |           |   |        |  |   |  
|Total liabilities                                                       |  | $                  | 1,198     |                                                  | $         | -       |           | $ | 1,198  |  | $ | -
|                                                                        |  |                    |           |                                                  |           |         |           |   |        |  |   |  

| | 
| | 

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



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

The following table summarizes the change in the fair value during the period for the auction rate security using Level 3 inputs (in
thousands):



|                                            |  |   |       |  | 
|------------------------------------------- |  | - | ----- |  | 
|Balance at January 1, 2009                  |  | $ | 291   |  | 
|Transfers in and out of Level 3             |  |   | -     |  | 
|Total realized losses included in earnings  |  |   | (291) |  | 
|Included in other comprehensive income      |  |   | -     |  | 
|Purchases, sales, issuances and settlements |  |   | -     |  | 
|                                            |  |   |       |  | 
|Balance at September 30, 2009               |  | $ | -     |  | 
|                                            |  |   |       |  | 

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, (2) valuing potential impairment losses related to long-lived assets which are accounted for pursuant to the authoritative guidance for
property, plant and equipment, and (3) valuing any restructuring liabilities initially measured at fair value under the authoritative guidance for exit or disposal cost obligations.

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) our TCZ joint venture which is currently developing and producing a process system for use in the manufacture of flat panel displays.
We test for goodwill impairment 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 nine months ended September 30, 2009. 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 nine months ended September 30, 2009, there have been no triggering events associated with our long lived assets and thus no impairment analysis was conducted during the period.



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We record restructuring costs at fair value per the authoritative guidance for exit or
disposal cost obligations. During the nine months ended September 30, 2009, restructuring expenses of $8.4 million were recognized in connection with reduction in workforce actions that were conducted during the first quarter of 2009.
These expenses approximated their fair value as they primarily represent the short term cash payments to be made to the impacted employees. See Note 12, Restructuring Costs, for further information on these restructuring costs.

10. SEGMENT OPERATIONS

Our 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. We are also
a 60% majority-owner of TCZ, which is currently developing and producing a system for use in the manufacture of flat panel displays. These two businesses constitute separate reporting segments as they each serve a different customer base, one in the
semiconductor capital equipment industry and the other in the flat panel display industry. In the third quarter of 2009, we started to present operating income (loss) instead of net income (loss) as the measurement for each segments profit or
loss. Prior period amounts were updated to reflect this presentation. Information related to our Cymer and TCZ segments is as follows (in thousands):



|                          |  |                    |         |                        |                   |         |         |  |                        |         |  |   |         |    
|------------------------- |  | ------------------ | ------- | ---------------------- | ----------------- | ------- | ------- |  | ---------------------- | ------- |  | - | ------- | ---
|                          |  | Three Months Ended |         |                        | Nine Months Ended |        
|                          |  | Revenue            |         | OperatingIncome (Loss) |                   |         | Revenue |  | OperatingIncome (Loss) |        
|September 30, 2009:       |  |                    |         |                        |                   |         |         |  |                        |         |  |   |         |    
|Cymer, Inc.               |  | $                  | 92,328  |                        | $                 | 16,603  |         |  | $                      | 211,260 |  | $ | 1,497   |    
|TCZ                       |  |                    | -       |                        |                   | (1,271) | (1)     |  |                        | -       |  |   | (3,347) | (1)
|Consolidation Adjustments |  |                    | -       |                        |                   | 72      |         |  |                        | -       |  |   | 198     |    
|                          |  |                    |         |                        |                   |         |         |  |                        |         |  |   |         |    
|Total                     |  | $                  | 92,328  |                        | $                 | 15,404  |         |  | $                      | 211,260 |  | $ | (1,652) |    
|                          |  |                    |         |                        |                   |         |         |  |                        |         |  |   |         |    
|September 30, 2008:       |  |                    |         |                        |                   |         |         |  |                        |         |  |   |         |    
|Cymer, Inc.               |  | $                  | 110,619 |                        | $                 | 14,708  |         |  | $                      | 358,562 |  | $ | 58,931  |    
|TCZ                       |  |                    | -       |                        |                   | (1,097) | (1)     |  |                        | -       |  |   | (3,526) | (1)
|Consolidation Adjustments |  |                    | -       |                        |                   | 109     |         |  |                        | -       |  |   | 297     |    
|                          |  |                    |         |                        |                   |         |         |  |                        |         |  |   |         |    
|Total                     |  | $                  | 110,619 |                        | $                 | 13,720  |         |  | $                      | 358,562 |  | $ | 55,702  |    
|                          |  |                    |         |                        |                   |         |         |  |                        |         |  |   |         |    
|                          |  |                    |         |                       
|Assets:                   |  | September 30,2009  |         | December 31,2008       |                   |         |         |  |                        |        
|Cymer, Inc.               |  | $                  | 615,232 |                        | $                 | 761,876 |         |  |                        |         |  |   |         |    
|TCZ                       |  |                    | 18,670  |                        |                   | 17,657  |         |  |                        |         |  |   |         |    
|Consolidation Adjustments |  |                    | (1,822) |                        |                   | (2,089) |         |  |                        |         |  |   |         |    
|                          |  |                    |         |                        |                   |         |         |  |                        |         |  |   |         |    
|Total                     |  | $                  | 632,080 |                        | $                 | 777,444 |         |  |                        |         |  |   |         |    
|                          |  |                    |         |                        |                   |         |         |  |                        |         |  |   |         |    

| | 
| | 

| | (1) | TCZ operating loss is presented net of noncontrolling interest.
| | --- | ---------------------------------------------------------------

11. 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 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 condensed consolidated statements of operations.



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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 consolidated financial statements. Once the underlying transaction is recorded in the unaudited condensed 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 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 condensed consolidated financial statements do not include such gains or losses.

The second category of foreign currency risk occurs when transactions are recorded in our 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 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 revaluation 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 financial statements are not designated as hedges and therefore we record changes in their fair value to other income (expense) in order to
mitigate gains and losses on the underlying transactions.

Derivatives designated as cash flow hedges generally have maturity
dates of no more than twelve months. Non-designated derivatives that mitigate the revaluation of non-functional currency transactions generally have maturity dates of no more than three months in the case of ordinary payables and receivables or no
more than twelve months in the case of inter-company loans. We do not currently have any derivatives hedging inter-company loans. 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 at least once per month.

At September 30, 2009, we had outstanding forward
contracts to buy $16.0 million in exchange for Japanese Yen, $4.5 million in exchange for Korean Won, $4.0 million in exchange for Taiwanese Dollars and to sell $7.0 million in exchange for Euros. The fair value of all of our forward
contracts totaled to a liability of $1.1 million as of September 30, 2009. The deferred loss, net of tax, for those forward contracts that qualified for hedge accounting treatment was $348,000 as of September 30, 2009. We expect that this
unrealized loss 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 condensed consolidated balance sheet was as follows (in thousands):



|                                                                               |  |                                   |  |                       |     |                        |                                       |            |   |      
|------------------------------------------------------------------------------ |  | --------------------------------- |  | --------------------- | --- | ---------------------- | ------------------------------------- | ---------- | - | -----
|                                                                               |  | Asset Derivatives                 |  | Liability Derivatives
|                                                                               |  | September 30, 2009               
|                                                                               |  | Balance Sheet Location            |  | FairValue             |     | Balance Sheet Location |                                       | Fair Value
|Derivatives Designated as Hedging Instruments - Foreign Exchange Contracts     |  |                                   |  |                       |     |                        |                                       |            |   |      
|                                                                               |  | Prepaid expenses and other assets |  | $                     | -   |                        | Accrued and other current liabilities |            | $ | 441  
|                                                                               |  |                                   |  |                       |     |                        |                                       |            |   |      
|Derivatives not Designated as Hedging Instruments - Foreign Exchange Contracts |  |                                   |  |                       |     |                        |                                       |            |   |      
|                                                                               |  | Prepaid expenses and other assets |  | $                     | 103 |                        | Accrued and other current liabilities |            | $ | 766  
|                                                                               |  |                                   |  |                       |     |                        |                                       |            |   |      
|Total Derivatives                                                              |  |                                   |  | $                     | 103 |                        |                                       |            | $ | 1,207
|                                                                               |  |                                   |  |                       |     |                        |                                       |            |   |      



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



|                                              |  |                                                                                        |      |   |                                                                                   |                 |                                                                        |   |     |                                                                                                                  |  |                                                                                                                 |  |   |   
|--------------------------------------------- |  | -------------------------------------------------------------------------------------- | ---- | - | --------------------------------------------------------------------------------- | --------------- | ---------------------------------------------------------------------- | - | --- | ---------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------- |  | - | --
|                                              |  | Three months ended September 30, 2009                                                 
|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 recognized inIncome onDerivative(ineffectiveportionsand
amountexcluded fromeffectivenesstesting) |  | Gain (loss)recognized inIncome
onDerivative(ineffective portionand amountexcluded fromeffectivenesstesting) (1)
|Foreign exchange contracts                    |  | $                                                                                      | (508 | ) |                                                                                   | Cost ofrevenues |                                                                        | $ | (63 | )                                                                                                                |  | Cost ofrevenues                                                                                                 |  | $ | 15
|                                              |  |                                                                                        |      |   |                                                                                   |                 |                                                                        |   |     |                                                                                                                  |  |                                                                                                                 |  |   |   
|                                              | 
|                                              |  | Nine months ended September 30, 2009                                                  
|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 ofgainrecognized inIncome onDerivative(ineffectiveportionsand
amountexcluded fromeffectivenesstesting)  |  | Gain (loss)recognized inIncome
onDerivative(ineffective portionand amountexcluded fromeffectivenesstesting) (2)
|Foreign exchange contracts                    |  | $                                                                                      | (324 | ) |                                                                                   | Cost ofrevenues |                                                                        | $ | (1  | )                                                                                                                |  | Cost ofRevenues                                                                                                 |  | $ | 47
|                                              |  |                                                                                        |      |   |                                                                                   |                 |                                                                        |   |     |                                                                                                                  |  |                                                                                                                 |  |   |   



|(1) | The amount of gain (loss) recorded in income was zero related to the ineffective portion of the hedging relationship and $15,000 related to the amount excluded from the
assessment of hedge effectiveness.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | The amount of gain (loss) recorded in income was zero related to the ineffective portion of the hedging relationship and $47,000 related to the amount excluded from the
assessment of hedge effectiveness.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                  |  |                                                           |  |                                                |      |   |                   |   |      |  
|------------------------------------------------- |  | --------------------------------------------------------- |  | ---------------------------------------------- | ---- | - | ----------------- | - | ---- | -
|Derivatives Not Designated as Hedging Instruments |  | Location of gain (loss) recognized inIncome on Derivative |  | Gain (loss) recognized in Income on Derivative |     
|                                                  |  |                                                           |  | Three Months Ended                             |      |   | Nine Months Ended |  
|                                                  |  |                                                           |  | September 30, 2009                             |     
|Foreign exchange contracts                        |  | Foreign currency exchange gain(loss), net                 |  | $                                              | (720 | ) |                   | $ | (375 | )
|                                                  |  |                                                           |  |                                                |      |   |                   |   |      |  

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 at least a quarterly 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. We did not have any credit exposure from nonperformance of foreign exchange hedging counterparties as of September 30, 2009.



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12. RESTRUCTURING COSTS

In the first quarter of 2009, we reduced our worldwide workforce by approximately 26 percent, or a total of 230 employees, in response
to reduced business levels in the lithography sector of the semiconductor capital equipment market and the impact of the global economic market conditions. These reductions in workforce were in addition to the action we took in November 2008. All
such reductions only impacted the Cymer reporting segment. As a result of these 2009 reductions in workforce, we recorded charges to restructuring expense of approximately $8.4 million for the three months ended March 31, 2009 primarily
associated with severance charges. Of this $8.4 million which was incurred in the first quarter of 2009, $3.6 million was paid prior to March 31, 2009, and the majority of the remaining $4.8 million balance was paid during the
three months ended June 30, 2009. In connection with the 2009 reductions in workforce, we reduced the annual salaries of certain of our executive officers by 15 percent and reduced our cash compensation to our directors by 15 percent.
We took additional cost reduction actions in early 2009 including reducing employee salaries, certain employee benefits and various other operating and capital expenditures. Salary reductions for employees and executive officers and cash
compensation for our directors were restored in the third quarter of 2009 based on approvals received by the compensation committee of our Board of Directors.

The activity for the nine months ended September 30, 2009 related to our restructuring charges and accrual is summarized below (in thousands):



|                                |  |   |         |  | 
|------------------------------- |  | - | ------- |  | 
|Balance at December 31, 2008(1) |  | $ | 484     |  | 
|Restructuring Costs             |  |   | 8,407   |  | 
|Payments                        |  |   | (8,852) |  | 
|                                |  |   |         |  | 
|Balance at September 30, 2009   |  | $ | 39      |  | 
|                                |  |   |         |  | 

| | 
| | 

| | (1) | The balance of $484,000 represents severance costs related to our November 2008 reduction in workforce which was paid in full during the first half of 2009.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

13. SUBSEQUENT EVENTS

We have evaluated any events or transactions occurring after September 30, 2009, the balance sheet date, through November 5, 2009, the date that our unaudited condensed consolidated financial
statements were issued, and found that no such events or transactions occurred which would impact our unaudited condensed consolidated financial statements for the three month or nine month periods ended September 30, 2009.

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

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed
consolidated financial statements and notes thereto included in Item 1. Financial Statements of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and the section titled
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed with the Securities Exchange
Commission on February 27, 2009.

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



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Overview

We provide state-of-the-art lithographic light sources designed to help enable the performance of leading edge wafer steppers and scanners built by the three lithography tool manufacturers, and we provide
installed base products to support chipmakers that use these light sources in the production of advanced wafer patterning applications. We currently supply deep ultraviolet (DUV) light sources to each of the lithography tool
manufacturers, ASML, Nikon, and Canon who in turn supply their wafer steppers and scanners to chipmakers. In addition, we sell installed base products, which include replacement parts, various service and support offerings and upgrades, to
lithography tool manufacturers as well as directly to chipmakers. We provide worldwide service and support through certified field service engineers, and we have replacement parts depots located close to many of our customers throughout the world.
Our light source systems currently constitute many of the excimer light sources incorporated in lithography wafer stepper and scanner tools at chipmakers worldwide. As the leading supplier of lithography light sources, many of the consumer
electronic devices manufactured in the last several years contain a semiconductor manufactured using our light sources.

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 organic light emitting diode (OLED) flat panel displays. No revenues have been earned or recorded to date for our TCZ segment; however TCZ shipped its
first flat panel display system for flat panel display manufacturing in the third quarter of 2009. Additional information regarding our reporting segments is contained in Note 10, Segment Operations, to our unaudited condensed
consolidated financial statements and this Item 2 under Results of Operations.

Since we derive a substantial portion of
our revenues from lithography tool manufacturers and chipmakers, we are subject to the volatile and unpredictable cyclical nature of the semiconductor equipment industry. In the second half of 2008, global economic conditions deteriorated which
negatively affected consumer spending on electronics and, as a result, the downturn in the semiconductor industry worsened significantly. Beginning in the fourth quarter of 2008 and continuing into 2009, we took various actions to reduce our cost
structure, including reducing our worldwide workforce, salaries, bonuses, and other operating and capital expenditures. The economic trend continued through the second quarter of 2009. In the third quarter of 2009, we saw some strengthening of the
global economy and the semiconductor industry and, as a result, restored the salaries of our employees and executive officers during the quarter.

Business and Economic Highlights

Third quarter 2009 highlights include the
following:



| |  |  | In the third quarter of 2009, revenue increased approximately 48 percent over the second quarter 2009 levels to $92.3 million. The higher level of
demand was driven by increased investment from foundry and memory customers, in support of their transition to the 5x nanometer (nm) node and below.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Chipmaker light source investment was, and we expect will continue to be, focused on argon and fluorine (ArF) immersion. Our immersion
light source products are well positioned to support our direct lithography and chipmaker customers with our XLR platform, led by the XLR600ix.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We shipped a total of 12 light source systems of which 11 were XLR, and we installed 14 light sources at chipmaker locations of which 11 were ArF
immersion.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In the third quarter of 2009, gross pulse utilization increased from the second quarter 2009 level. We estimate that at the end of the third quarter of
2009, monthly gross pulses were at approximately 86 percent of the June 2008 gross pulse level, which was our peak for the last two years.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We continued to actively work with chipmakers during the third quarter of 2009 to reduce their cost of operations, while increasing their light source
productivity with our OnPulse product and support infrastructure. In the third quarter of 2009, we added additional light sources under OnPulse coverage, and we now have OnPulse agreements at all of our top ten chipmaker customers in all three
sectors.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the third quarter of 2009, we worked closely with ASML to install our first laser produced plasma extreme ultraviolet (EUV) source
in their Veldhoven, Netherlands facilities. The installation is complete, first light has been demonstrated and acceptance testing is underway. We are currently in the process of assembling several pilot EUV source units in our San Diego
headquarters, and we anticipate fulfilling our orders with ASML per our multi-year, multi-unit agreement.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | TCZ shipped and installed its first system for flat panel display manufacturing in the third quarter of 2009 at a Korean customer site. TCZ is working
with this display maker to demonstrate the systems differentiated throughput and the superior uniformity of TCZs laser crystallization technology. The demonstration period is expected to run though the first half of 2010 and if
successful could lead to follow-on equipment orders.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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We have made good progress thus far in 2009 to position the company for growth. The
XLR600ix, with its flexible power and improved optical stability, has been qualified on the most advanced scanners, enabling chipmakers most advanced ArF immersion needs. Our installed base products, led by OnPulse, are helping chipmakers
increase productivity and lower their cost of operations and we are focused on continuing to add more light sources under this coverage. In addition, we have continued to focus on controlling our operating costs while keeping our structure
responsive to improved business conditions. We remain committed to the success of the EUV technology and the activities of our TCZ joint venture.

Critical Accounting Policies and Estimates

General

The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and use judgment that may impact
the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. As a part of our ongoing internal processes, we regularly evaluate our estimates and judgments associated with revenue
recognition, inventory valuation, refurbished inventories, warranty obligations, stock-based compensation, income taxes, allowances for doubtful accounts, long-lived assets valuation, goodwill valuation, assets and liabilities valuation, and
contingencies and litigation. We base these estimates and judgments upon historical information and other facts and assumptions that we believe to be valid and/or reasonable under the circumstances. These assumptions and facts form the basis for
making judgments and estimates and for determining the carrying values of our assets and liabilities that are not apparent from other sources. Adverse global economic conditions, illiquid credit markets, volatile equity, foreign currency
fluctuations and declines in consumer spending have increased the uncertainty inherent in such estimates and assumptions. 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.

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

Revenue Recognition

Our revenues consist of product sales, which primarily include sales of DUV light source systems and installed base products which
consist of replacement parts and, to a lesser extent, training, service, upgrades, and refurbishments of our light source systems. We anticipate that our future revenues will also include sales of our EUV lithography source systems and associated
installed base products and our TCZ systems and associated installed base products.

DUV Light Source Products

The sales of our light source systems generally include training and installation services. We determined that these
elements qualify as one unit of accounting, as we do not have evidence of fair value for the undelivered training and installation elements. Furthermore, we determined that the undelivered training and installation elements are perfunctory
performance obligations and are not essential to the functionality of our light source systems. For the installation element, we determined it to be a perfunctory performance obligation due to the following: 1) installation of our light source
systems is provided primarily as a courtesy to our customers and not as a requirement of the light source system sale, 2) our customers have the capability to perform the installation of the light source systems themselves, 3) we have
adequate history performing such light source system installations that we can accurately estimate the installation costs and 4) our cost to perform a light source system installation is less than 1% of the sales price of the light source
system and the installation takes a minimal number of hours to perform. In addition, the training services are considered to be perfunctory as they are only provided as a courtesy to our customers and are not a requirement of the light source system
sales. Accordingly, we recognize revenue when the revenue recognition criteria are met for the light source system, and accrue the costs of providing the training and installation services. We recognize light source system revenue at one of
following three points, depending on the terms of our arrangement with our customer: 1) shipment of the light source system, 2) delivery of the light source system or 3) receipt of an acceptance certificate. For the majority of our
light source system sales, the shipping terms are F.O.B. shipping point and revenue is recognized upon shipment. For our arrangements which include F.O.B. destination shipping terms, revenue is recognized upon delivery of the light source system to
our customer. Lastly, for certain light source system arrangements that include an acceptance provision, we recognize revenue upon receipt of the acceptance certificate issued by our customers. In addition, we test our light source systems in
environments similar to those used by our customers prior to shipment to ensure that they meet published specifications.

On a
very limited basis, certain of our product sales include additional elements, such as future product upgrades. In cases where we have objective and reliable evidence of the fair value of both the delivered and undelivered items in the transactions,
we



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allocate consideration to the multiple elements based on the relative fair values of each separate element which we determine based on prices charged for such items when sold on a stand alone
basis. In cases where there is objective and reliable evidence of the fair value of the undelivered item(s) in an arrangement but no such evidence for the delivered item(s), we use the residual method to allocate the arrangements
consideration. If there is no objective and reliable evidence of the fair value of the undelivered item, we account for the transaction as a single unit of accounting. Our sales arrangements do not include general rights of return.

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

Service and training revenue is recognized as the services are rendered. Revenue associated with our
OnPulse contracts, which include primarily replacement parts and to a much lesser extent services, is recognized based on the pulse usage of the light source systems covered under the contract. Revenue is determined based on a per pulse fee and the
number of pulses utilized during each month, with no minimums or maximums. From a revenue classification and reporting standpoint, we are able to determine the relative fair values of the replacement part and service components of the revenues
recognized under such contracts. To date, the revenue associated with the service element of our OnPulse contracts when combined with our training, service and service contract revenue has been less than 10% of our total revenue.

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

EUV
Light Source Products

The sale of our initial EUV lithography source systems include installation and system acceptance
testing services, on-site support services and On-Pulse coverage, to be delivered over discrete service periods. We believe that all of the undelivered elements in these transactions, with the exception of the installation and acceptance testing
services, will qualify as separate units of accounting under the authoritative guidance for revenue recognition and multiple-element arrangements, but we are currently in the process of analyzing the data that we have to support the fair value for
the undelivered service elements. Our current EUV lithography source systems arrangements include acceptance provisions and such provisions will be satisfied by the issuance of an acceptance certificate by the customer. To date, we have shipped one
EUV prototype system but have not yet recognized revenue as the acceptance certificate has not been received from the customer.

TCZ Products

The sale of our initial TCZ system includes installation services, training services and
technical support services which are expected to be delivered over discrete time periods. We are currently in the process of analyzing the data that we have to evaluate whether fair value exists for the undelivered service elements. The initial TCZ
sale includes an acceptance provision and this provision will be satisfied upon issuance of an acceptance certificate by the customer when the system meets all required specifications. To date, we have shipped one TCZ system, but have not yet
recognized revenue under the agreement since the acceptance certificate has not been received from the customer.

Deferred
Revenue

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

Inventory Valuation

Our inventories are recorded at the lower of cost, determined on a first-in, first-out basis, or estimated market value, which is defined in
authoritative guidance on inventory as the lower of the current replacement cost or net realizable value if the market value is less than cost. We evaluate the need to record adjustments of our inventory on a quarterly basis and our policy is to
assess the valuation of all inventories, including raw materials, work-in-process, finished goods, replacement parts and reusable parts that we use for our refurbishment activities. Obsolete inventory or inventory for which we do not have expected
usage based on our forecasted demand is written down to its estimated market value, if less than its cost. When we perform our quarterly analysis of obsolete and excess inventory, we take into consideration certain assumptions related to market
conditions and future demands for our products, including changes to product mix, new product introductions, and/or product discontinuances, which may result in excess or obsolete inventory. As part of this analysis, we also determine whether there
are potential amounts owed to vendors as a result of



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cancelled or modified raw material orders. We estimate and record a separate liability, which is included in accrued and other liabilities in the accompanying unaudited condensed consolidated
balance sheets for such amounts owed.

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



| |  |  | Condition of the semiconductor industry, which is cyclical in nature;
| | - |  | ---------------------------------------------------------------------



| |  |  | Overall condition of the world economy which can positively or negatively impact the demand for our products;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | Rate at which our lithography tool manufacturers and chipmaker customers take delivery of our light source systems and our replacement parts;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Loss of any of our major customers or a significant change in demand from any of these customers;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | Overall mix of light source system models or replacement parts and any changes to that mix required by our customers;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | Utilization rates of our light sources at chipmakers; and
| | - |  | ---------------------------------------------------------



| |  |  | Engineering change orders.
| | - |  | --------------------------

Based upon our experience, we believe that the estimates we use to calculate the value of our inventories are reasonable and properly reflect the risk of excess and obsolete inventory. If actual demand or
the usage periods for our inventory are substantially different from our estimates, such differences may have a material adverse effect on our financial condition and results of operations. During changing or adverse economic conditions, it is
difficult to estimate the future demand for our products. As a result, the likelihood that the usage period for our inventory will substantially differ from our estimates is increased. In order to minimize this risk, we use the most current demand
plan information available to us so that the calculations for our excess inventory reflect the current state of the economy and our business.

Refurbished Inventories

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

Warranty
Obligations

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

We actively engage in product improvement programs and processes to limit our warranty costs, but our
warranty obligation is affected by the complexity of our product, product failure rates and costs incurred to correct those product failures at customer



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

Stock-Based Compensation

We estimate the fair value of stock-based compensation awards on the date of grant using an option-pricing model and amortize the resulting
expense over the requisite service period of the award, which is generally the vesting period. We use the Black-Scholes option pricing model to estimate the fair value of stock options that we grant under our equity incentive plans. In order to
determine the fair value of stock option grants under the Black-Scholes option pricing model, we must use subjective assumptions including the expected term of the stock options and our expected stock price volatility over the expected term of the
stock options. An estimated forfeiture rate is applied and included in the calculation of stock-based compensation expense at the time that the stock option or other stock awards, such as our restricted stock unit awards, are granted and revised if
necessary in subsequent periods if actual forfeiture rates differ from those estimates.

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

If we change any of the key assumptions that we use in the Black-Scholes option pricing model as described above, or if we
decide to use a different valuation model in the future or change our forfeiture rate, the compensation expense that we record may differ significantly in the future from what we have recorded in the current period and could materially impact our
financial condition and operating results. Our key assumptions such as volatility and the forfeiture rate can be materially impacted during changing or adverse economic conditions.

We grant restricted stock units to key employees, non-employee directors and non-employees. The fair value of restricted stock units is
determined based on the number of shares granted and the quoted price of our common stock on the date of grant, therefore the valuation for these types of awards is straight forward. The estimation of restricted stock awards that will ultimately
vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. Actual results and future estimates may
differ substantially from our current estimates.

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

Allowance for Doubtful Accounts

A majority of our trade receivables are derived from sales to large lithography tool manufacturers or semiconductor manufacturers located throughout the world. In order to monitor potential credit losses,
we perform periodic credit evaluations of our customers financial condition. We maintain an allowance for doubtful accounts for probable credit losses based upon our assessment of the expected collectability of all accounts receivable. We
review the allowance for doubtful accounts on a quarterly basis to assess the adequacy of the allowance. We take into consideration the following when making this assessment;



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| |  |  | Our customers payment history and how current they are on paying their outstanding receivables balance;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | Our history of successfully collecting on past due or aged receivables if such exists for our customers;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | Our customers current financial condition and any circumstances of which we are aware that would impact our customers ability to meet its
financial obligations; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our judgments as to prevailing economic conditions in the industry and global economy and their impact on our customers.
| | - |  | ------------------------------------------------------------------------------------------------------------------------

If circumstances change, and the financial condition of our customers are adversely affected and they are unable to meet their financial
obligations to us or the judgments used by us to determine a customers allowance prove to be incorrect or inaccurate, we may need to record additional allowances. When global economic conditions are changing or adverse, the likelihood that our
customers will be unable to meet their financial obligations to us increases and it becomes more difficult and requires more judgment to determine the additional accounts receivable allowances required. In addition, due to the fact that our products
are fairly expensive and we deal with a limited customer base, the trade receivable balance owed by any one customer can be significant. As a result, if our judgment of the financial condition of our customers, even a single customer, proves to be
incorrect, we would have to record additional and potentially significant allowances and bad debt expense which would have a material impact on our business, financial condition and results of operations.

Long-Lived Assets Valuation

Included in our long-lived assets are property, plant and equipment and definite lived intangible assets. Long-lived assets are reviewed for impairment when events or circumstances indicate that the carrying amount of an asset may not be
recoverable. Factors that would indicate potential impairment may include, but are not limited to, significant decreases in the market value of the long-lived assets, a significant change in the long-lived assets physical condition, and
operating or cash flow losses associated with the use of the long-lived asset. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future net cash flows (undiscounted and without
interest) expected to be generated by the asset. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. If such assets are considered to be
not recoverable (i.e. the carrying amount is greater than the undiscounted cash flows), the impairment is measured and recorded based upon the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Significant judgments and
estimates by management are required to project cash flows and, if required, estimate the fair value of the impaired long-lived assets. The estimated future cash flows are based upon, among other things, our strategic plans with regard to our
business and operations, assumptions about expected future operating performance, and the interpretation of current and future economic indicators. When global economic conditions are changing or adverse, it is very difficult to estimate future cash
flows as it requires management at the company to make judgments on when and how quickly the economy and the companys business will recover. To the extent that the judgments used by us to calculate our future cash flows prove to be inaccurate
or there are significant changes in market conditions, the overall condition of the global economy or our strategic plans change, it is possible that our conclusions regarding long-lived asset impairment could change. This could result in
significant impairment charges which would have a material adverse effect on our business, financial position and results of operations.

Income Taxes

Deferred tax assets and liabilities are recognized using enacted tax rates for the effect of
temporary differences between the financial statement and tax bases of recorded assets and liabilities. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be
realized. We have determined that our future taxable income will be sufficient to recover the majority of our deferred tax assets, with the exception of TCZ USA LLCs (which is 100% owned by TCZ) deferred assets which are fully provided for. If
in the future we determine that a change has occurred which will not allow this recovery, we will record a valuation allowance against our deferred tax assets. This will result in a charge against our income tax provision.

The calculation of our tax provision is dependant upon the geographic composition of our world wide earnings, tax regulations governing each
region and the availability of tax credits. In addition, the calculation of our tax liabilities involves uncertainties in the application of complex tax laws and regulations. We record tax liabilities for uncertain tax positions. The final payment
of the amounts regarding these uncertainties may ultimately prove to be less than or greater than our estimate. If this occurs there will be either a benefit or a charge to our income tax provision.



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RESULTS OF OPERATIONS

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



|                                                    |  |                                 |  |   |  |                                |  |   |  |       |  |   |  |       |  |  
|--------------------------------------------------- |  | ------------------------------- |  | - |  | ------------------------------ |  | - |  | ----- |  | - |  | ----- |  | -
|                                                    |  | Three months endedSeptember 30, |  |   |  | Nine months endedSeptember 30, |  |  
|                                                    |  | 2009                            |  |   |  | 2008                           |  |   |  | 2009  |  |   |  | 2008  |  |  
|Revenues:                                           |  |                                 |  |   |  |                                |  |   |  |       |  |   |  |       |  |  
|Product sales                                       |  | 99.8                            |  | % |  | 99.6                           |  | % |  | 99.7  |  | % |  | 99.5  |  | %
|Product sales - related party                       |  | 0.2                             |  |   |  | 0.4                            |  |   |  | 0.3   |  |   |  | 0.5   |  |  
|                                                    |  |                                 |  |   |  |                                |  |   |  |       |  |   |  |       |  |  
|Total revenues                                      |  | 100.0                           |  |   |  | 100.0                          |  |   |  | 100.0 |  |   |  | 100.0 |  |  
|Cost of revenues                                    |  | 51.8                            |  |   |  | 53.1                           |  |   |  | 57.3  |  |   |  | 51.9  |  |  
|                                                    |  |                                 |  |   |  |                                |  |   |  |       |  |   |  |       |  |  
|Gross profit                                        |  | 48.2                            |  |   |  | 46.9                           |  |   |  | 42.7  |  |   |  | 48.1  |  |  
|                                                    |  |                                 |  |   |  |                                |  |   |  |       |  |   |  |       |  |  
|Operating expenses:                                 |  |                                 |  |   |  |                                |  |   |  |       |  |   |  |       |  |  
|Research and development                            |  | 18.7                            |  |   |  | 22.0                           |  |   |  | 23.7  |  |   |  | 19.9  |  |  
|Sales and marketing                                 |  | 5.0                             |  |   |  | 5.3                            |  |   |  | 6.0   |  |   |  | 5.1   |  |  
|General and administrative                          |  | 7.8                             |  |   |  | 7.2                            |  |   |  | 9.9   |  |   |  | 7.6   |  |  
|Restructuring                                       |  | -                               |  |   |  | -                              |  |   |  | 3.9   |  |   |  | -     |  |  
|                                                    |  |                                 |  |   |  |                                |  |   |  |       |  |   |  |       |  |  
|Total operating expenses                            |  | 31.5                            |  |   |  | 34.5                           |  |   |  | 43.5  |  |   |  | 32.6  |  |  
|                                                    |  |                                 |  |   |  |                                |  |   |  |       |  |   |  |       |  |  
|Operating income (loss)                             |  | 16.7                            |  |   |  | 12.4                           |  |   |  | (0.8) |  |   |  | 15.5  |  |  
|Total other expense - net                           |  | (0.1)                           |  |   |  | (5.6)                          |  |   |  | (0.6) |  |   |  | (2.4) |  |  
|                                                    |  |                                 |  |   |  |                                |  |   |  |       |  |   |  |       |  |  
|Income (loss) before income tax provision (benefit) |  | 16.6                            |  |   |  | 6.8                            |  |   |  | (1.4) |  |   |  | 13.1  |  |  
|Income tax provision (benefit)                      |  | 5.9                             |  |   |  | 2.4                            |  |   |  | (0.3) |  |   |  | 4.6   |  |  
|                                                    |  |                                 |  |   |  |                                |  |   |  |       |  |   |  |       |  |  
|Net income (loss)                                   |  | 10.7                            |  |   |  | 4.4                            |  |   |  | (1.1) |  |   |  | 8.5   |  |  
|                                                    |  |                                 |  |   |  |                                |  |   |  |       |  |   |  |       |  |  
|Net loss attributable to noncontrolling interest    |  | 0.9                             |  |   |  | 0.4                            |  |   |  | 0.4   |  |   |  | 0.6   |  |  
|                                                    |  |                                 |  |   |  |                                |  |   |  |       |  |   |  |       |  |  
|Net income (loss) attributable to Cymer, Inc.       |  | 11.6                            |  |   |  | 4.8                            |  |   |  | (0.7) |  |   |  | 9.1   |  |  
|                                                    |  |                                 |  |   |  |                                |  |   |  |       |  |   |  |       |  |  

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 product sales. The TCZ segment is targeting the growing market for LTPS processing used in the manufacture of flat panel displays. No revenues were earned or
recorded for the nine months ended September 30, 2009 and 2008 for the TCZ segment. The discussion which follows for operating expenses and other income and expenses includes our consolidated expenses and identifies expenses associated with the
TCZ segment for the three and nine months ended September 30, 2009 and 2008. Additional information regarding our reporting segments is contained in Note 10, Segment Operations, to our unaudited condensed consolidated financial
statements.

Three Months Ended September 30, 2009 and 2008

Revenues. The types of revenue that we generate and how we recognize revenue for each is explained above under the heading
Critical Accounting Policies and Estimates. The following table summarizes the components of our revenue (in thousands, except units sold and percentage change):



|                             |  |                                         |        |               |   |                          |  |           |         |  |      |  
|---------------------------- |  | --------------------------------------- | ------ | ------------- | - | ------------------------ |  | --------- | ------- |  | ---- | -
|                             |  | For the three months endedSeptember 30, |        | 2009 vs. 2008 |  
|                             |  | 2009                                    |        | 2008          |   | Increase      (Decrease) |  | %  Change |        
|Light source systems:        |  |                                         |        |               |   |                          |  |           |         |  |      |  
|Revenue                      |  | $                                       | 21,627 |               | $ | 34,118                   |  | ($        | 12,491) |  | -37  | %
|                             |  |                                         |        |               |   |                          |  |           |         |  |      |  
|Units sold                   |  |                                         | 12     |               |   | 21                       |  |           | (9)     |  | -43  | %
|                             |  |                                         |        |               |   |                          |  |           |         |  |      |  
|Average selling price(1)     |  | $                                       | 1,814  |               | $ | 1,620                    |  |           | 194     |  | 12   | %
|                             |  |                                         |        |               |   |                          |  |           |         |  |      |  
|Installed base product sales |  | $                                       | 70,701 |               | $ | 76,448                   |  | $         | (5,747) |  | -8   | %
|                             |  |                                         |        |               |   |                          |  |           |         |  |      |  
|Other revenue                |  | $                                       | -      |               | $ | 53                       |  | $         | (53)    |  | -100 | %
|                             |  |                                         |        |               |   |                          |  |           |         |  |      |  
|Total revenue                |  | $                                       | 92,328 |               | $ | 110,619                  |  | ($        | 18,291) |  | -17  | %
|                             |  |                                         |        |               |   |                          |  |           |         |  |      |  

| | 
| | 

| | (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.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Total revenue decreased 17% for the three months ended September 30, 2009 compared to
the three months ended September 30, 2008 primarily due to a 37% decline in light source system revenues and an 8% decrease in installed base product sales from period to period. The decrease in light source system revenues was primarily due to
the lower number of light source systems that we sold as a result of the decline in lithography demand and the impact of the global economic conditions. A total of 12 light source systems were sold at an average selling price of approximately $1.8
million in the three months ended September 30, 2009 as compared to 21 light sources systems at an average selling price of approximately $1.6 million in the three months ended September 30, 2008. The average selling price of our
light source systems increased 12% period over period due to a higher concentration of sales of our most advanced ArF light sources for high volume immersion production applications, primarily our XLR series of light source systems. Our installed
base product revenue from period to period declined due to lower pulse utilizations of our light source systems. We expect our revenue in the fourth quarter of 2009 to be comparable to the revenue reported for the third quarter of 2009.

There were no revenues earned associated with our TCZ segment for the three months ended September 30, 2009 or 2008. To date TCZ has
shipped one TCZ system, but we have not yet recognized revenue since the agreement includes acceptance provisions and the acceptance certificate has not been received from the customer.

Our DUV backlog includes only those orders for which we have received a completed purchase order from a customer, and that will be delivered
to a customer within the following twelve months. In addition, our DUV backlog does not include services which will be provided to our customers in the future or under service contracts. For the period ended September 30, 2009, our DUV backlog
totaled $41.1 million and total DUV bookings were $99.0 million which yielded a DUV book-to-bill ratio of 1.07 compared to the same period in 2008 where our DUV backlog totaled $50.4 million and total DUV bookings were
$111.6 million which yielded a 1.0 DUV book-to-bill ratio. The decline in backlog and bookings period over period primarily reflects the downturn in the semiconductor capital equipment industry and the impact of the global economic conditions.

We installed 14 light sources at chipmakers and other end-users for the three months ended September 30, 2009 as
compared to 23 light sources installed during the three months ended September 30, 2008.

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. Approximately 84% and 82% of our sales for the three months ended September 30, 2009 and 2008, respectively, were
derived from customers outside the U.S. We maintain a wholly owned Japanese subsidiary, Cymer Japan, which sells to our Japanese customers. Revenues from Japanese customers, generated primarily by Cymer Japan, accounted for 18% and 21% of total
revenues for the three months ended September 30, 2009 and 2008, respectively. The activities of Cymer Japan include sales and service of light source and installed base products purchased by Cymer Japan 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, installation 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. Shipping costs associated with our product sales are also included in cost of revenues. We do not
charge our customers for shipping fees. The cost of revenues decreased 18.5% to $47.8 million for the three months ended September 30, 2009 from $58.7 million for the three months ended September 30, 2008. This decrease was
primarily due to lower costs associated with our reduced light source system sales and lower costs associated with reduced installed base product revenue from period to period as well as lower OnPulse start-up costs for the three months ended
September 30, 2009.

Cost of revenues associated with the TCZ segment was $171,000 for the three months ended
September 30, 2009. The cost of revenues is associated with the installation costs incurred during the third quarter of 2009 to install our first TCZ system at a customer site. The 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 three months ended September 30, 2008.

Gross profit decreased to $44.5 million with a 48.2% gross margin for the three months ended September 30, 2009 from
$51.9 million with a 46.9% gross margin for the three months ended September 30, 2008. The decrease in gross profit period over period reflects the lower levels of both light source system and installed base product revenue. The increase
in gross margin from period to period was primarily due to beneficial changes in product mix, lower OnPulse start-up expenses, and lower overall manufacturing and field costs. We anticipate that gross margin will remain relatively flat in the fourth
quarter of 2009 as compared to the third quarter of 2009.

Research and Development. Research and development expenses
include costs of internally-funded projects as well as continuing product development support expenses, which consist primarily of employee and material costs, depreciation of equipment and other engineering related costs. Research and development
expenses decreased 29.1% to $17.3 million for the three months ended September 30, 2009 from $24.3 million for the three months ended September 30, 2008. This decrease in research and development



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expenses reflects the impact of the cost reduction actions we conducted in the fourth quarter of 2008 and continued into 2009 which resulted in lower employee compensation and benefit costs as
well as adjusted spending on our DUV product portfolio. Although we have reduced our spending in response to the industry downturn and current global economic climate, we continue to maintain our strategic investment in EUV source development and in
TCZ for low-temperature poly-silicon product development. Included in variable compensation expenses for research and development for the three months ended September 30, 2009 were approximately $763,000 of expenses associated with our
financial performance-based cash bonus program for the second half of fiscal 2009 (the 2H-2009 Plan). As a percentage of total revenues, research and development expenses decreased to 18.7% for the three months ended September 30,
2009 from 22.0% for the three months ended September 30, 2008. We anticipate that research and development expenses in the fourth quarter of 2009 will be comparable to the third quarter of 2009.

Research and development expenses for the TCZ segment associated with their LTPS product development efforts remained flat at $1.1
million for each of the three month periods ended September 30, 2009 and 2008.

Sales and Marketing. Sales
and marketing expenses include sales, marketing and customer support staff expenses and other marketing expenses. Sales and marketing expenses decreased 20.1% to $4.7 million for the three months ended September 30, 2009 from
$5.9 million for the three months ended September 30, 2008. The decrease in sales and marketing expenses from period to period primarily reflects a decline of $1.4 million in employee compensation and benefits, travel and entertainment,
trade shows, and facilities related expenses as a result of cost reduction actions we conducted in the fourth quarter of 2008 and continued in 2009. Included in variable compensation expenses for sales and marketing for the three months ended
September 30, 2009 were approximately $367,000 of expenses associated with our 2H-2009 Plan. As a percentage of total revenues, sales and marketing expenses decreased to 5.0% for the three months ended September 30, 2009 compared to 5.3%
for the three months ended September 30, 2008. We anticipate that sales and marketing expenses in the fourth quarter of 2009 will be comparable to the third quarter 2009 levels.

Sales and marketing expenses associated with the TCZ segment increased to $579,000 for the three months ended September 30, 2009
from $517,000 for the three months ended September 30, 2008 due primarily to increases in employee compensation and benefits partially offset by, a decrease in travel and entertainment expenses.

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 decreased 10.4% to $7.2 million for the three months ended September 30, 2009 from $8.0 million
for the three months ended September 30, 2008. The decrease from period to period primarily reflects a $1.9 million decline in employee compensation and benefits costs, outside services and professional fees, travel and entertainment expenses
and facilities related expense as a result of the cost reduction actions we implemented in the fourth quarter of 2008 and continued in 2009. In addition, this period over period decrease reflects a $214,000 decrease in bad debt expense.
Included in our variable compensation expenses for the three months ended September 30, 2009 were approximately $598,000 of expenses associated with our 2H-2009 Plan. As a percentage of total revenues, general and administrative expenses
increased to 7.8% for the three months ended September 30, 2009 compared to 7.2% for the three months ended September 30, 2008. We anticipate that general and administrative expenses in the fourth quarter of 2009 will be comparable to the
third quarter 2009 levels.

General and administrative expenses associated with the TCZ segment increased to $276,000 for
the three months ended September 30, 2009 from a negative expense of $66,000 for the three months ended September 30, 2008 due primarily to increases in employee compensation and benefits. This increase in employee compensation and benefit
expenses was partially offset by a decrease in accounting, travel and entertainment expenses from period to period. The primary cause of the negative expense for the three months ended September 30, 2008 was due to a reversal of amounts recorded for
the TCZ incentive program as a result of changes in TCZs expected results identified during the period.

Restructuring.There were no restructuring expenses recorded for the Cymer segment or the TCZ segment for the three months ended September 30, 2009 or 2008.

Total Other Income (Expense)Net. Net other income (expense) consists primarily of interest income earned on our investment and
cash portfolio, interest expense incurred on our convertible subordinated notes that were outstanding until February 2009, 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. Net other expense decreased to $47,000 for the three months ended September 30, 2009 compared to $6.3 million for the three months
ended September 30, 2008 primarily due to a large decline in foreign currency exchange losses from period to period. Foreign currency exchange losses totaled $10,000 during the three months ended September 30, 2009 as compared to $6.4
million during the three months ended September 30, 2008. This reduction from period to period reflects the reduced volatility of foreign currency exchange rates, particularly the Korean Won against the U.S. Dollar, and the impact of our
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Additionally, the decline in net other expense reflects a decrease in interest expenses of
$1.6 million from period to period as a result of the repayment of our convertible subordinated note in February 2009. Net other expense for the three months ended September 30, 2009 also included a $126,000 gain recognized from the redemption
of a short-term investment. These positive impacts on net other expenses for the three months ended September 30, 2009 were partially offset by a decrease in interest income of $1.8 million from period to period as a result of lower overall
cash and investment balances and lower interest rate yields. We also recorded a $291,000 write-down during the three months ended September 30, 2009 on a preferred stock security that was distributed to us in April 2009 when an auction rate
security held by us was dissolved. We recorded a $270,000 write-down on this auction rate security during the three months ended September 30, 2008.

Total expense, net associated with the TCZ segment decreased to $56,000 for the three months ended September 30, 2009 compared to $176,000 for the three months ended September 30, 2008. This
decrease primarily reflects lower foreign currency exchange losses recorded during the three months ended September 30, 2009 related to the stronger Korean Won and Japanese Yen compared to much higher foreign currency exchange losses and higher
interest income during the same period in 2008.

Income Tax Provision (Benefit). The tax provision of $5.4 million
and $2.6 million for the three months ended September 30, 2009 and 2008, respectively, reflects a tax rate for both quarters of 35%. Forecasting for 2009 continues to be subject to significant change and projection of an annual effective tax
rate for the year is not appropriate. Therefore, we calculated our quarterly provision using the year to date actual results for the nine months ended September 30, 2009, and the tax provision for the third quarter of 2009 reflects the
difference between the tax provision for the nine months of 2009 and that of the first two quarters of 2009. The tax expense for the three months ended September 30, 2009 reflects the quarterly expense recorded in order to adjust the 2009
year to date tax benefit to a 21% rate from the 33% rate recorded as of June 30, 2009. The decrease in the tax rate from period to period is primarily due to the impact of the lower research and development expenses resulting in a lower
research and development tax credits and an increase in foreign losses with no tax benefit during the third quarter of 2009.

Nine
Months Ended September 30, 2009 and 2008

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



|                             |  |                                        |         |               |   |                    |  |           |           |  |      
|---------------------------- |  | -------------------------------------- | ------- | ------------- | - | ------------------ |  | --------- | --------- |  | -----
|                             |  | For the nine months endedSeptember 30, |         | 2009 vs. 2008
|                             |  | 2009                                   |         | 2008          |   | Increase(Decrease) |  | %  Change
|Light source systems:        |  |                                        |         |               |   |                    |  |           |           |  |      
|Revenue                      |  | $                                      | 45,582  |               | $ | 120,466            |  | ($        | 74,884)   |  | -62% 
|                             |  |                                        |         |               |   |                    |  |           |           |  |      
|Units sold                   |  |                                        | 25      |               |   | 81                 |  |           | (56)      |  | -69% 
|                             |  |                                        |         |               |   |                    |  |           |           |  |      
|Average selling price(1)     |  | $                                      | 1,794   |               | $ | 1,486              |  |           | 308       |  | 21%  
|                             |  |                                        |         |               |   |                    |  |           |           |  |      
|Installed base product sales |  | $                                      | 165,678 |               | $ | 237,814            |  |           | (72,136)  |  | -30% 
|                             |  |                                        |         |               |   |                    |  |           |           |  |      
|Other revenue                |  |                                        | -       |               | $ | 282                |  | ($        | 282)      |  | -100%
|                             |  |                                        |         |               |   |                    |  |           |           |  |      
|Total revenue                |  | $                                      | 211,260 |               | $ | 358,562            |  | $         | (147,302) |  | -41% 
|                             |  |                                        |         |               |   |                    |  |           |           |  |      

| | 
| | 

| | (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 decreased 41% for the nine months
ended September 30, 2009 compared to the nine months ended September 30, 2008 primarily due to a 62% decline in light source system revenues and a 30% decrease in installed base product sales. The decrease in light source revenues was
primarily due to the lower number of light source systems that we sold as a result of the decline in lithography demand and the impact of the global economic conditions. A total of 25 light source systems were sold at an average selling price of
$1.8 million in the nine months ended September 30, 2009 compared to 81 light sources systems at an average selling price of $1.5 million in the nine months ended September 30, 2008. The average selling price of our light source
systems increased 21% period over period due to a higher concentration of sales of our most advanced ArF light sources for immersion production applications which include our XLR series light source systems. Although our installed base product
revenue declined from period to period due to a decline in pulse utilizations it did not decline as significantly as our light source system sales.



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There were no revenues earned associated with our TCZ segment for the nine months ended
September 30, 2009 or 2008. To date, TCZ has shipped one system but we have not yet recognized revenue as the agreement includes acceptance provisions and the acceptance certificate has not been received from the customer.

Sales to Nikon and ASML, two of our three lithography tool manufacturing customers, and Samsung, who purchases installed base products from
us, amounted to 18%, 14% and 13%, respectively, of total revenue for the nine months ended September 30, 2009, and 18%, 24% and 10%, respectively, of total revenue for the nine months ended September 30, 2008. Sales of our installed base
products sales accounted for 78% of total revenue for the nine months ended September 30, 2009 and 66% of total revenue for the nine months ended September 30, 2008. This increase from period to period is primarily due to the significantly
reduced levels of light source system sales relative to total sales for the nine months ended September 30, 2009 as compared to the same period in 2008.

Approximately 83% and 84% of our sales for the nine months ended September 30, 2009 and 2008, respectively, were derived from customers outside the United States. Revenues from Japanese customers,
generated primarily by Cymer Japan, accounted for 24% and 21% of total revenues for the nine months ended September 30, 2009 and 2008, respectively.

Cost of Revenues. The cost of revenues decreased 34.9% to $121.1 million for the nine months ended September 30, 2009 from $186.1 million for the nine months ended
September 30, 2008. This decrease was primarily due to lower costs associated with our reduced light source system sales, and lower installed base product costs due to lower installed based product sales and lower warranty expenses period over
period. These decreases in costs of revenue were partially offset by a $5.6 million idle capacity charge associated with unabsorbed manufacturing costs which resulted primarily from the decline in light source demand and reduced production
levels during the first nine months of 2009.

Cost of revenues associated with the TCZ segment was $171,000 for the nine
months ended September 30, 2009. This cost of revenues is associated with the installation costs incurred during the third quarter of 2009 to install the first system at a customer site. The 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 nine months ended September 30, 2008.

Gross profit decreased to $90.2 million with a 42.7% gross margin for the nine months ended September 30, 2009 from
$172.4 million with a 48.1% gross margin for the nine months ended September 30, 2008. The decline from period to period was primarily due to the larger percentage of sales attributable to our installed base products which generate lower
margins than our light source systems. In addition, gross margin was also negatively impacted in the first nine months of 2009 by start-up costs for light sources covered under OnPulse contracts, idle capacity charges associated with unabsorbed
manufacturing costs, and additional reserves for our inventory.

Research and Development.Research and development
expenses decreased 29.9% to $50.0 million for the nine months ended September 30, 2009 from $71.3 million for the nine months ended September 30, 2008 primarily due to the reductions in our workforce and cost reduction actions
which we conducted in the fourth quarter of 2008 and continued in 2009. These activities resulted in lower employee compensation and benefit costs, reduced variable compensation costs, decreased travel and entertainment expenses and adjustments to
spending on our DUV product portfolio. Included in our variable compensation expenses for the nine months ended September 30, 2009 were approximately $763,000 of expenses associated with our 2H-2009 Plan. We continue to maintain our strategic
investment in EUV source development and also in TCZ for LTPS product development. As a percentage of total revenues, research and development expenses increased to 23.7% for the nine months ended September 30, 2009 from 19.9% for the nine
months ended September 30, 2008.

Research and development expenses for the TCZ segment associated with their LTPS
product development efforts decreased 18.4% to $3.1 million for the nine months ended September 30, 2009 from $3.8 million for the nine months ended September 30, 2008 due primarily to a reduction in depreciation expense
associated with certain demonstration equipment that was fully depreciated in 2008.

Sales and Marketing. Sales and
marketing expenses decreased 31.5% to $12.6 million for the nine months ended September 30, 2009 from $18.4 million for the nine months ended September 30, 2008. This decrease from period to period primarily reflects a decline of
$5.8 million in employee compensation and benefits, travel and entertainment, and facilities costs as a result of the reductions in workforce and cost reduction actions we conducted in the fourth quarter of 2008 and continued in 2009. Included
in our variable compensation expenses for the nine months ended September 30, 2009 were approximately $367,000 of expenses associated with our 2H-2009 Plan. As a percentage of total revenues, sales and marketing expenses increased to 6.0% for
the nine months ended September 30, 2009 compared to 5.1% for the nine months ended September 30, 2008.

Sales and
marketing expenses associated with the TCZ segment increased 25.0% to $1.5 million for the nine months ended September 30, 2009 from $1.2 million for the nine months ended September 30, 2008 due primarily to increases in employee
compensation and benefits related expenses, travel and entertainment expenses and consulting expenses.



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General and Administrative. General and administrative expenses decreased 23.1% to
$20.8 million for the nine months ended September 30, 2009 from $27.1 million for the nine months ended September 30, 2008. The decline period over period primarily reflects a decline of $7.6 million in employee compensation and
benefits, professional fees, travel and entertainment, and facilities related costs as a result of the reductions in our workforce and cost reduction actions which we implemented in the fourth quarter of 2008 and continued in 2009. These decreases
in general and administrative expenses were partially offset by a $948,000 increase in bad debt expense from period to period as a result of certain of our customers that we identified as being at risk as a result of the downturn in the
semiconductor industry and the current global economic climate. Included in our variable compensation expenses for the nine months ended September 30, 2009 were approximately $598,000 of expenses associated with our 2H-2009 Plan. As a
percentage of total revenues, general and administrative expenses increased to 9.9% for the nine months ended September 30, 2009 compared to 7.6% for the nine months ended September 30, 2008.

General and administrative expenses associated with the TCZ segment increased 30.6% to $772,000 for the nine months ended
September 30, 2009 from $591,000 for the nine months ended September 30, 2008 due primarily to increases in compensation and benefits associated with the TCZ incentive program. This increase was partially offset by a decrease in accounting
and travel expenses.

Restructuring. In the first quarter of 2009, we reduced our worldwide workforce by approximately
26 percent or a total of 230 employees, in response to the deterioration in the lithography sector of the semiconductor capital equipment market. These reductions in workforce impacted employees within 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 nine months ended September 30, 2009 primarily associated with severance charges. We did not have any such restructuring
expenses for the nine months ended September 30, 2008. As a percentage of total revenues, restructuring expenses were 3.9% for the nine months ended September 30, 2009.

There were no restructuring expenses associated with TCZ for the nine months ended September 30, 2009 or 2008.

Total Other Income (Expense)Net. Net - other expense decreased to $1.4 million for the nine months ended September 30,
2009 from $8.8 million for the nine months ended September 30, 2008 primarily due to the decreases in our foreign currency exchanges losses and the significantly reduced write-downs on investments period over period. Foreign currency exchange
losses total to $1.5 million for the nine months ended September 30, 2009 and were caused primarily by a lower volatility in the Korean Won against the U.S. Dollar and the impact of our foreign currency exchange hedging program. Foreign
currency exchange losses were $6.4 million for the nine months ended September 30, 2008 and were caused by a significant decline in the value of the Korean Won against the U.S. Dollar. Impairment charges on the preferred stock that was
distributed to us when the sole auction rate security held by us was dissolved in April 2009 were $291,000 for the nine months ended September 30, 2009 reducing the carrying amount of the auction rate preferred stock to zero at
September 30, 2009, compared to impairment charges on our auction rate security of $5.1 million for the nine months ended September 30, 2008. Based on the crisis in the credit market in 2008 and the continued downgrading of this auction
rate security in 2008, our evaluation of its fair value at September 30, 2008 resulted in an other-than-temporary impairment of $5.1 million.

Additionally, the decline in net other expense reflects a decrease in interest expense of $4.0 million from period to period as a result of the repayment of our convertible subordinated note in February
2009. Interest and other income for the nine months ended September 30, 2009 includes a $126,000 gain associated with the redemption of a short-term investment. These decreases in other expense, net were partially offset by a $6.4 million
reduction in interest and other income from period to period as a result of lower overall cash and investment balances and lower interest rate yields.

Total other expense, net associated with the TCZ segment decreased to $79,000 for the nine months ended September 30, 2009 from $145,000 for the nine months ended September 30, 2008. This
change primarily reflects lower foreign currency exchange losses due to decreased foreign currency volatility and exposure offset by lower interest income due to lower interest rate yields earned for the nine months ended September 30, 2009
compared to the same period in 2008.

Income Tax Provision (Benefit). The tax benefit of $632,000 and the tax
provision of $16.4 million for the nine months ended September 30, 2009 and 2008, respectively, reflects a tax benefit for the year of 21% and a tax provision of 35%, respectively. Forecasting for 2009 is subject to significant change and
projection of an annual effective tax rate for the year is not appropriate. Therefore, we calculated our provision using the actual results for the nine months ended September 30, 2009. The tax benefit recognized during the nine months ended
September 30, 2009 is primarily due to the net loss incurred for the first nine months of 2009. The impact of the foreign losses with no tax benefit had a much larger impact on the nine months ended September 30, 2009 than it did on the
nine months ended September 30, 2008. This is primarily due to the fact that the foreign losses remained consistent for both years while the pre-tax loss for the nine months ended September 30, 2009 was significantly smaller than the
pre-tax income for the nine months ended September 30, 2008.



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LIQUIDITY AND CAPITAL RESOURCES

Historically, 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. At September 30, 2009, we had $111.6 million in cash and cash equivalents, $46.7 million in short-term
investments, and $390.5 million in working capital. We also had $1.2 million in restricted cash at September 30, 2009 which is associated with a secured refund bond that we entered into and was required by one of our customers related to a
sale to them in the third quarter of 2009. The overall decrease in cash and cash equivalents from December 31, 2008 to September 30, 2009 was primarily due to cash used in the first quarter of 2009 to repay our convertible subordinated
notes and accrued interest which totaled to $143.2 million.

Operating Activities. Net cash provided by
operating activities was $9.0 million for the nine months ended September 30, 2009 compared to net cash used in operating activities of $28.5 million for the nine months ended September 30, 2008. Net cash provided by operating
activities for the nine months ended September 30, 2009 primarily reflects decreases in inventory and the effect of non-cash charges including depreciation and amortization and stock-based compensation and increases in deferred revenue. These
sources of cash were somewhat offset by increases in accounts receivable, decreases in accrued and other liabilities, and changes in the balances of income taxes payable and receivable during the nine months ended September 30, 2009. The
decrease in inventory is due primarily to decreases in our spare parts inventory as we focused on managing and optimizing these inventory levels during the nine months ended September 30, 2009. These decreases in our spare parts inventory
levels were partially offset by increases in inventory related to EUV systems that are being built to fulfill our first EUV order with ASML. The increase in accounts receivable reflects higher overall revenue levels and a higher level of shipments
that occurred later in the quarter which resulted in higher outstanding accounts receivable balances at September 30, 2009. The changes in the income tax accounts were primarily due to tax payments that were made during the period. The decrease
in accrued and other liabilities primarily reflects the decrease in our warranty provision as a result of reduced sales and the lower number of light source systems that are currently under warranty and payments we made during the period associated
with our restructuring activities that took place in the first quarter of 2009.

Net cash used in operating activities for the
nine months ended September 30, 2008 primarily reflects significant increases in inventory, decreases in accrued expenses and other liabilities, changes in the balances of income taxes payable and receivable during the period. This use of cash
was partially offset by net income for the period and decreases in accounts receivable during the period. The increase in inventory was due primarily to increases in our field inventory to support the increased utilization of our light sources in
the first nine months of 2008, to provide for faster replacement parts availability and optimize field inventory to support the XLR light source system installations and to support our OnPulse agreements. The increase in inventory also reflected EUV
work in process inventory in support of planned production demand. The decrease in accounts receivable was due to ongoing collection efforts, and the changes in the income tax accounts were primarily due to significant tax payments that were made
during the nine month period ended September 30, 2008.

Investing Activities. Net cash used in investing
activities was $13.1 million and $28.3 for the nine months ended September 30, 2009 and 2008, respectively. Net cash used in investing activities for the nine months ended September 30, 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 remained low and totaled approximately $6.3 million for the first nine months
of 2009. A portion of the proceeds from matured investments were used to redeem our convertible subordinated notes in February 2009.

Net cash used in investing activities for the nine months ended September 30, 2008 was due primarily to the timing of short-term and long-term investments that matured and were reinvested during the period and the acquisition of
$19.2 million of property and equipment, a significant portion of which related to building improvement costs and engineering equipment associated with our EUV research, development and productization efforts.

Financing Activities. Net cash used in financing activities was $136.0 million and $19.1 million for the nine months ended
September 30, 2009 and 2008, respectively. Net cash used in financing activities for the nine months ended September 30, 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 proceeds from the exercise of employee stock options totaling $3.8 million, an additional cash investment received from Zeiss, the TCZ minority
shareholder, in the amount of $800,000, and excess tax benefits from stock option exercises of $199,000.

Net cash used in
financing activities for the nine months ended September 30, 2008 reflects the purchase of shares of our common stock totaling $22.9 million. This use of cash was partially offset by an additional cash investment received from Zeiss in the
amount of $2.0 million, proceeds from the exercise of employee stock options totaling $1.8 million, and excess tax benefits from stock option exercises of $37,000.



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Effect of Exchange Rate Changes. Most of our foreign subsidiary offices 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. Several of the foreign currencies in which our subsidiary offices operate have experienced increased volatility in 2008 and 2009. The exchange rate related reduction in cash and cash
equivalents of $799,000 for the nine months ended September 30, 2009 was primarily driven by the volatility of the Japanese Yen and the Korean Won against the U.S. Dollar. The exchange rate related reduction in cash and cash equivalents of
$7.0 million for the nine months ended September 30, 2008 was primarily caused by the weakening of the Korean Won 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 light source technologies, including inventory
and capital in support of these technologies. In addition, we require resources to fund our normal operations and the activities of TCZ. On February 17, 2009, we used $143.2 million of our total cash and short-term investments balances to
redeem our convertible subordinated notes and the remaining interest due. 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, our investments in our new light source technologies, including EUV and TCZ, 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. We have taken steps to reduce certain expenditures as part of our announced reductions in
workforce in November 2008 and the first quarter of 2009, and we will continue to monitor and control expenditures for this purpose. In April 2008, our board of directors authorized us to repurchase up to $100.0 million of our common stock. As
of September 30, 2009, we have $77.1 million remaining of this authorization. We are currently not using our cash or marketable securities for common stock repurchases but we could do so in the future.

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 light source technologies such as EUV;
| | - |  | --------------------------------------------------------------------------



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



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



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



| |  |  | the required investment to support TCZ;
| | - |  | ---------------------------------------



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



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



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



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



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



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



| |  |  | 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------



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OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

As of September 30, 2009, 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.

On February 17, 2009, we redeemed the 3.50% convertible subordinated notes at a price equal to 100% of the principal amount of the
notes of $140.7 million plus accrued interest of $2.5 million. We anticipate that this payment will not impact our ability to sustain operations for at least the next 12 months.

Other than the redemption of our convertible subordinated notes and the payment of accrued interest as discussed above, 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 fiscal year ended December 31, 2008.

FUTURE ACCOUNTING REQUIREMENTS

In December 2008, the FASB issued authoritative guidance for retirement benefits which requires an entity to disclose the following
information related to its pension plan assets: 1) investment policies and strategies; 2) categories of plan assets; 3) fair value measurements of plan assets (following the fair value hierarchy of the authoritative guidance for fair
value measurements and disclosures and 4) any significant concentrations of risks. The authoritative guidance for retirement benefits is effective for fiscal years ending after December 15, 2009. We will adopt the authoritative guidance
for retirement benefits on December 31, 2009 and we do not expect its adoption to have an impact on our consolidated financial statements.

In August 2009, the FASB issued authoritative guidance for fair value measurements and disclosures for liabilities to provide additional guidance on the valuation techniques used in fair value
measurements of liabilities of a reporting entity. This authoritative guidance is effective for the first reporting period beginning after its issuance. We will adopt this revised authoritative guidance for fair value measurements and disclosures
for liabilities as of October 1, 2009 and we do not expect the adoption of this guidance to have an impact on our consolidated financial statements.

In October 2009, the FASB issued revised guidance for revenue recognition for multiple-element arrangements. This new guidance provides amendments to the criteria for separating consideration in
multiple-deliverable arrangements, and establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available,
third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The revised guidance also eliminates the residual method of
allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables. In addition, the revised guidance expands the disclosures related to a vendors multiple-deliverable revenue
arrangements, and requires detailed transitional disclosures during the year of adoption of this new authoritative guidance. The revised authoritative guidance for revenue recognition for multiple-element arrangements will be effective prospectively
for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted under certain circumstances. We are currently assessing the potential impact of the adoption of this
new authoritative guidance on our consolidated financial statements and disclosures and whether we will early adopt it.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Risk

We conduct business in several international currencies through our global operations. Historically, our foreign currency hedging program
included only the Japanese Yen. In February 2009, we expanded our foreign currency hedging program to include the Korean Won, the Euro and the Taiwanese Dollar due to increased foreign currency exposures and elevated volatility associated with these
currencies. Our foreign currency risk falls into two primary categories.

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.

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



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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.

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 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 experience ineffectiveness of cash flow hedges from cancelled transactions. The fair value of all our forward contracts totaled to a liability of $1.1 million as of September 30, 2009. The deferred loss, net of
tax, for those that qualified for hedge accounting treatment was $348,000 as of September 30, 2009.

At
September 30, 2009, we had outstanding forward contracts to buy $16.0 million in exchange for Japanese Yen, $4.5 million in exchange for Korean Won, $4.0 million in exchange for Taiwanese Dollars and to sell $7.0 million in
exchange for Euros. These contracts expire on various dates through March 2010.

For the nine months ended September 30,
2009 and 2008, we recorded foreign currency exchange losses which totaled $1.5 million and $6.4 million, respectively. The foreign currency exchange losses for both periods were primarily attributable to the volatility of the Korean Won against the
U.S. Dollar. These foreign currency losses are included in other income (expense) on the accompanying unaudited condensed consolidated statements of operations.

We considered the historical trends in currency exchange rates and determined that it was reasonably possible that adverse changes in exchange rates of 15% 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 $917,000 and $6.2 million at September 30, 2009 and September 30, 2008, respectively. The adverse impact at
September 30, 2009 and September 30, 2008 is after consideration of the offsetting effect of approximately $3.2 million and $3.6 million from forward exchange contracts in place for the months of September 30, 2009 and
September 30, 2008, respectively. These reasonably possible adverse changes in foreign currency exchange rates of 15% 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. A change in market interest rates of 10% would have impacted our net income from these investments by approximately $106,000 for the nine months ended September 30, 2009.

We also currently hold preferred stock that was distributed to us when our sole auction rate security was dissolved in April 2009. The
auction rate security was purchased according to our investment policy in October 2007 at a par value of $5.6 million and failed at every auction from November 2007 until its dissolution in April 2009. We recorded impairment charges totaling
$5.3 million in 2008 associated with this security. At June 30, 2009, the preferred stock had a carrying value of $291,000 equivalent to the most recent fair value determination of the auction rate security. During the three month period
ended September 30, 2009, we determined that there is no reasonable probability of receiving any future cash flow from the preferred stock. Therefore, we concluded that it was appropriate for us to write off the remaining value of this security
and record an other-than-temporary impairment of $291,000. This final impairment was included in other income (expense) in the accompanying unaudited condensed consolidated financial statements of operations during the three months ended
September 30, 2009.

On February 17, 2009, our 3.50% convertible subordinated notes came due and we repaid the
outstanding principal balance of $140.7 million plus accrued interest of $2.5 million.

ITEM 4.
Controls and Procedures

Evaluation of disclosure controls and procedures. For the third quarter of 2009, our chief
executive officer and our chief financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of



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the Securities Exchange Act of 1934, as amended (the Exchange Act), as of September 30, 2009, and concluded that as of such date, our disclosure controls and procedures were
effective in ensuring that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules and forms of the Securities and
Exchange Commission.

Changes in internal control over financial reporting. There has been no change in our internal
control over financial reporting during the quarter ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

None.

ITEM 1A. Risk Factors

The risks described below may not be the only risks we face. Additional risks that we do not currently 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, 2008. If any of the events or circumstances described in the following risks actually occur, our business, financial condition or results of operations could suffer, and the
trading price of our common stock 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:



| |  |  | changing or adverse global economic conditions, including their potential effects on our customers, suppliers, ability to sell products
internationally, 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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | increases or decreases in market penetration by our competitor;
| | - |  | ---------------------------------------------------------------



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



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



| |  |  | 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 impact their ability to supply us with the parts that we need to manufacture our
products;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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

We have historically derived the majority of our quarterly and annual revenues from selling light source systems and installed base products
used in semiconductor manufacturing. In recent years, light source sales accounted for approximately half of our revenue until 2008, when light source sales fell to 34% of total revenue. We expect that light source sales will represent a lower
percentage of our total revenue for 2009. Because we sell a limited number of light source system products, the precise timing for recognizing revenue from an order may have a significant impact on our total revenue for a particular period. As is
the practice in our industry, our customers may cancel or reschedule orders with little or no penalty. Orders expected in one quarter could shift to another period due to changes in the anticipated timing of our customers purchase decisions or
rescheduled delivery dates requested by our customers. Our operating results for a particular quarter or year may be adversely affected if our customers cancel or reschedule orders, or if we cannot fill orders in time due to unexpected delays in
manufacturing, testing, shipping, or product acceptance. In addition, our light source systems used in a production environment generate product revenues based on system usage.

As our installed base of light source systems grows, the product revenues generated by the operation of these light sources have a
significant impact 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.

We manage our expense levels based, in large part, on expected future revenues. As a result, our expenses are relatively fixed for the short term, and if our actual revenue decreases below the level we
expect 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 demand for their products from the
chipmakers. The capital equipment and related operating expenditures of chipmakers depend on a number of factors, including the current and anticipated market demand for semiconductors and the many products using semiconductors. That demand is
volatile and unpredictable.

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



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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 to 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 from time to time, and our
operating results may fall below the expectations of public market analysts or investors in future quarters. Any failure to meet such expectations could materially adversely affect the price of our common stock.

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

Global economic market conditions could
affect our revenues and operating results.*

The economies of the United States and other developed countries have been in
a recession. We cannot predict either the depth or the duration of an economic downturn or the speed and sustainability of an economic recovery.

Our current operating plans are based on assumptions concerning levels of consumer and corporate spending. A general weakening of, or declining corporate or consumer confidence in, the global and domestic
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 impact the principal markets in which we conduct business. If global economic and market conditions, or economic conditions in the United States or other key
markets, deteriorate, we will experience material impacts on our business, operating results, and financial condition, which could result in a decline in the price of our common stock.

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.

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, our revenues would be reduced and our financial condition and cash flows would suffer.*

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



|        |  |                                  |   |  |      |  
|------- |  | -------------------------------- | - |  | ---- | -
|        |  | Nine months   endedSeptember 30, |  
|        |  | 2009                             |   |  | 2008 |  
|ASML    |  | 14                               | % |  | 24   | %
|Nikon   |  | 18                               | % |  | 18   | %
|Samsung |  | 13                               | % |  | 10   | %
|        |  |                                  |   |  |      |  
|Total   |  | 45                               | % |  | 52   | %
|        |  |                                  |   |  |      |  

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:



| |  |  | a deterioration of the global economy;
| | - |  | --------------------------------------



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



| |  |  | changes in economic conditions in the semiconductor or the photolithography tool industries; and
| | - |  | ------------------------------------------------------------------------------------------------



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

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



|        |  |                      |   |  |                    |  
|------- |  | -------------------- | - |  | ------------------ | -
|        |  | September 30,   2009 |   |  | December 31,  2008 |  
|ASML    |  | 24                   | % |  | 32                 | %
|Nikon   |  | 8                    | % |  | 23                 | %
|Samsung |  | 8                    | % |  | 4                  | %
|        |  |                      |   |  |                    |  
|Total   |  | 40                   | % |  | 59                 | %
|        |  |                      |   |  |                    |  

These three customers account for approximately 45% of total consolidated revenue for
the first nine months of 2009 and approximately 40% of total accounts receivable at September 30, 2009. 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 collect future revenue from them is dependent on their financial condition and liquidity.

We maintain allowances for potential credit losses associated with accounts receivable due from our customers, and such losses to date have
not exceeded managements expectations. These customers may experience financial difficulties, particularly during adverse economic conditions, and this could negatively impact their liquidity and their ability to pay us.

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

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

We sell excimer light source systems, including KrF and ArF systems, and
installed base products. We expect these light source systems and the products in support of the installed base of light sources 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 with which chipmakers adopt excimer light sources may vary for a variety of reasons, including:



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



| |  |  | potential shortages of specialized materials used in 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;
| | - |  | ----------------------------------------------



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| |  |  | the introduction of one or more improved versions of products by a competitor in the market in which we participate; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------



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

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

In February 2009, we paid approximately $143.2 million including accrued interest to redeem our outstanding convertible subordinated notes which had reached maturity. As a result, our total cash and
investment balances are significantly lower than they were at December 31, 2008. We believe that our remaining cash resources will be sufficient for our planned operations, but 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. Depending on the available interest rates and other market
conditions at the time, 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 plans, 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 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 ups and downs 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 the
size of their workforce in an industry downturn and increase it in an upturn, they may not be able to meet our requirements or respond quickly enough as an upturn begins and gains momentum. Due to the nature of our product development requirements,
these key suppliers must rapidly advance their own technologies and production capabilities in order to support the introduction schedule of our new products. These suppliers may not be able to provide new modules and subassemblies when they are
needed to satisfy our manufacturing and delivery schedules. These suppliers may also be adversely impacted by economic conditions, which could result in a lack of available capital and thereby 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 would harm our
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 enabling such processes. We believe that our future success depends in part upon our ability to develop, manufacture, timely introduce and support new light source products
with improved capabilities on a timely basis and to continue to enhance our existing light source systems and process capabilities. Due to the risks inherent in transitioning to new products, we must forecast accurate demand for new products while
managing the transition from older products.

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

To benefit our customers with more productive, lower
cost of operation systems and to continue to grow our business, our existing light source products and their process capabilities must be enhanced, and we must develop and manufacture new products to serve other semiconductor applications. We cannot
guarantee that we will be able to manage our business growth effectively. Nor can we guarantee that we will be able to accelerate the development of new enhancements to our existing products and create new



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products. Further, we may not be able to effectively integrate new products and applications into our current operations. Any of these risks could materially harm our business, financial
condition and results of operations.

Current technologies which are still being 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 adversely
affect our sales of existing products.

We are currently developing EUV source technology for chip manufacturing at 22 nm and
below. In the second quarter of 2009, we shipped the first prototype EUV source to ASML. We are currently integrating and testing the prototype source into an ASML EUV lithography scanner. If we are not able to meet customer specifications, or have
reliability or quality problems, or if follow on pilot and eventually commercial systems are not introduced on time, our performance may be impacted by reduced orders, higher manufacturing costs, delays in acceptance of and payment for new products,
and additional service and warranty expenses. Our financial performance may also be adversely impacted if we must delay the timing of recognizing revenue associated with new products such as EUV. Our EUV product currently has an exposure power of 75
watts and we are targeting to achieve higher exposure power to support volume manufacturing with ASMLs EUV technology. If we cannot achieve the necessary level of exposure power, the adoption rate of our EUV product, and therefore our
performance, may be adversely affected.

We may not be able to develop and introduce new products or enhancements to our
existing products and processes in a timely or cost effective manner that satisfies customer needs or achieves market acceptance. Failure to develop and introduce these new products and enhancements could materially adversely affect our operating
results, financial condition and cash flows. New products represent significant investments of our resources and their success, or lack thereof, could have a material effect on our financial results.

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

Our future performance depends, in part, upon our ability to continue to compete successfully worldwide. Currently, we have one competitor
that sells light sources for DUV photolithography applications . This competitor, Gigaphoton, is a joint venture between two large companies, Komatsu and Ushio, and is headquartered in Japan. We know that our customers have purchased products from
this competitor and that our customers have qualified this competitors light sources for use with their products.

We
may face future competition from companies who 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 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, our operating results, financial condition and cash flows will be adversely
affected.

Any failure to manage our inventory levels, particularly during adverse economic conditions, and our inventory controls at our
widely dispersed operations could adversely affect our business, financial conditions and results of operations.*

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



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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 misjudge the market or demand for our products or the overall condition of the global economy, our revenues may decline significantly, which could result in excess inventory levels. As a result of these
inventory levels, we may be required to significantly write down the value of our inventory which would negatively impact our financial condition and results of operations. In addition, if we sell excessive amounts of inventory to our subsidiary
offices, this would increase their intercompany payables to us in U.S. Dollars which could increase our exposure to foreign currency fluctuations. This exposure could negatively impact our financial condition and results of operations if it is not
adequately offset by our foreign currency hedging program.

We also need to continually evaluate the adequacy of our existing
inventory controls, including the risk of loss of inventory in bonded warehouses. We could also sustain a loss in the event of a catastrophe in any of the locations where we maintain our inventory or if the warehouse companys 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, financial condition and results of operations.

We are exposed to foreign currency exchange rate fluctuations for all foreign currencies in which we do business and we may be adversely affected by
these fluctuations.*

We have international subsidiaries that operate in foreign currencies. All of our international
subsidiaries purchase the products that they sell to their customers from our corporate office or Korean subsidiary in U.S. Dollars and in many cases they resell these products to their customers in their local currency.

We operate a foreign currency hedging program to mitigate this risk. Historically our hedging program only managed our exposure to the
Japanese Yen; however we expanded our hedging program in the first quarter of 2009 to include the Korean Won, the Euro and the Taiwanese Dollar due to growth in our exposure to these currencies and increased volatility of foreign exchange rates in
general. The growth in our exposure to the Korean Won, the Euro and the Taiwanese Dollar was primarily driven by increased intercompany payable balances denominated in U.S. Dollars. These increased intercompany payable balances resulted from our
initiative to better serve customers by providing faster replacement parts availability which caused inventory levels at our international subsidiaries to increase. We hedge these risks by entering into forward foreign currency exchange contracts.
Although we enter into such forward contracts, they may not be adequate to eliminate the risk of foreign currency exchange rate exposures.

In addition to expanding our foreign currency hedging program, we have moved some of the inventory previously held by our international subsidiaries into bonded warehouses in Korea, Taiwan and Europe that
are controlled by our corporate office. Moving inventory into these bonded warehouses returned title of the inventory to our corporate office in San Diego, which reduced the intercompany payable balances denominated in U.S. Dollars of our
international subsidiaries. As a result, this decreased our foreign currency exposures in these locations and reduced the level of hedges required.

These steps may be insufficient to manage our foreign currency exchange risks. Failure to sufficiently hedge or otherwise manage our foreign currency risks properly could have a material adverse effect on
our financial condition and results of operations.

Failure to effectively maintain our direct field support organization 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 throughout the world that 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 locations in Europe, Korea, Japan, China, Singapore, Taiwan and the U.S. This requires us to do the following:



| |  |  | recruit and train qualified field 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 on our limited manufacturing facilities to assemble and test our products. *

Operations at our two manufacturing facilities and 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. 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.



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

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



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



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



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



| |  |  | field support;
| | - |  | --------------



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



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

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



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



| |  |  | our ability to attract, train and retain highly-skilled key personnel, particularly in periods following those when we have conducted reductions in our
workforce, and uncertainty regarding the outlook for our business; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

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

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

We serve a global market. A large portion of our total revenues is derived from
customers located outside of the U.S. We expect our international sales to continue to account for a very large portion of our total revenues. In order to support our foreign customers, we maintain a manufacturing and field support subsidiary in
Korea as well as field support subsidiaries 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 make us 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 domestic and foreign subsidiary and branch operations;
| | - |  | --------------------------------------------------------------------------------------------



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



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



| |  |  | the possibility of accounts receivable collection difficulties;
| | - |  | ---------------------------------------------------------------



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| |  |  | in Asia, the risk of business interruption and damage from earthquakes or tsunamis;
| | - |  | -----------------------------------------------------------------------------------



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



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



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

Many of our chipmaker customers are located in Asia. Political turmoil, economic problems and currency fluctuations affecting Asia could
increase our risk in that region. Even though it has not been difficult for us to comply with U.S. export controls, 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 do not purchase insurance, including earthquake risk. Any of these vulnerabilities could have a material adverse effect on our business, financial condition and results of operations.

Currently, none of our U.S. 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 results of operations.

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

We believe our success and ability to compete depend in part upon protecting our proprietary technology. We rely on a combination of patent,
trade secret, copyright and trademark laws, nondisclosure and other contractual agreements and technical measures to protect our proprietary rights. We own and have numerous patents pending in the U.S. and various foreign countries covering certain
aspects of technology related to light sources and piezoelectric techniques. These patents will expire at various times through 2027.

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

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

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



| |  |  | 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:



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



| |  |  | 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.
| | - |  | ---------------------------------------------------------------------------------

The parties to whom we have provided research and development services may dispute the ownership of the intellectual property that we developed while
performing these services.*



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Historically, 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 small portion
of our 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.*

Per current accounting requirements, 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 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 would negatively impact our results of operations.

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 of our effort, which would have an adverse effect on our business, financial
condition and operating results. Furthermore, our customers and the end-users of our products might assert other claims for indemnification that arise from infringement claims against them. If these assertions are successful, our business, financial
condition and operating results may be materially affected. Instead of litigation, or as a result thereof, we may seek a license from third parties to use their intellectual property. However, we may not be able to obtain a license. Alternatively,
we may design around the third partys intellectual property rights or we may challenge these claims in legal proceedings. Any adverse determination in a legal proceeding could result in one or more of the following, any of which could harm our
business, financial condition and operating results:



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



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



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



| |  |  | injunction 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 would
materially adversely affect our business, financial condition and results of operations.

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

We maintain a portfolio of investments in
marketable securities, particularly in corporate and government fixed income securities, money market funds and commercial paper. Our earnings may be adversely affected by changes in the value of this portfolio. In particular, the value of our
investments may be adversely affected by changes in interest rates, downgrades in the corporate bonds included in the portfolio, 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 results of operations.

Changes in our effective tax rate may have an adverse effect on our results of operations.*

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 is scheduled to expire at the end of 2009 and has
yet to be reinstated for 2010 and later years;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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 U.S. taxes.
| | - |  | -----------------------------------------------------------------------------------------------

Any significant increase in our future effective tax rates could adversely impact net income in future periods. In addition, the IRS and
other tax authorities regularly examine our income tax returns. Our financial condition and results of operations could be adversely impacted if any assessments resulting from the examination of our income tax returns by the IRS or other taxing
authorities are not resolved in our favor.

Decreased effectiveness of equity awards, particularly stock options, could adversely affect
our ability to attract and retain employees.*

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

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

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



| |  |  | diversion of managements attention and resources to integrate the new company or 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
| | - |  | -------------------------------------------------------------------------------------



| |  |  | 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.

TCZ, our joint venture with Zeiss, could fail to achieve profitability.*

The manufacture of flat panel displays is a new
market for both us and Zeiss 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. Under the terms of the joint venture, neither party is obligated to continue
to make capital contributions and may elect to terminate the joint venture subject to certain conditions. 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, financial condition and operating results could be materially harmed.



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

System failure or malfunction or loss of data
which is housed in our critical information systems could disrupt our ability to timely and accurately process transactions and produce key financial reports, including information on our results of operations, financial position and cash flows. Any
disruptions or difficulties that may occur in connection with our ERP system or other critical systems could also adversely affect our ability to complete important business processes such as the evaluation of our internal controls and attestation
activities pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. 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 U.S. or abroad is disrupted by terrorist activities or
security responses to the threat of terrorism, regulatory compliance issues or for any other reason, our business could be adversely affected in the following ways:



| |  |  | 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.

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

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

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



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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.

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

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

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

We have registered a number of trademarks including CYMER in the U.S. and in some other countries. We are also trying to register additional trademarks in the U.S. and in other countries. These registrations in other countries,
or any new registrations we may undertake in the U.S., 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.
| | - |  | --------------------------------------------------------------------------------------------

Stock markets in the United States can experience extraordinary volatility and have done so recently. 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 it could have a
material adverse effect on our business, financial condition and results of operations.



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



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



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



| | (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 September 30,
2009.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ITEM 3. Defaults Upon Senior Securities

None.

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

None.

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. 2H-2009 Bonus Plan, effective August 19, 2009.          
|     | 
|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: November 5, 2009 |  | By:         |  | /s/ PAUL B. BOWMAN                               
|                       |  |             |  | Paul B. Bowman                                   
|                       |  |             |  | Senior Vice President and Chief Financial Officer
|                       |  |             |  | (Principal Financial Officer)                    



50