##### Table of Contents

Securities and Exchange Commission

Washington, D.C. 20549

Form 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

for the fiscal year ended December 31, 2006

Commission file number 025566

ASML HOLDING N.V.

(Exact Name of Registrant as Specified in Its Charter)

THE NETHERLANDS

(Jurisdiction of Incorporation or Organization)

DE RUN 6501

5504 DR VELDHOVEN

THE NETHERLANDS

(Address of Principal Executive Offices)

Securities registered or to be registered pursuant to

Section 12(b) of the Act:

|                                       |  |                                          
|-------------------------------------- |  | -----------------------------------------
|Title of each class                    |  | Name of each exchange on which registered
|                                       |  |                                          
|Ordinary Shares                        |  | Nasdaq Global Select Market              
|(nominal value EUR 0.02 per
    share) |  | Euronext Amsterdam N.V.                  



















477,099,245 Ordinary Shares


(nominal value EUR 0.02 per share)






ü






ü










ü




12b-2


ü




ü




12b-2


ü






Richard A. Ely


Skadden, Arps, Slate, Meagher & Flom (UK) LLP


40 Bank Street, Canary Wharf


London E14 5DS England




---



##### Table of Contents

Contents

|                                                                          |  |  |  | 
|------------------------------------------------------------------------- |  |  |  | 
|Part
    I                                                                |  |  |  | 
|                                                                         
|4    Item 1
    Identity of Directors, Senior Management and
    Advisors |  |  |  | 
|                                                                         
|4    Item 2
    Offer Statistics and Expected Timetable                   |  |  |  | 
|                                                                         
|4    Item 3
    Key Information                                           |  |  |  | 
|A. Selected
    Financial Data                                            |  |  |  | 
|B. Capitalization
    and Indebtedness                                    |  |  |  | 
|C. Reasons
    for the Offer and Use of Proceeds                          |  |  |  | 
|D. Risk
    Factors                                                       |  |  |  | 
|                                                                         
|12   Item 4
    Information on the Company                                |  |  |  | 
|A. History
    and Development of the Company                             |  |  |  | 
|B. Business
    Overview                                                  |  |  |  | 
|C. Organizational
    Structure                                           |  |  |  | 
|D. Property,
    Plants and Equipment                                     |  |  |  | 
|                                                                         
|19   Item 4A
    Unresolved Staff Comments                                |  |  |  | 
|                                                                         
|19   Item 5
    Operating and Financial Review and Prospects              |  |  |  | 
|A. Operating
    Results                                                  |  |  |  | 
|B. Liquidity
    and Capital Resources                                    |  |  |  | 
|C. Research
    and Development, Patents and Licenses                     |  |  |  | 
|D. Trend
    Information                                                  |  |  |  | 
|E. Off-Balance
    Sheet Arrangements                                     |  |  |  | 
|F. Tabular
    Disclosure of Contractual Obligations                      |  |  |  | 
|G. Safe
    Harbor                                                        |  |  |  | 
|                                                                         
|36   Item 6
    Directors, Senior Management and Employees                |  |  |  | 
|A. Directors
    and Senior Management                                    |  |  |  | 
|B. Compensation                                                           |  |  |  | 
|C. Board
    Practices                                                    |  |  |  | 
|D. Employees                                                              |  |  |  | 
|E. Share
    Ownership                                                    |  |  |  | 
|                                                                         
|42   Item 7
    Major Shareholders and Related Party Transactions         |  |  |  | 
|A. Major
    Shareholders                                                 |  |  |  | 
|B. Related
    Party Transactions                                         |  |  |  | 
|C. Interests
    of Experts & Counsel                                     |  |  |  | 
|                                                                         
|44   Item 8
    Financial Information                                     |  |  |  | 
|A. Consolidated
    Statements and Other Financial Information            |  |  |  | 
|B. Significant
    Changes                                                |  |  |  | 









---



##### Table of Contents



|                                                                                                  |  |  |  | 
|------------------------------------------------------------------------------------------------- |  |  |  | 
|45   Item 9
    The Offer and Listing                                                             |  |  |  | 
|A. Listing
    Details                                                                            |  |  |  | 
|B. Plan
    of Distribution                                                                       |  |  |  | 
|C. Markets                                                                                        |  |  |  | 
|D. Selling
    Shareholders                                                                       |  |  |  | 
|E. Dilution                                                                                       |  |  |  | 
|F. Expenses
    of the Issue                                                                      |  |  |  | 
|                                                                                                 
|46   Item 10
    Additional Information                                                           |  |  |  | 
|A. Share
    Capital                                                                              |  |  |  | 
|B. Memorandum
    and Articles of Association                                                     |  |  |  | 
|C. Material
    Contracts                                                                         |  |  |  | 
|D. Exchange
    Controls                                                                          |  |  |  | 
|E. Taxation                                                                                       |  |  |  | 
|F. Dividends
    and Paying Agents                                                                |  |  |  | 
|G. Statement
    by Experts                                                                       |  |  |  | 
|H. Documents
    on Display                                                                       |  |  |  | 
|I.  Subsidiary
    Information                                                                    |  |  |  | 
|                                                                                                 
|51   Item 11
    Quantitative and Qualitative Disclosures About Market
    Risk                   |  |  |  | 
|                                                                                                 
|53   Item 12
    Description of Securities Other Than Equity
    Securities                       |  |  |  | 
|                                                                                                 
|Part
    II                                                                                       |  |  |  | 
|                                                                                                 
|54   Item 13
    Defaults, Dividend Arrearages and Delinquencies                                  |  |  |  | 
|                                                                                                 
|54   Item 14
    Material Modifications to the Rights of Security Holders and Use
    of Proceeds |  |  |  | 
|                                                                                                 
|54   Item 15
    Controls and Procedures                                                          |  |  |  | 
|                                                                                                 
|54   Item 16                                                                                      |  |  |  | 
|A. Audit
    Committee Financial Expert                                                           |  |  |  | 
|B. Code
    of Ethics                                                                             |  |  |  | 
|C. Principal
    Accountant Fees and Services                                                     |  |  |  | 
|D. Exemptions
    from the Listing Standards for Audit Committees                                 |  |  |  | 
|E. Purchases
    of Equity Securities by the Issuer and Affiliated Purchasers                     |  |  |  | 
|                                                                                                 
|Part
    III                                                                                      |  |  |  | 
|                                                                                                 
|57   Item 17
    Financial Statements                                                             |  |  |  | 
|                                                                                                 
|57   Item 18
    Financial Statements                                                             |  |  |  | 
|                                                                                                 
|57   Item 19
    Exhibits                                                                         |  |  |  | 
|EXHIBIT 8.1                                                                                      
|EXHIBIT 12.1                                                                                     
|EXHIBIT 13.1                                                                                     
|EXHIBIT 15.1                                                                                     











---



##### Table of Contents

Part I

Special Note Regarding Forward-Looking Statements

In addition to historical information, this annual report on
Form 20-F contains
statements relating to our future business and/or results. These
statements include certain projections and business trends that
are forward-looking within the meaning of the
Private Securities Litigation Reform Act of 1995. You can
generally identify these statements by the use of words like
may, will, could,
should, project, believe,
anticipate, expect, plan,
estimate, forecast,
potential, intend, continue
and variations of these words or comparable words.

Forward-looking statements do not guarantee future performance
and involve risks and uncertainties. Actual results may differ
materially from projected results as a result of certain risks
and uncertainties. These risks and uncertainties include,
without limitation, those described under Item 3.D.
Risk Factors and those detailed from time to time in
our other filings with the United States Securities and Exchange
Commission (the Commission or the SEC).
These forward-looking statements are made only as of the date of
this annual report on
Form 20-F. We do
not undertake to update or revise the forward-looking
statements, whether as a result of new information, future
events or otherwise.

Presentation of Financial and Operational Information

On December 18, 2002, we announced our decision to divest
our Thermal business, including related customer support
activities, and the termination of our manufacturing activities
in the Track business. As a result of this decision, our
consolidated financial statements for each of the three years
ended December 31, 2006, our selected financial data for
each of the five years ended December 31, 2006 and the
financial and operational information presented in this annual
report on
Form 20-F present
these businesses as discontinued operations, instead of as a
separate segment as they had been reported prior to the
divestiture announcement.





Item 1 Identity of Directors, Senior Management and
Advisors

Not applicable.





Item 2 Offer Statistics and Expected Timetable

Not applicable.





Item 3 Key Information





A. Selected Financial Data

The following selected consolidated financial data should be
read in conjunction with Item 5 Operating and
Financial Review and Prospects and Item 18
Financial Statements.



ASML ANNUAL REPORT 2006

4



---



##### Table of Contents

Five-Year Financial Summary

|                                                                                     |  |      |           |   |      |  |           |      |  |  |           |   |  |      |           |   |  |  |           |   |  | 
|------------------------------------------------------------------------------------ |  | ---- | --------- | - | ---- |  | --------- | ---- |  |  | --------- | - |  | ---- | --------- | - |  |  | --------- | - |  | 
|                                                                                    
|Year ended December 31                                                               |  | 2002 |           |   | 2003 |  |           | 2004 |  |  | 2005      |   |  | 2006 |           |   | 
|(in thousands, except per share data)1                                               |  | EUR  |           |   | EUR  |  |           | EUR  |  |  | EUR       |   |  | EUR  |           |   | 
|                                                                                    
|Consolidated statements of
    operations data                                       |  |      |           |   |      |  |           |      |  |  |           |   |  |      |           |   |  |  |           |   |  | 
|Net sales                                                                            |  |      | 1,958,672 |   |      |  | 1,542,737 |      |  |  | 2,465,377 |   |  |      | 2,528,967 |   |  |  | 3,597,104 |   |  | 
|Cost of sales                                                                        |  |      | 1,491,068 |   |      |  | 1,173,955 |      |  |  | 1,559,738 |   |  |      | 1,554,772 |   |  |  | 2,135,086 |   |  | 
|                                                                                    
|                                                                                    
|Gross profit on sales                                                                |  |      | 467,604   |   |      |  | 368,782   |      |  |  | 905,639   |   |  |      | 974,195   |   |  |  | 1,462,018 |   |  | 
|Research and development costs                                                       |  |      | 324,419   |   |      |  | 305,839   |      |  |  | 352,920   |   |  |      | 347,901   |   |  |  | 413,708   |   |  | 
|Research and development credits                                                     |  |      | (26,015   | ) |      |  | (19,119   | )    |  |  | (21,961   | ) |  |      | (24,027   | ) |  |  | (27,141   | ) |  | 
|Selling, general and administrative
    expenses                                     |  |      | 263,243   |   |      |  | 212,609   |      |  |  | 201,629   |   |  |      | 201,204   |   |  |  | 204,799   |   |  | 
|Restructuring and merger and
    acquisition costs (credits)                         |  |      | 0         |   |      |  | 24,485    |      |  |  | (5,862    | ) |  |      | 0         |   |  |  | 0         |   |  | 
|                                                                                    
|                                                                                    
|Income (loss) from
    operations                                                    |  |      | (94,043   | ) |      |  | (155,032  | )    |  |  | 378,913   |   |  |      | 449,117   |   |  |  | 870,652   |   |  | 
|Interest income (expense), net                                                       |  |      | (36,781   | ) |      |  | (29,149   | )    |  |  | (16,073   | ) |  |      | (14,094   | ) |  |  | (854      | ) |  | 
|                                                                                    
|                                                                                    
|Income (loss) from continuing
    operations before income taxes                     |  |      | (130,824  | ) |      |  | (184,181  | )    |  |  | 362,840   |   |  |      | 435,023   |   |  |  | 869,798   |   |  | 
|(Provision for) benefit from income
    taxes                                        |  |      | 42,779    |   |      |  | 59,675    |      |  |  | (127,380  | ) |  |      | (123,559  | ) |  |  | (245,109  | ) |  | 
|                                                                                    
|                                                                                    
|Income (loss) from continuing
    operations                                         |  |      | (88,045   | ) |      |  | (124,506  | )    |  |  | 235,460   |   |  |      | 311,464   |   |  |  | 624,689   |   |  | 
|Loss from discontinued
    operations before income taxes                            |  |      | (183,624  | ) |      |  | (59,026   | )    |  |  | 0         |   |  |      | 0         |   |  |  | 0         |   |  | 
|Benefit from income taxes                                                            |  |      | 63,846    |   |      |  | 23,316    |      |  |  | 0         |   |  |      | 0         |   |  |  | 0         |   |  | 
|                                                                                    
|                                                                                    
|Loss from discontinued
    operations                                                |  |      | (119,778  | ) |      |  | (35,710   | )    |  |  | 0         |   |  |      | 0         |   |  |  | 0         |   |  | 
|                                                                                    
|                                                                                    
|Net income (loss)                                                                    |  |      | (207,823  | ) |      |  | (160,216  | )    |  |  | 235,460   |   |  |      | 311,464   |   |  |  | 624,689   |   |  | 
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Earnings per share
    data2                                                         |  |      |           |   |      |  |           |      |  |  |           |   |  |      |           |   |  |  |           |   |  | 
|Basic net income (loss) from
    continuing
    operations per ordinary share        |  |      | (0.18     | ) |      |  | (0.26     | )    |  |  | 0.49      |   |  |      | 0.64      |   |  |  | 1.32      |   |  | 
|Basic net loss from discontinued
    operations per ordinary share                   |  |      | (0.26     | ) |      |  | (0.07     | )    |  |  | 0.00      |   |  |      | 0.00      |   |  |  | 0.00      |   |  | 
|Basic net income (loss) per
    ordinary share                                       |  |      | (0.44     | ) |      |  | (0.33     | )    |  |  | 0.49      |   |  |      | 0.64      |   |  |  | 1.32      |   |  | 
|Diluted net income (loss) per
    ordinary share                                     |  |      | (0.44     | ) |      |  | (0.33     | )    |  |  | 0.49      |   |  |      | 0.64      |   |  |  | 1.27      |   |  | 
|                                                                                    
|Number of ordinary shares used
    in
    computing per share amounts (in thousands) |  |      |           |   |      |  |           |      |  |  |           |   |  |      |           |   |  |  |           |   |  | 
|Basic                                                                                |  |      | 476,866   |   |      |  | 482,240   |      |  |  | 483,380   |   |  |      | 484,103   |   |  |  | 474,860   |   |  | 
|Diluted                                                                              |  |      | 476,866   |   |      |  | 482,240   |      |  |  | 484,661   |   |  |      | 542,979   |   |  |  | 503,983   |   |  | 
|                                                                                    
|                                                                                    



|  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | The selected consolidated data for all periods reflect the
    effects of our decision in December 2002 to discontinue our
    Track business and divest our Thermal business which we
    substantially divested in October 2003.                                                                                                                                                                                         
|2 | The calculation of the number of ordinary shares used in
    computing diluted net income per ordinary share (i) in
    2002, 2003 and 2004 does not assume conversion of ASMLs
    outstanding Convertible Subordinated Notes and (ii) in 2002
    and 2003 does not assume the exercise of options issued under
    ASMLs stock option plans, as such conversions and
    exercises would have an anti-dilutive effect.









---



##### Table of Contents



|                                                                     |  |      |           |   |      |  |           |      |  |  |           |   |  |      |           |   |  |  |           |    |  | 
|-------------------------------------------------------------------- |  | ---- | --------- | - | ---- |  | --------- | ---- |  |  | --------- | - |  | ---- | --------- | - |  |  | --------- | -- |  | 
|                                                                    
|As of December 31                                                    |  | 2002 |           |   | 2003 |  |           | 2004 |  |  | 2005      |   |  | 2006 |           |   | 
|(in thousands)                                                       |  | EUR  |           |   | EUR  |  |           | EUR  |  |  | EUR       |   |  | EUR  |           |   | 
|                                                                    
|Consolidated balance sheets
    data                                 |  |      |           |   |      |  |           |      |  |  |           |   |  |      |           |   |  |  |           |    |  | 
|Cash and cash equivalents                                            |  |      | 668,760   |   |      |  | 1,027,806 |      |  |  | 1,228,130 |   |  |      | 1,904,609 |   |  |  | 1,655,857 |    |  | 
|Working
    capital3                                                 |  |      | 1,662,570 |   |      |  | 1,463,308 |      |  |  | 1,868,871 |   |  |      | 1,785,836 |   |  |  | 2,244,625 |    |  | 
|Total assets                                                         |  |      | 3,301,688 |   |      |  | 2,868,282 |      |  |  | 3,243,766 |   |  |      | 3,756,023 |   |  |  | 3,951,035 |    |  | 
|Long-term liabilities                                                |  |      | 1,233,398 |   |      |  | 1,040,556 |      |  |  | 1,039,023 |   |  |      | 624,203   |   |  |  | 613,167   |    |  | 
|Total shareholders equity                                           |  |      | 1,315,516 |   |      |  | 1,141,207 |      |  |  | 1,391,602 |   |  |      | 1,711,837 |   |  |  | 2,156,455 |    |  | 
|Capital stock                                                        |  |      | 9,644     |   |      |  | 9,651     |      |  |  | 9,675     |   |  |      | 9,694     |   |  |  | 10,051    |    |  | 
|                                                                    
|Consolidated statements of cash
    flows data                       |  |      |           |   |      |  |           |      |  |  |           |   |  |      |           |   |  |  |           |    |  | 
|Purchases of property, plant and
    equipment                       |  |      | (89,282   | ) |      |  | (48,567   | )    |  |  | (74,979   | ) |  |      | (72,660   | ) |  |  | (70,619   | )  |  | 
|Depreciation, amortization and
    impairment                        |  |      | 186,686   |   |      |  | 156,900   |      |  |  | 93,144    |   |  |      | 98,881    |   |  |  | 104,446   |    |  | 
|Net cash provided by (used in)
    continuing operating activities   |  |      | (61,127   | ) |      |  | 532,659   |      |  |  | 257,147   |   |  |      | 713,511   |   |  |  | 477,507   |    |  | 
|Net cash provided by (used in)
    discontinued operating activities |  |      | (121,039  | ) |      |  | 12,736    |      |  |  | (5,880    | ) |  |      | (2,018    | ) |  |  | 0         |    |  | 
|Net cash provided by (used in)
    total operating activities        |  |      | (182,166  | ) |      |  | 545,395   |      |  |  | 251,267   |   |  |      | 711,493   |   |  |  | 477,507   |    |  | 
|Net cash used in continuing
    investing activities                 |  |      | (72,876   | ) |      |  | (49,028   | )    |  |  | (60,398   | ) |  |      | (60,803   | ) |  |  | (65,523   | )  |  | 
|Net cash used in discontinued
    investing activities               |  |      | (6,434    | ) |      |  | 0         |      |  |  | 0         |   |  |      | 0         |   |  |  | 0         |    |  | 
|Net cash used in total investing
    activities                      |  |      | (79,310   | ) |      |  | (49,028   | )    |  |  | (60,398   | ) |  |      | (60,803   | ) |  |  | (65,523   | )  |  | 
|Net cash provided by (used in)
    continuing financing activities   |  |      | 21,427    |   |      |  | (68,156   | )    |  |  | 18,871    |   |  |      | 2,879     |   |  |  | (647,957  | )6 |  | 
|Net cash provided by (used in)
    discontinued financing activities |  |      | 0         |   |      |  | 0         |      |  |  | 0         |   |  |      | 0         |   |  |  | 0         |    |  | 
|Net cash provided by (used in)
    total financing activities        |  |      | 21,427    |   |      |  | (68,156   | )    |  |  | 18,871    |   |  |      | 2,879     |   |  |  | (647,957  | )6 |  | 
|Net increase (decrease) in
    cash and cash equivalents             |  |      | (241,918  | ) |      |  | 359,046   |      |  |  | 200,324   |   |  |      | 676,479   |   |  |  | (248,752  | )  |  | 
|                                                                    
|Ratios and other data                                                |  |      |           |   |      |  |           |      |  |  |           |   |  |      |           |   |  |  |           |    |  | 
|Increase (decrease) net sales
    (in percent)                       |  |      | 23.2      |   |      |  | (21.2     | )    |  |  | 59.8      |   |  |      | 2.6       |   |  |  | 42.2      |    |  | 
|Gross profit as a percentage of net
    sales                        |  |      | 23.9      |   |      |  | 23.9      |      |  |  | 36.7      |   |  |      | 38.5      |   |  |  | 40.6      |    |  | 
|Income (loss) from operations
    as a percentage of net sales       |  |      | (4.8      | ) |      |  | (10.0     | )    |  |  | 15.4      |   |  |      | 17.8      |   |  |  | 24.2      |    |  | 
|Net income (loss) as a
    percentage of net sales                   |  |      | (4.5      | ) |      |  | (8.1      | )    |  |  | 9.6       |   |  |      | 12.3      |   |  |  | 17.4      |    |  | 
|Shareholders equity as a
    percentage of total assets             |  |      | 39.8      |   |      |  | 39.8      |      |  |  | 42.9      |   |  |      | 45.6      |   |  |  | 54.6      |    |  | 
|Backlog of new systems (in units)
    at year end                    |  |      | 103       |   |      |  | 103       |      |  |  | 119       |   |  |      | 86        |   |  |  | 153       |    |  | 
|Backlog of used systems (in units)
    at year end                   |  |      | 7         |   |      |  | 21        |      |  |  | 12        |   |  |      | 9         |   |  |  | 10        |    |  | 
|Backlog of systems (in units) at
    year end                        |  |      | 110       |   |      |  | 124       |      |  |  | 131       |   |  |      | 95        |   |  |  | 163       |    |  | 
|Sales of systems (in units)                                          |  |      | 205       |   |      |  | 169       |      |  |  | 282       |   |  |      | 196       |   |  |  | 266       |    |  | 
|Number of employees at year end for
    continuing operations        |  |      | 5,971     |   |      |  | 5,059     |      |  |  | 5,071     |   |  |      | 5,055     |   |  |  | 5,594     |    |  | 
|Number of ordinary shares
    outstanding (in thousands) at year end |  |      | 482,182   |   |      |  | 482,514   |      |  |  | 483,676   |   |  |      | 484,670   |   |  |  | 477,099   |    |  | 
|Share price ASML at year
    end4                                    |  |      | 7.96      |   |      |  | 15.72     |      |  |  | 11.81     |   |  |      | 16.90     |   |  |  | 18.84     |    |  | 
|Volatility % ASML shares
    (260 days)5                             |  |      | 89.0      |   |      |  | 60.9      |      |  |  | 37.4      |   |  |      | 26.0      |   |  |  | 28.08     |    |  | 
|                                                                    
|                                                                    



|  |                                                                                                                                                                                                                                    
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3 | Working Capital is calculated as the difference between total
    current assets, including cash and cash equivalents, and total
    current liabilities.                                                                          
|4 | Closing price of ASMLs ordinary shares listed on the
    Official Segment of the stock market of Euronext Amsterdam N.V.
    (Source: Bloomberg)                                                                                  
|5 | Volatility represents the variability in our share price on the
    Official Segment of the stock market of Euronext Amsterdam N.V.
    as measured over the last 260 business days of each year
    presented (Source: Bloomberg).
|6 | Net cash used in financing activities includes an amount of
    EUR 678 million with respect to 2006 share buyback programs.                                                                                                       









---



##### Table of Contents

Exchange Rate Information

We publish our consolidated financial statements in euro. In
this Annual Report, references to
,
EUR or euro are to euro, and references
to $, dollars, U.S. dollars,
U.S. dollar, USD or US$ are
to United States dollars. Solely for the convenience of the
reader, certain U.S. dollar amounts have been translated into
euro amounts using an exchange rate in effect on
December 31, 2006 of US$ 1.00 = EUR 0.75930.

A portion of our net sales and expenses is, and historically has
been, denominated in currencies other than the euro. For a
discussion of the impact of exchange rate fluctuations on our
financial condition and results of operations, see
Item 5.A. Operating Results, Foreign Exchange
Management and Note 1 to our consolidated financial
statements.

The following are the Noon Buying Rates certified by the Federal
Reserve Bank of New York for customs purposes (the Noon
Buying Rate) expressed in U.S. dollars per euro.

|                |  |            |      |  |      |  |      |      |  |  |      |  |  |      |      |  |      |  |      |  |  |  |      | 
|--------------- |  | ---------- | ---- |  | ---- |  | ---- | ---- |  |  | ---- |  |  | ---- | ---- |  | ---- |  | ---- |  |  |  | ---- | 
|                | 
|                |  | January 24 |     
|Calendar period |  | 2002       |      |  | 2003 |  |      | 2004 |  |  | 2005 |  |  | 2006 |      |  | 2007 | 
|                | 
|Period End      |  |            | 1.05 |  |      |  | 1.26 |      |  |  | 1.35 |  |  |      | 1.18 |  |      |  | 1.32 |  |  |  | 1.30 | 
|Average1        |  |            | 0.95 |  |      |  | 1.13 |      |  |  | 1.24 |  |  |      | 1.24 |  |      |  | 1.26 |  |  |  | 1.30 | 
|High            |  |            | 1.05 |  |      |  | 1.26 |      |  |  | 1.36 |  |  |      | 1.35 |  |      |  | 1.33 |  |  |  | 1.33 | 
|Low             |  |            | 0.86 |  |      |  | 1.04 |      |  |  | 1.18 |  |  |      | 1.17 |  |      |  | 1.19 |  |  |  | 1.29 | 
|               



|  |                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------
|1 | The average of the Noon Buying Rates on the last business day of
    each month during the period presented.

|          |  |      |      |  |        |  |      |           |  |  |         |  |  |          |      |  |          |  |      |            |  |  |      |  |  |  |      | 
|--------- |  | ---- | ---- |  | ------ |  | ---- | --------- |  |  | ------- |  |  | -------- | ---- |  | -------- |  | ---- | ---------- |  |  | ---- |  |  |  | ---- | 
|          | 
|          |  | July |      |  | August |  |      | September |  |  | October |  |  | November |      |  | December |  |      | January 24 | 
|Months of |  | 2006 |      |  | 2006   |  |      | 2006      |  |  | 2006    |  |  | 2006     |      |  | 2006     |  |      | 2007       | 
|          | 
|High      |  |      | 1.28 |  |        |  | 1.29 |           |  |  | 1.28    |  |  |          | 1.28 |  |          |  | 1.33 |            |  |  | 1.33 |  |  |  | 1.33 | 
|Low       |  |      | 1.25 |  |        |  | 1.27 |           |  |  | 1.26    |  |  |          | 1.25 |  |          |  | 1.27 |            |  |  | 1.31 |  |  |  | 1.29 | 
|         




B. Capitalization and Indebtedness







C. Reasons for the Offer and Use of Proceeds







D. Risk Factors




Risks Related to the Semiconductor Industry


The Semiconductor Industry is Highly Cyclical and We May
Be Adversely Affected by Any Future Downturns




|  |                                                                                                            
|- | -----------------------------------------------------------------------------------------------------------
| | the current and anticipated market demand for semiconductors and
    for products utilizing semiconductors;
| | semiconductor prices;                                                                                      
| | semiconductor production costs; and                                                                        
| | general economic conditions.                                                                               













---



##### Table of Contents

require significant lead time to complete. Accordingly, we may
not be able to effectively increase our production capacity to
respond to an increase in customer demand in an industry upturn
resulting in lost revenues and damage to customer relationships.

Conversely, in an industry downturn, our ability to maintain
profitability will depend substantially on whether we are able
to lower our costs and break-even level, which is the number of
lithography systems we must sell in a year to achieve net
income. If we are unable to lower costs in an industry downturn,
our net income may decline significantly. As we need to keep
certain levels of inventory on hand to meet anticipated product
demand, we also incur increased costs related to inventory
obsolescence in an industry downturn. In addition, industry
downturns generally result in overcapacity, resulting in
downward pressure on prices, which has had in the past, and
could have in the future, a material adverse effect on our
business, financial condition and results of operations.

Our Business Will Suffer If We Do Not Respond Rapidly to
Commercial and Technological Changes in the Semiconductor
Industry

The semiconductor manufacturing industry is subject to:


    rapid change towards more complex technologies;
    frequent new product introductions and enhancements;
    evolving industry standards;
    changes in customer requirements; and
    continued shortening of product life cycles.Our products could become obsolete sooner than anticipated
because of a faster than anticipated change in one or more of
the technologies related to our products or in market demand for
products based on a particular technology. Our success in
developing new products and in enhancing our existing products
depends on a variety of factors, including the successful
management of our research and development programs and timely
completion of product development and design relative to
competitors. If we do not develop and introduce new and enhanced
systems at competitive prices and on a timely basis, our
customers will not integrate our systems into the planning and
design of new fabrication facilities and upgrades of existing
facilities, which would have a material adverse effect on our
business, financial condition and results of operations.

In addition, we may invest considerable financial and other
resources to develop and introduce new products and product
enhancements, such as Extreme Ultraviolet lithography
(EUV), that our customers may not ultimately adopt.
If our customers do not adopt these new technologies, products
or product enhancements that we develop due to a preference for
more established technologies and products or for other reasons,
we would not recoup any return on our investments in these
technologies or products, which may result in charges to our
statement of operations and materially and adversely affect the
future growth of the Company.

We Face Intense Competition

The semiconductor equipment industry is highly competitive. The
principal elements of competition in our markets are:


    the technical performance characteristics of a photolithography
    system;
    the value of ownership of that system based on its purchase
    price, maintenance costs, productivity and customer service and
    support; and
    the strength and breadth of our portfolio of patents and other
    intellectual property rights.Our competitiveness increasingly depends upon our ability to
develop new and enhanced semiconductor equipment that is
competitively priced and introduced on a timely basis, as well
as our ability to protect and defend our intellectual property
rights. See Item 4.B. Business Overview, Intellectual
Property and Note 14 to our consolidated financial
statements.

The costs to develop new systems, in particular photolithography
systems, are extremely high and accordingly, the
photolithography equipment industry is characterized by fierce
competition among a few suppliers. ASMLs primary
competitors are Nikon Corporation (Nikon) and Canon
Kabushika Kaisha (Canon). Nikon and Canon are the
dominant suppliers in the Japanese market, which accounts for a
significant portion of worldwide semiconductor production. This
market historically has been difficult for non-Japanese
companies to penetrate.

Both Nikon and Canon have substantial financial resources and
broad patent portfolios. Each continues to introduce new
products with improved price and performance characteristics
that compete directly with our products, and may cause a decline
in our sales or loss of market acceptance for our
photolithography systems. In addition, adverse market
conditions, industry overcapacity or a decrease in the value of
the Japanese yen in relation to the euro or the U.S. dollar
could further intensify price-based competition in those markets
that account for the majority of our sales, resulting in lower
prices and margins and a material adverse effect on our
business, financial condition and results of operations.



ASML ANNUAL REPORT 2006

8



---



##### Table of Contents

Industry Alliances May Not Select our Equipment

Increasingly, our customers are entering into alliances or other
forms of cooperation with one another to expedite the
development of processes and other manufacturing technologies.
One of the results of such a form of cooperation may be the
definition of a system or particular tool set for a certain
function or a series of process steps that use a specific set of
manufacturing equipment. These decisions could work to our
disadvantage if a competitors equipment becomes the
standard equipment for such function or process. Even if
ASMLs equipment was previously used by a customer, that
equipment may be displaced in current and future applications by
the equipment standardized by the form of cooperation. These
forms of cooperation may have a material adverse effect on our
business, financial condition and results of operations.

Risks Related to ASML

The Number of Systems We Can Produce Is Limited by Our
Dependence on a Limited Number of Suppliers of
Key Components

We rely on outside vendors for the components and subassemblies
used in our systems, each of which is obtained from a single
supplier or a limited number of suppliers. Our reliance on a
limited group of suppliers involves several risks, including a
potential inability to obtain an adequate supply of required
components and the risk of untimely delivery of these components
and subassemblies.

The number of photolithography systems we have been able to
produce has occasionally been limited by the production capacity
of Carl Zeiss SMT AG (Zeiss). Zeiss is our single
supplier of lenses and other critical optical components. If
Zeiss were unable to maintain and increase production levels or
if we are unable to maintain our business relationship with
Zeiss in the future we could be unable to fulfill orders, which
could damage relationships with current and prospective
customers and have a material adverse effect on our business,
financial condition and results of operations. If Zeiss were to
terminate its relationship with us or if Zeiss were unable to
maintain production of lenses over a prolonged period, we would
effectively cease to be able to conduct our business. See
Item 4.B. Business Overview, Manufacturing, Logistics
and Suppliers.

In addition to Zeiss current position as our single
supplier of lenses, the excimer laser illumination systems that
provide the ultraviolet light source, referred to as deep
UV, used in our high resolution steppers and Step &
Scan systems, are available from only a limited number of
suppliers. In particular, we rely heavily on Cymer, Inc., a
United States based company, to provide excimer laser
illumination systems.

Although the timeliness, yield and quality of deliveries to date
from our other subcontractors generally have been satisfactory,
manufacturing of certain of these components and subassemblies
that we use in our manufacturing processes is an extremely
complex process and delays caused by suppliers may occur in the
future. A prolonged inability to obtain adequate deliveries of
components or subassemblies, or any other circumstance that
requires us to seek alternative sources of supply, could
significantly hinder our ability to deliver our products in a
timely manner, which could damage relationships with current and
prospective customers and have a material adverse effect on our
business, financial condition and results of operations.

A High Percentage of Net Sales Is Derived from a Few
Customers

Historically, we have sold a substantial number of lithography
systems to a limited number of customers. While the identity of
our largest customers may vary from year to year, we expect
sales to remain concentrated among relatively few customers in
any particular year. In 2006, sales to one customer accounted
for EUR 730 million, or 20 percent of net sales,
compared to EUR 609 million, or 24 percent of net
sales, in 2005. The loss of any significant customer or any
reduction in orders by a significant customer may have a
material adverse effect on our business, financial condition and
results of operations.

Additionally, as a result of the limited number of our
customers, credit risk on our receivables is concentrated. Our
three largest customers accounted for 35 percent of
accounts receivable at December 31, 2006, compared to
49 percent at December 31, 2005. As a result, business
failure or insolvency of one of our main customers may have a
material adverse effect on our business, financial condition and
results of operations.

The Pace of Introduction of Our New Products Is
Accelerating and Is Accompanied by Potential Design and
Production Delays and by Significant Costs

The development and initial production, installation and
enhancement of the systems we produce is often accompanied by
design and production delays and related costs of a nature
typically associated with the introduction and transition to
full-scale manufacturing of complex capital equipment. While we
expect and plan for a corresponding learning curve effect in our
product development cycle, we cannot precisely predict the time
and expense required to overcome these initial problems and to
ensure full performance to specifications. There is a risk that
we may not be able to introduce or bring to full-scale
production new products as quickly as we expected in our product
introduction plans, which could have a material adverse effect
on our business, financial condition and results of operations.



ASML ANNUAL REPORT 2006

9



---



##### Table of Contents

In order for the market to accept technology enhancements, our
customers, in many cases, must upgrade their existing technology
capabilities. Such upgrades from established technology may not
be available to our customers to enable volume production using
our new technology enhancements. This could result in our
customers not purchasing, or pushing back or canceling orders
for our technology enhancements, which could negatively impact
our business, financial condition and results of operations.

We Derive Most of Our Revenues from the Sale of a
Relatively Small Number of Products

We derive most of our revenues from the sale of a relatively
small number of lithography equipment systems (266 units in
2006; 196 units in 2005), with an average selling price
(ASP) in 2006 of EUR 12.1 million
(EUR 14.0 million for new systems and
EUR 3.2 million for used systems) and ASP in 2005 of
EUR 11.4 million (EUR 13.5 million for new systems and
EUR 2.9 million for used systems). As a result, the timing
of recognition of revenue from a small number of transactions
may have a significant impact on our net sales and other
operating results for a particular reporting period.
Specifically, the failure to receive anticipated orders, or
delays in shipments near the end of a particular reporting
period, due, for example, to:


    the highly cyclical semiconductor business industry;
    unanticipated shipment rescheduling;
    cancellation or order push back by customers;
    unexpected manufacturing difficulties; and
    delays in deliveries by suppliers,may cause net sales in a particular reporting period to fall
significantly below net sales in previous periods or our
expected net sales, and would have a material adverse effect on
our operating results for that period.

In particular our published quarterly earnings have varied
significantly from quarter to quarter and may vary in the future
for the reasons discussed above.

Failure to Adequately Protect the Intellectual Property
Rights upon Which We Depend Could Harm Our Business

We rely on intellectual property rights such as patents,
copyrights and trade secrets to protect our proprietary
technology. However, we face the risk that these measures will
be inadequate:


    intellectual property laws may not sufficiently support our
    proprietary rights or may adversely change in the future;
    patent rights may not be granted or construed as intended;
    patent rights will expire;
    the steps we take to prevent misappropriation or infringement of
    our proprietary rights may not be successful; and
    third parties may be able to develop or obtain patents for
    similar competing technology.In addition, litigation may be necessary in order to enforce our
intellectual property rights or to determine the validity and
scope of the proprietary rights of others. Any such litigation
may result in substantial costs and diversion of resources, and,
if decided unfavorably to us, could have a material adverse
effect on our business, financial condition and results of
operations.

Defending Against Intellectual Property Claims by Others
Could Harm Our Business

In the course of our business, we are subject to claims by third
parties alleging that our products or processes infringe upon
their intellectual property rights. If successful, such claims
could limit or prohibit us from developing our technology and
manufacturing our products, which could have a material adverse
effect on our business, financial condition and results of
operations.

In addition, our customers may be subject to claims of
infringement from third parties, alleging that our products used
by such customers in the manufacture of semiconductor products
and/or the processes relating to the use of our products
infringe one or more patents issued to such parties. If such
claims were successful, we could be required to indemnify
customers for some or all of any losses incurred or damages
assessed against them as a result of such infringement, which
could have a material adverse effect on our business, financial
condition and results of operations.

We may also incur substantial licensing or settlement costs
where doing so would strengthen or expand our intellectual
property rights or limit our exposure to intellectual property
claims by others, which may have a material adverse effect on
our business, financial condition and results of operations.

We Are Subject to Risks in Our International
Operations

The majority of our sales are made to customers outside Europe.
There are a number of risks inherent in doing business in some
of those markets, including the following:


    potentially adverse tax consequences;
    unfavorable political or economic environments;
    unexpected legal or regulatory changes; and
    an inability to effectively protect intellectual property.

ASML ANNUAL REPORT 2006

10



---



##### Table of Contents

If we are unable to manage successfully the risks inherent in
our international activities, our business, financial condition
and results of operations could be materially and adversely
affected.

In particular, approximately 20 percent of our 2006
revenues and approximately 18 percent of our 2005 revenues
were derived from customers in Taiwan. Taiwan has a unique
international political status. The Peoples Republic of
China asserts sovereignty over Taiwan and does not recognize the
legitimacy of the Taiwan government. Changes in relations
between Taiwan and the Peoples Republic of China,
Taiwanese government policies and other factors affecting
Taiwans political, economic or social environment could
have a material adverse effect on our business, financial
condition and results of operations.

We Are Dependent on the Continued Operation of a Limited
Number of Manufacturing Facilities

All of our manufacturing activities, including subassembly,
final assembly and system testing, take place in one clean room
facility located in Veldhoven, the Netherlands, and one clean
room facility in Wilton, Connecticut, United States. These
facilities are subject to disruption for a variety of reasons,
including work stoppages, fire, energy shortages, flooding or
other natural disasters. We cannot ensure that alternative
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. Such a disruption could have a
material adverse effect on our business, financial condition and
results of operations.

Because of Labor Laws and Practices, Any Workforce
Reductions That We May Wish to Implement In Order To Reduce
Costs Company-Wide May Be Delayed or Suspended

The semiconductor market is highly cyclical and as a consequence
we may need to implement workforce reductions in case of a
downturn, in order to adapt to such market changes. In
accordance with labor laws and practices applicable in the
jurisdictions in which we operate, a reduction of any
significance may be subject to certain formal procedures, which
can delay, or may result in the modification of our planned
workforce reductions. For example, in the Netherlands, if our
Works Council does not agree with a proposed workforce reduction
in the Netherlands, but we nonetheless determine to proceed, we
must temporarily suspend any action while the Works Council
determines whether to appeal to the Netherlands Court. This
appeal process can cause a delay of several months and may
require us to address any procedural inadequacies identified by
the Court in the way we reached our decision. Such delays could
impair our ability to reduce costs company-wide to levels
comparable to those of our competitors. See Item 6.D.
Employees.

Non-compliance with or a Change in Environmental Laws and
Regulations Could Harm Our Results of Operations

We are subject to Netherlands and foreign environmental
regulations in areas such as energy resource management, use,
storage, discharge and disposal of hazardous substances,
recycling, clean air, water protection and waste disposal.
Although we believe that we are in general compliance with these
regulations and do not use large quantities of hazardous
substances in our manufacturing processes, if we do not take
adequate measures to comply with these regulations in the course
of our ordinary business operations, or if there is a
significant change in the environmental laws or regulations that
affect our business, there could be a material adverse effect on
our business, financial condition and results of operations.

Fluctuations in Foreign Exchange Rates Could Harm Our
Results of Operations

We are exposed to currency risks. We are particularly exposed to
fluctuations in the exchange rates between the U.S. dollar,
Japanese yen and the euro as we incur manufacturing costs and
price our systems predominantly in euro while a portion of our
net sales and cost of sales is denominated in U.S. dollars
and Japanese yen.

In addition, a substantial portion of our assets and liabilities
and operating results are denominated in U.S. dollar, and a
small portion of our assets, liabilities and operating results
are denominated in currencies other than the euro and the
U.S. dollar. Our consolidated financial statements are
expressed in euro. Accordingly, our results of operations and
assets and liabilities are exposed to fluctuations in various
exchange rates.

Furthermore, a strengthening of the euro particularly against
the Japanese Yen could lead to intensified price-based
competition in those markets that account for the majority of
our sales, resulting in lower prices and margins and a material
adverse effect on our business, financial condition and results
of operations.

Also see Item 5.A. Operating Results, Foreign
Exchange Management, Item 5.F. Tabular
Disclosure of Contractual Obligations, Item 11
Quantitative and Qualitative Disclosures About Market
Risk and Note 4 to our consolidated financial
statements.

We May Be Unable to Make Desirable Acquisitions or to
Integrate Successfully Any Businesses We Acquire

Our future success may depend in part on the acquisition of
businesses or technologies intended to complement, enhance or
expand our current business or products or that might otherwise
offer us growth opportunities. Our ability to complete such
transactions may be hindered by a number of factors, including
potential difficulties in obtaining government approvals.



ASML ANNUAL REPORT 2006

11



---



##### Table of Contents

Any acquisition that we do make would pose risks related to the
integration of the new business or technology with our business.
We cannot be certain that we will be able to achieve the
benefits we expect from a particular acquisition or investment.
Acquisitions may also strain our managerial and operational
resources, as the challenge of managing new operations may
divert our staff from monitoring and improving operations in our
existing business. Our business, financial condition and results
of operations may be materially and adversely affected if we
fail to coordinate our resources effectively to manage both our
existing operations and any businesses we acquire.

Our Business and Future Success Depend on Our Ability to
Attract and Retain Sufficient, Educated and Skilled
Employees

Our business and future success significantly depends upon our
employees, including a large number of highly qualified
professionals, as well as our ability to attract and retain
employees. Competition for such personnel is intense, and we may
not be able to continue to attract and retain such personnel,
which could adversely affect our business, financial condition
and results of operations.

Risks Related to Our Ordinary Shares

The Price of Our Ordinary Shares is Very Volatile

The current market price of our ordinary shares may not be
indicative of prices that will prevail in the future. In
particular, the market price of our ordinary shares has in the
past experienced significant fluctuation, including fluctuation
that is unrelated to our performance. This fluctuation may
continue in the future.

Restrictions on Shareholder Rights May Dilute Voting
Power

Our Articles of Association provide that we are subject to the
provisions of Netherlands law applicable to large corporations,
called structuurregime. These provisions have the
effect of concentrating control over certain corporate decisions
and transactions in the hands of our Supervisory Board. As a
result, holders of ordinary shares may have more difficulty in
protecting their interests in the face of actions by members of
our Supervisory Board than if we were incorporated in the
United States.

We also have a class of protective cumulative preference shares
(the Preference Shares) and have granted to
Stichting Preferente Aandelen ASML, a Netherlands
foundation, an option to acquire from us, at their nominal value
of EUR 0.02 per share, a number of preference shares equal
to the number of ordinary shares outstanding at the time of
option exercise. This effectively would dilute by one half the
voting power of our outstanding ordinary shares, which may
discourage or significantly impede a third party from acquiring
a majority of our voting shares.

See further Item 6.C. Board Practices and
Item 10.B. Memorandum and Articles of
Association.





Item 4 Information on the Company





A. History and Development of the Company

We commenced business operations in 1984. ASM Lithography
Holding N.V. was incorporated in the Netherlands on
October 3, 1994 to serve as the holding company for our
worldwide operations, which include operating subsidiaries in
the Netherlands, the United States, Italy, France, Germany, the
United Kingdom, Ireland, Belgium, Korea, Taiwan, Singapore,
China (including Hong Kong), Japan, Malaysia and Israel. In
2001, we changed our name from ASM Lithography Holding N.V. to
ASML Holding N.V. Our registered office is located at
De Run 6501, 5504 DR Veldhoven, the Netherlands,
telephone +31 40 268 3000.

In May 2001, we merged with SVG (now part of ASML US, Inc.), a
company that was active in the Lithography, Track and Thermal
businesses. In December 2002, we announced the termination of
our manufacturing activities in the Track business and the
divestiture of our Thermal business. In October 2003, we
substantially completed the divestiture of our Thermal business.

Capital Expenditures and Divestitures

Our capital expenditures for 2006, 2005 and 2004 amounted to EUR
99.4 million, EUR 79.8 million and EUR
111.3 million, respectively. The related cash outflows for
2006, 2005 and 2004 amounted to EUR 70.7 million, EUR
74.0 million and EUR 75.5 million, respectively. Our
capital expenditures consist of purchases of machinery and
equipment (e.g. prototypes, demonstration systems and training
systems), information technology investments, leasehold
improvements to our facilities and licenses of patents related
to lithography equipment. Substantially all capital expenditures
in these periods have been made in The Netherlands.



ASML ANNUAL REPORT 2006

12



---



##### Table of Contents

Our Veldhoven headquarters is financed through a special purpose
vehicle that is a variable interest entity. See Item 5.E.
Off-Balance Sheet
Arrangements and Note 12 to our consolidated
financial statements. All other current capital expenditures are
financed internally.

Divestitures within continued operations, principally comprising
machinery and equipment (more specifically, demonstration
systems and training systems), amounted to EUR 5.6 million
for 2006, EUR 30.3 million for 2005 and EUR
36.2 million for 2004. See Note 9 to our consolidated
financial statements.





B. Business Overview

We are one of the worlds leading providers of advanced
technology systems for the semiconductor industry, based on
revenue and market share. We offer an integrated portfolio of
lithography systems mainly for manufacturing complex integrated
circuits (semiconductors or ICs). We
supply lithography systems to IC manufacturers throughout the
United States, Asia and Europe and also provide our customers
with a full range of support from advanced process and product
applications knowledge to complete round-the-clock service
support.

Our Business Model

Our business model is derived from our Value of
Ownership concept which is based on the following
principles:


    offering ongoing improvements in productivity, imaging and
    overlay by introducing advanced technology based on modular
    platforms;
    providing customer services that ensure rapid, efficient
    installation and superior on-site support and training to
    optimize manufacturing processes and improve productivity;
    maintaining appropriate levels of research and development to
    offer the most advanced technology suitable for
    high-throughput and
    low-cost volume production at the earliest possible date;
    enhancing the capabilities of the installed base through ongoing
    field upgrades of key value drivers (productivity, imaging and
    overlay) based on further technology developments;
    reducing the cycle time between customer order of a system and
    the use of that system in volume production on-site;
    expanding operational flexibility in research and manufacturing
    by reinforcing strategic alliances with world-class partners;
    improving the reliability and uptime of our installed system
    base; and
    providing re-marketing services that effectively increase
    residual value by extending the life of equipment.Market and Technology Overview

The worldwide electronics and computer industries have
experienced significant growth since the commercialization of
ICs in the 1960s, largely due to the continual reduction in the
cost per function performed by ICs. Improvement in the design
and manufacture of ICs with higher circuit or
packing densities has resulted in smaller and lower
cost ICs capable of performing a greater number of functions at
higher speeds and with lower power consumption. We believe that
these long-term trends will continue for the foreseeable future
and will be accompanied by a continuing demand, subject to
ongoing cyclical variations, for production equipment that can
accurately produce advanced ICs in high volumes at the lowest
possible cost. Photolithography is used to print complex circuit
patterns onto the wafers that are the primary raw material for
ICs and is one of the most critical and expensive steps in their
fabrication. It is therefore a significant focus of the IC
industrys demand for cost-efficient enhancements to
production technology.

We primarily design, manufacture, market and service
semiconductor processing equipment used in the fabrication of
integrated circuits. Our photolithography equipment includes
Step & Scan systems, which combine stepper technology with a
photoscanning method.

Our TWINSCAN product platform was introduced in July 2000 and
applies the production-proven elements of our PAS 5500
product family to the industry shift toward larger
(300 millimeter) wafers. In 2003, the TWINSCAN platform
became the vehicle to introduce improved resolution products
both for 300 millimeter and 200 millimeter wafer size
factories. Our PAS 5500 product family, which supports a
maximum wafer size of 200 millimeters in diameter,
comprises advanced wafer steppers and Step & Scan
systems suitable for i-line and deep UV (including 248 nm
and 193 nm wavelengths) processing of wafers. In the third
quarter of 2006, we shipped our 500th TWINSCAN system,
demonstrating the acceptance of the TWINSCAN platform as the
semiconductor industrys standard for
300-millimeter
lithography. In 2006 we gained 7 new customers with orders
for 200 and 300 millimeter systems.

In 2005, we intensified our research and development on
immersion lithography as we believed this was the most probable
solution to lower the manufacturing cost per wafer while
increasing resolution. In 2006 we shipped an additional
23 immersion systems bringing the total of immersion
systems shipped at 36.

In 2006, we reached a milestone in our EUV program. EUV combines
a wavelength of 13.5 nm and a lens system with an initial
numerical aperture (NA) of 0.25 to provide imaging
at a resolution of 40 nm. EUV will provide a large process
window compared to todays approaches and we expect it to
be a multi-generation lithography solution. In the third quarter
of 2006,



ASML ANNUAL REPORT 2006

13



---



##### Table of Contents

ASML shipped the industrys first EUV Alpha Demo Tools to
research and development institutions located in Albany,
New York (United States of America) and Leuven (Belgium),
where potential customers can conduct early research and
development. The launch of systems for volume applications is
planned for 2009.

We are also performing research and development on maskless
lithography (the mask contains the pattern which is imaged onto
the wafer). Maskless lithography is one of the possible
solutions for managing increasing mask cost, which is becoming a
dominant factor in bringing new semiconductor designs to market
for advanced technology nodes. Designs resulting in small
quantities of wafers produced, designs with many changes or
designs that require a fast time-to-market will particularly
benefit from this technology. In December 2004, Micronic Laser
Systems AB (Micronic) and ASML agreed to a license
agreement relating to the development of optical maskless
lithography technology for semiconductor manufacturing.

Products

We develop lithography systems for the semiconductor industry
and related technologies. Our product development strategy
focuses on the development of product families based on a
modular, upgradeable design.

Our older PAS 2500 and PAS 5000 systems, which we no
longer manufacture but refurbish, are used for
g-line and i-line
processing of wafers up to 150 millimeters (mm)
in diameter and are employed in manufacturing environments and
in special applications for which design resolutions no more
precise than 0.5 microns are required.

Our PAS 5500 product family comprises advanced wafer steppers
and Step & Scan systems suitable for
i-line and deep Ultra
Violet (UV) processing of wafers up to 200 mm
in diameter. In mid-1997, we introduced the PAS 5500
Step & Scan systems with improved resolution and
overlay. Since then, we have further developed and expanded this
Step & Scan product family. This modular upgradeable design
philosophy has been further refined and applied in the design of
our most advanced product family, the TWINSCAN platform, which
is the basis for our current and next generation Step &
Scan systems, producing wafers up to 300 mm in diameter and
capable of extending shrink technology beyond 45 nm.

For processing of 200 mm wafers using step-and-scan technology,
the PAS 5500 series is the most suitable product range. We
offer PAS 5500 systems based on
i-line (using light
with a 365-nm
wavelength), KrF (using light with a
248-nm wavelength) and
ArF (using light with a 193-nm wavelength) technology. For
200 mm high end applications we also offer TWINSCAN ArF
tools.

For processing of 300 mm wafers, we offer TWINSCAN systems based
on i-line, KrF and ArF
technology. In 2003, we introduced the second generation of
TWINSCAN systems based on the XT body with a reduced footprint
and a 50 percent reduction in the main production area
occupied by our system. In 2004, we shipped our first
lithography systems based on immersion technology. These
shipments marked the delivery of the industrys first high
productivity immersion scanners for production applications. We
are the leader in the innovation of immersion technologies and
we were the worlds first producer of dual-stage design
(TWINSCAN) systems. Wafer measurement, including focus and
alignment, is completed on the dry stage, while the imaging
process, using water applied between the wafer and the lens, is
completed on the wet stage. The dual-stage advantage of TWINSCAN
systems enables our customers to gain the process enhancements
of immersion and to continue with familiar and proven metrology
technology.

In July 2005, we announced the TWINSCAN XT:1700i, a 193-nm
immersion scanner capable of imaging at the
45-nm node in volume
production environments. This new system has an NA of 1.2, which
is substantially higher than the XT:1400 with an NA of 0.93,
exceeding the previously perceived, pre-immersion barrier of
1.0. We started volume production of this system in the second
quarter of 2006. The XT:1700i allows chipmakers to improve
resolution by 30 percent. We believe this new system
increases the value of each wafer since better resolution will
likely result in more chips being produced per wafer or more
functionality per chip. Additionally, we believe the XT:1700i
has the highest throughput currently available, 122 wafers
per hour, for the 45-nm node.

In July 2006, we announced plans to introduce a next generation
immersion system the XT:1900i which set a new industry benchmark
of 1.35 NA, which we believe is close to the practical
limit for water-based immersion technology. This new system
extends optical lithography for volume production to 40 nm
and below. ASML expects to begin shipping the XT:1900i by mid
2007.

We also continually develop and sell a range of product options
and enhancements designed to increase productivity, imaging and
overlay to optimize value of ownership over the entire life of
our systems. The table below sets forth our current product
portfolio of Steppers and Scan & Step Systems by resolution
and wavelength.



ASML ANNUAL REPORT 2006

14



---



##### Table of Contents

Current ASML Lithography product portfolio of Steppers and
Step & Scan
Systems1

|      |  |                         |  |       |  |                         |  |       |  |                           |  |       |  |              
|----- |  | ----------------------- |  | ----- |  | ----------------------- |  | ----- |  | ------------------------- |  | ----- |  | -------------
|     
|Res.2 |  | 365 nm (i-line)         |  | Res.2 |  | 248 nm (KrF)            |  | Res.2 |  | 193 nm (ArF)              |  | Res.2 |  | 193 nm (ArFi)
|     
|700   |  | PAS 5500/22             |  | 150   |  | PAS 5500/350            |  | 100   |  | PAS 5500/1100 and AT:1100 |  | 45    |  | XT:1700i     
|350   |  | PAS 5500/125 and XT:400 |  | 130   |  | PAS 5500/750            |  | 90    |  | PAS 5500/1150 and AT:1150 |  | 40    |  | XT:1900i     
|280   |  | PAS 5500/275            |  | 130   |  | AT:750 and XT:760       |  | 80    |  | AT:1200                   |  |       |  |              
|280   |  | PAS 5500/400            |  | 120   |  | PAS 5500/800            |  | 70    |  | XT:1250                   |  |       |  |              
|280   |  | AT:400                  |  | 110   |  | PAS 5500/850 and AT:850 |  | 65    |  | XT:1400 and XT:1450       |  |       |  |              
|220   |  | PAS 5500/450 and XT:450 |  | 100   |  | XT:860                  |  |       |  |                           |  |       |  |              
|      |  |                         |  | 90    |  | XT:875                  |  |       |  |                           |  |       |  |              
|     



|  |                                                                                                                                                                           
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | This table does not include the older products sold on the PAS
    2500 and PAS 5000 platforms                                                                            
|2 | Resolution (Res.) refers to the size of line width
    in nanometers                                                                                                    
| 
| | PAS 5500/22/125/250/350 are Stepper systems for wafer sizes of
    up to 200 mm                                                                                           
| | PAS 5500/400 and up are Step & Scan systems for wafer sizes
    of up to 200 mm                                                                                           
| | AT and XT are TWINSCAN systems for wafer sizes of up to 200 and
    300 mm                                                                                                
| | i denotes a system using immersion technology                                                                                                                           
| | Wavelength refers to the length of light going through
    projection lens; the shorter the wavelength, the smaller the
    line width and the finer the pattern on the IC
| | 1 nanometer is equal to one billionth of a meter                                                                                                                          

Sales and Customer Support










Customers and Geographic Markets




Manufacturing, Logistics and Suppliers






|  |                                                                               
|- | ------------------------------------------------------------------------------
| | maintaining long-term relationships with our suppliers;                       
| | sharing risks and rewards with our suppliers;                                 
| | dual sourcing of knowledge, globally, together with our
    suppliers; and    
| | single, dual or multiple sourcing of products, where possible or
    required.









---



##### Table of Contents

Value sourcing is intended to align the performance of our
suppliers with our requirements on quality, logistics,
technology and total costs.

Zeiss is our sole external supplier of main optical systems and
one of the suppliers of other components. Total purchased value
from Zeiss accounted for between 20 percent and
50 percent of our cost of goods sold, depending on product
type. In 2006 approximately 34 percent of our aggregate
cost of goods sold was purchased from Zeiss.

Zeiss currently is capable of manufacturing a limited number of
lenses and optical components for our stepper and scanner
systems and is highly dependent on its manufacturing and testing
facilities in Oberkochen and Wetzlar, Germany, and its
suppliers. From time to time, the number of systems we have been
able to produce has been limited by the capacity of Zeiss to
provide us with lenses and optical components. During 2006, we
were in some cases constrained by the number of lenses that
Zeiss could produce.

If Zeiss is unable to maintain or increase production levels, we
might not be able to respond to customer demand. As a result,
our relationships with current and prospective customers could
be harmed, which would have a material adverse effect on our
business, financial condition and results of operations.

Our relationship with Zeiss is structured as a strategic
alliance pursuant to several agreements executed in 1997 and
later years. These agreements define an exclusive framework for
cooperation in all areas of our joint business. The partnership
between ASML and Zeiss is focused on continuous improvement of
operational excellence.

Pursuant to these agreements, ASML and Zeiss will continue their
strategic alliance until either party provides at least three
years notice of its intent to terminate. Although we
believe such an outcome is unlikely, if Zeiss were to terminate
its relationship with us, or if Zeiss were unable to produce
lenses and optical components over a prolonged period, we would
effectively cease to be able to conduct our business.

In addition to Zeiss, we also rely on other outside vendors for
the components and subassemblies used in our systems, each of
which is obtained from a single supplier or a limited number of
suppliers. Our reliance on a limited group of suppliers involves
several risks, including a potential inability to obtain an
adequate supply of required components and the risk of untimely
delivery of these components and subassemblies. During 2006, we
were in some cases constrained by the number of excimer laser
illumination systems that we could obtain from Cymer.

See Item 3.D. Risk Factors  The Number of
Systems We Can Produce Is Limited by Our Dependence on a Limited
Number of Suppliers of Key Components.

Research and Development

The semiconductor manufacturing industry is subject to rapid
technological changes and new product introductions and
enhancements. We believe that continued and timely development
and introduction of new and enhanced systems are essential for
us to maintain our competitive position. To meet this ongoing
requirement, we have historically devoted a significant portion
of our financial resources to research and development programs
and we expect to continue to allocate significant resources to
these efforts. In addition, we have established and are
currently establishing sophisticated development centers in the
Netherlands and the United States of America and Taiwan,
respectively. We also work jointly with independent research
centers in nano-electronics and nano-technology. Those research
centers focus on the next generations of chips and systems.

We apply for subsidy payments in connection with specific
development projects under programs sponsored by the Netherlands
government, the European Union, the United States and Taiwanese
government. Amounts received under these programs generally are
not required to be repaid. See our discussions of research and
development in Item 5 Operating and Financial Review
and Prospects, and Note 1 to our consolidated
financial statements.

We invested EUR 414 million on research and development in
continuing operations in 2006, compared to EUR 348 million
in 2005 and EUR 353 million in 2004 (including a charge of
EUR 49 million with respect to a cross-license agreement
entered into between ASML and Nikon). We are also involved in
joint research and development programs with both public and
private partnerships and consortiums, involving independent
research centers, leading chip manufacturers and governmental
programs. We aim to own or license, our jointly developed
technology and designs of critical components.

In 2006, our research and development efforts propelled further
development of the TWINSCAN platform along with several leading
edge technologies, including 248 nm, 193 nm, immersion
and EUV. These efforts enabled us to ship the first EUV system
to research and development institutions in 2006, a milestone
achievement. The continuous drive by our customers for cost
reductions has led us to significantly increase the commonality
of components of the different models of the TWINSCAN platform.
Our research and development activities in 2006 have also led to
productivity and performance enhancements for our other product
families. Moreover, we have continued our research into the
feasibility of maskless technology and started



ASML ANNUAL REPORT 2006

16



---



##### Table of Contents

research on extension of ArF immersion with higher index fluid
and optical materials. We also started developing technology to
support applications of double patterning. Double
patterning is a resolution enhancement technique that involves
splitting a dense circuit pattern into multiple, less-dense
patterns. These simplified patterns are then printed
sequentially on a target wafer. In between the exposures, the
wafer is removed from the exposure system for additional
processing. Double patterning improves the achievable resolution
and enables the printing of smaller features.

Intellectual Property

We rely on intellectual property rights such as patents,
copyrights and trade secrets to protect our proprietary
technology. We aim to obtain ownership rights on technology
developed by or for us or, alternatively, to have appropriate
licensing in place with respect to such technology. However, we
face the risk that such measures will be inadequate.
Intellectual property laws may not sufficiently support our
proprietary rights, our patent applications may not be granted
and our patents may not be construed as intended. Also,
competitors may be able to develop or protect similar technology
earlier and independently.

Litigation may be necessary in order to enforce our intellectual
property rights, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of
infringement. Any such litigation may result in substantial
costs and diversion of resources, and, if decided unfavorably to
us, could have a material adverse effect on our business,
financial condition and results of operations. We also may incur
substantial licensing or settlement costs where doing so would
strengthen or expand our intellectual property rights or limit
our exposure to intellectual property claims of third parties.

Patent litigation with Nikon

From 2001 through late 2004, we were a party to a series of
civil litigations and administrative proceedings in which Nikon
alleged ASMLs infringement of Nikon patents relating to
photolithography. ASML in turn filed claims against Nikon.

Pursuant to agreements executed on December 10, 2004
(effective November 12, 2004), ASML, Zeiss and Nikon agreed
to settle all pending worldwide patent litigation between the
companies. The settlement included an agreement to dismiss all
pending patent litigation between the companies, an exchange of
releases, a cross-license of patents related to lithography
equipment used to manufacture semiconductor devices and payments
to Nikon by ASML and Zeiss. In connection with the settlement,
ASML made an initial payment to Nikon of
US$ 60 million (approximately
EUR 49 million) in 2004, further made payments of
US$ 9 million (approximately EUR 8 million)
in both 2005 and 2006, and is obligated to make an additional
payment to Nikon of US$ 9 million in 2007. Zeiss made
an initial payment to Nikon of US$ 40 million
(approximately EUR 32 million) in 2004, further made
required payments of US$ 6 million (approximately
EUR 4 million) in both 2005 and 2006, and is required
to make an additional payment to Nikon of
US$ 6 million in 2007. See Item 18
Financial Statements for a description of the
accounting treatment and Item 10.C. Material
Contracts for a summary of the ASML-Nikon patent
Cross-License Agreement and the ASML-Zeiss Sublicense Agreement.

Patent litigation with Ultratech Stepper, Inc

In May 2000, Ultratech Stepper, Inc. (Ultratech)
filed a lawsuit against ASML. Ultratech alleges that ASML is
infringing Ultratechs rights under a United States patent
in connection with its manufacture and commercialization in the
United States of advanced photolithography equipment embodying
technology that, in particular, is used in Step & Scan
equipment.

Ultratechs patent infringement claims were tried before a
jury in Oakland, California, in May and June of 2005. On
June 21, 2005 the jury unanimously determined that each of
the patent claims that Ultratech had asserted against ASML was
invalid, and thus that ASML was not liable for patent
infringement, notwithstanding the jurys finding that each
of these claims was infringed by ASML and certain of its
customers. The Court entered judgment in favor of ASML following
receipt of the jury verdict.

Ultratech filed motions with the Court seeking to overturn the
jurys finding that the asserted claims of its patent are
invalid or, in the alternative, seeking a new trial. The Court
denied each of Ultratechs motions. Ultratech then filed an
appeal with the United States Court of Appeals for the Federal
Circuit challenging the finding that the asserted claims of
Ultratechs patent are invalid. Briefing is ongoing in
connection with this appeal, and no hearing date has been set
yet. In the event the appeals court overturns the jurys
finding that the asserted claims of Ultratechs patent are
invalid and ASML is held to infringe any valid claims of
Ultratechs patent, it could result in a substantial
damages award and an injunction that could substantially
restrict or prohibit ASMLs sales in the United States,
either of which could have a material adverse effect on the
Companys financial position and results of operations.

Arbitration with Aviza Technology

On December 1, 2006, Aviza Technology (Aviza)
initiated arbitration proceedings against ASML Holding N.V.,
ASML U.S., Inc. and various other affiliates and
subsidiaries (collectively, the ASML parties).
Avizas arbitration demand alleges that the ASML parties
engaged in fraud and made negligent misrepresentations or
omissions in connection with a 2002 license agreement between
ASML and IPS, Ltd. that was assigned to Aviza in connection with
the 2003 divestiture of ASMLs Thermal Division.



ASML ANNUAL REPORT 2006

17



---



##### Table of Contents

We believe that there are meritorious defenses to Avizas
allegations, and we intend to vigorously defend ourself in the
arbitration proceeding, and accordingly, that the outcome of the
proceeding will not have a material adverse effect on our
financial position or results of operations. However, there can
be no assurance that ASML will prevail, given the inherently
uncertain nature of arbitration proceedings. If Aviza were to
prevail, it could result in a substantial damages award and have
a material adverse effect on our financial position and results
of operations.

Competition

The semiconductor equipment industry is highly competitive. The
principal elements of competition in our markets are the
technical performance characteristics of a photolithography
system and the value of ownership of that system based on its
purchase price, maintenance costs, productivity and customer
service and support. In addition, we believe that an
increasingly important factor affecting our ability to compete
is the strength and breadth of our portfolio of patent and other
intellectual property rights. We believe that the market for
photolithography systems and the investments required to be a
significant competitor in this market have resulted in increased
competition for market share through the aggressive prosecution
of patents. Our competitiveness will increasingly depend upon
our ability to protect and defend our patents, as well as our
ability to develop new and enhanced semiconductor equipment that
is competitively priced and introduced on a timely basis. See
Item 3.D. Risk Factors, We Face Intense
Competition.

Government Regulation

Our business is subject to direct and indirect regulation in
each of the countries in which our customers or we do business.
As a result, changes in various types of regulations could
affect our business adversely. The implementation of new
technological or legal requirements could impact our products,
or our manufacturing or distribution processes, and could affect
the timing of product introductions, the cost of our production,
and products as well as their commercial success. Moreover,
environmental and other regulations that adversely affect the
pricing of our products could adversely affect our results of
operation. The impact of these changes in regulation could
adversely affect our business even where the specific
regulations do not directly apply to us or to our products.

Share Purchase Agreement Brion Technologies, Inc.

On December 19, 2006 we announced the intended acquisition
of 100 percent of the outstanding shares of Brion
Technologies, Inc. (Brion). Subject to approval by
regulatory authorities, closing is expected in the first quarter
of 2007. Pursuant to the sale and purchase agreement, Brion
shareholders will receive total consideration of USD 270
million (approximately EUR 203 million) in cash.

Brion was incorporated in 2002 and is a leader in the field of
computational lithography which encompasses design verification,
reticle enhancement technologies and optical proximity
correction. Brion designs, develops and markets computational
lithography technology enabling semiconductor manufacturers to
simulate the realized pattern of integrated circuits and to
correct the mask pattern that could compromise the manufacturing
process and reduce yield. The software technology behind its
products is a hardware accelerated, image-based data and
simulation engine which has been designed for the tasks of
lithography modeling and database handling.

Brions largest customers are principally semiconductor
manufacturers in Asia, Europe and North America. Brion currently
employs approximately 130 employees worldwide which are
mainly located in the United States and China.

Brion has its headquarter in Santa Clara, California (United
States) with subsidiaries in Cayman Islands, Japan and China.





C. Organizational Structure

ASML Holding N.V. is a holding company that operates through its
subsidiaries. Our major operating subsidiaries, each of which is
a direct wholly-owned subsidiary, are as follows:

(CHART)

See Exhibit 8.1 for a list of our material subsidiaries.



ASML ANNUAL REPORT 2006

18



---



##### Table of Contents

D. Property, Plants and Equipment

We principally obtain and operate our facilities under operating
leases. However, we also own a limited number of buildings. The
book value of the buildings used in our continuing operations
and owned by us amounted to EUR 59 million as of
December 31, 2006 compared to EUR 76 million as of
December 31, 2005.

In support of our expected growth, we plan to invest an
additional EUR 150 million in capital expenditures in 2007
to expand our capacity worldwide, bringing the total amount of
planned capital expenditures for the year to EUR 250
million. A substantial part of these expenditures is allocated
to expanding our facilities in Veldhoven, the Netherlands with
6,000 square meters of clean room and office space. This
expansion will offer the extra space and facilities necessary to
accommodate our current production levels as well as support
continued growth in the long term. The completion of the
additional clean room facilities and central utilities is
expected before the end of 2007; whereas, the complete building
(including office space) is expected to be completed in the
first half of 2008. We intend to fund the related capital
expenditures primarily with cash on hand and/or cash generated
through operations.

See also Item 4.A. History and Development of the
Company, Capital Expenditures and Divestitures and
Item 5.B. Liquidity and Capital Resources and
Note 9 to our consolidated financial statements.

During 2006 our facilities were generally utilized above normal
capacity.

Facilities in Europe

Our headquarters, applications laboratory and research and
development facilities are located in a 120,000 square meter
state-of-the-art facility in the Netherlands, of which 65,000
square meters is used as office space and 55,000 square
meters is used for manufacturing and research and development
activities. We lease the majority of these facilities through
long-term operating leases that contain purchase options. Some
of our office facilities at our headquarters in Veldhoven are
financed through a special purpose vehicle that is a variable
interest entity. See Item 5.E. Off-Balance Sheet
Arrangements and Note 12 to our consolidated
financial statements. We also lease several sales and service
locations across Europe.

Facilities in the United States

We maintain lithography research, development and manufacturing
operations in a 27,142 square meter facility in Wilton,
Connecticut. Our American headquarters and American training
facilities are located in two buildings, comprising an
8,840 square meter office building space and a
10,485 square meter training space in Tempe, Arizona. We
also lease several sales and service locations across the United
States.

Facilities in Asia

Our Asian headquarters are located in a 250 square meter office
space in Hong Kong. We also lease and own several sales and
service/training locations across Asia.





Item 4A Unresolved Staff Comments

Not applicable.





Item 5 Operating and Financial Review and Prospects

Executive Summary

Introduction

ASML is the worlds leading provider of lithography systems
that are critical to the production of ICs or chips.
Headquartered in Veldhoven, the Netherlands, ASML operates
globally, with activities in Europe, the United States and Asia.

In 2006, we generated net sales of EUR 3,597 million and
income from operations of EUR 871 million or
24.2 percent of net sales. Net income in 2006 amounted to
EUR 625 million or 17.4 percent of net sales,
representing EUR 1.32 per share.

We employed approximately 5,600 employees and operated in
14 countries through over 60 sales and service
locations.

In the executive summary below we provide an update of the
semiconductor equipment industry, followed by our business
strategy and a discussion of our key performance indicators.



ASML ANNUAL REPORT 2006

19



---



##### Table of Contents

Semiconductor equipment industry update

Historically the semiconductor industry has experienced
significant growth largely due to the continual reduction of
cost per function performed by ICs. Improvement in the design
and manufacture of ICs with higher circuit densities has
resulted in smaller and cheaper ICs capable of performing a
larger number of functions at higher speeds with lower power
consumption. We believe that these long term trends will
continue for the foreseeable future and will be accompanied by a
continuing demand for production equipment that is capable of
accurate production of advanced ICs in high volumes at the
lowest possible cost.

Lithography equipment is used to imprint complex circuit
patterns onto silicon wafers, which are the primary raw
materials for ICs. The imprinting process is one of the most
critical and expensive steps in wafer fabrication. Lithography
equipment is therefore a significant focus of the IC
industrys demand for cost efficient enhancements to
production technology.

The costs to develop new lithography equipment are high.
Accordingly, the lithography equipment industry is characterized
by the presence of only a few primary suppliers: ASML, Nikon and
Canon. ASML is the worlds leading provider of lithography
equipment with a market share based on revenue of
61 percent in 2006 up from 57 percent in 2005
according to the latest available data up to and including
November 2006 as reported by SEMI, an independent semiconductor
industry organization.

Nikon and Canon are the dominant suppliers in the Japanese
market-segment, which accounts for a significant portion of
worldwide semiconductor production. This market-segment
historically has been difficult for non-Japanese companies to
penetrate. Since 2004, we have been increasing our service,
sales and marketing operations in Japan to serve our growing
customer base. In 2006, we further strengthened our long term
market development strategy in Japan. Our customer base there
grew from 6 customers in 2005 to 8 customers in 2006. In
2006, 7 percent of our net system sales was generated by
Japanese customers.

Total lithography equipment shipped by the industry as a whole
in the five years ended December 31, 2005 is set forth in
the following table:

|                              |  |       |  |       |  |       |  |       |  |      
|----------------------------- |  | ----- |  | ----- |  | ----- |  | ----- |  | -----
|                             
|Year ended December 31        |  | 2001  |  | 2002  |  | 2003  |  | 2004  |  | 2005 
|                             
|Total units shipped           |  | 789   |  | 413   |  | 456   |  | 694   |  | 536  
|Total value (in millions USD) |  | 3,792 |  | 2,817 |  | 3,229 |  | 5,268 |  | 4,988
|                             





Business strategy




Customer focus


















---



##### Table of Contents

We also intend to expand our business scope as ASML pursues
hardware technologies and new product opportunities in fields
adjacent to and complementary with our core semiconductor
lithography competence.

Aggressive investment in research and development

Our product range for steppers and advanced Step & Scan
systems spans all the industrys current wavelengths for
both 200- and
300-millimeter wafers.

Supported by our financial performance, research and development
expenses in 2006 increased by 19 percent compared with
2005, as we accelerated new developments and advanced our
development of immersion and EUV technologies. This operating
decision was made possible by leveraging our outsourcing
strategy, which continues to enable us to rapidly and
efficiently adjust our cost structure throughout a cycle while
making use of leading edge capabilities in our supply chain.

Since 2000, we have offered the industrys only dual-stage
wafer imaging platform  the
TWINSCANtm
system  which allows exposure of one wafer while
simultaneously measuring the wafer that will be exposed next.
This unique capability translates into the industrys
highest throughput, enabling reduced cost-per-exposure per
wafer. In the third quarter of 2006, we shipped our
500th TWINSCAN system, demonstrating the acceptance of the
TWINSCAN platform as the semiconductor industrys standard
for 300 mm lithography.

In 2006, we expanded our immersion product suite by introducing
the industrys most advanced lithography system, the
ASML TWINSCAN XT:1900i. Our innovative immersion
lithography replaces the air over the wafer with fluid,
enhancing focus and enabling circuit line-width to shrink to
even smaller dimensions. The new XT:1900i system extends optical
lithography for volume production to 40nm and below. Since
the fourth quarter of 2004, we have shipped 36 immersion
systems to customers in three continents, marking our continued
immersion technological leadership.

In December 2006, we announced ASMLs newest TWINSCAN
system, the XT:1450, an advanced
193-nm exposure tool
targeted for high volume manufacturing that extends dry
193-nm technology to
sub-60-nm. It can also
be used by customers to support development of
32-nm node processes
using double patterning techniques. Double patterning represents
a bridge between current lithography technology and next
generation extreme ultra violet (EUV) technology.

In parallel, we are developing EUV technology. In the third
quarter of 2006, we shipped the industrys first
EUV Alpha Demo Tools to research and development
institutions located in Albany, New York (United States) and
Leuven (Belgium) where potential customers can conduct early
stage research and development.

Operational excellence

We strive to sustain our business success based on our
technological leadership by continuing to execute well on our
fundamental operating strategy, including reduction in lead time
while improving our cost competitiveness. Lead time is the time
from a customers order to a tools delivery.

Our business strategy includes outsourcing the majority of
components and subassemblies that make up our products. We work
in partnership with suppliers, collaborating on quality,
logistics, technology and total cost. By operating our strategy
of value sourcing, we strive to attain flexibility and cost
efficiencies from our suppliers through mutual commitment and
shared risk and reward. Value sourcing also allows the necessary
flexibility to adapt to the cyclicality of the world market for
semiconductor lithography systems.

We strive to improve efficiencies in our own operations on an
ongoing basis: addressing our cost structure and strengthening
our capability to generate cash. We have been successful at
progressively enhancing the value of ownership of our products
while increasing margins and boosting cash generation through
gains in manufacturing productivity and reductions in cycle time.

In the first quarter of 2006, we expanded our capability to
manufacture lithography systems in Veldhoven, the Netherlands,
by introducing a flexible labor model. It reinforces our ability
to adapt more quickly to semiconductor market cycles, including
support for potential 24-hour, seven days-a-week production
activities. By maximizing the flexibility of our high tech work
force in manufacturing facilities located in Veldhoven, we can
shorten lead time: a key driver of added value for customers. It
also reduces our working capital requirements.



ASML ANNUAL REPORT 2006

21



---



##### Table of Contents

ASML operations update on key performance indicators

The following table presents the key performance indicators used
by our Board of Management and senior management to measure
performance in our monthly operational review meetings.

|                                |  |      |       |  |  |  |       |  |  |  |       |      |  |  |       |  |  |  |       |  |  |  |       | 
|------------------------------- |  | ---- | ----- |  |  |  | ----- |  |  |  | ----- | ---- |  |  | ----- |  |  |  | ----- |  |  |  | ----- | 
|                                | 
|Year ended December 31          |  |     
|(in millions, except market     |  | 2004 |       |  |  |  | 2005  |  |  |  |       | 2006 |  |  |      
|share and systems)              |  | EUR  |       |  |  |  | EUR   |  |  |  |       | EUR  |  |  |      
|                                | 
|Growth                          |  |      |       |  |  |  |       |  |  |  |       |      |  |  |       |  |  |  |       |  |  |  |       | 
|Market share (based on revenue) |  |      | 53%   |  |  |  |       |  |  |  | 57%   |      |  |  |       |  |  |  | 61%3  |  |  |  |       | 
|Net sales                       |  |      | 2,465 |  |  |  |       |  |  |  | 2,529 |      |  |  |       |  |  |  | 3,597 |  |  |  |       | 
|Systems shipped (value)         |  |      | 2,175 |  |  |  |       |  |  |  | 2,228 |      |  |  |       |  |  |  | 3,229 |  |  |  |       | 
|Systems shipped (number)        |  |      | 282   |  |  |  |       |  |  |  | 196   |      |  |  |       |  |  |  | 266   |  |  |  |       | 
|Average selling price           |  |      | 7.7   |  |  |  |       |  |  |  | 11.4  |      |  |  |       |  |  |  | 12.1  |  |  |  |       | 
|Systems backlog (value)         |  |      | 1,691 |  |  |  |       |  |  |  | 1,434 |      |  |  |       |  |  |  | 2,146 |  |  |  |       | 
|Systems backlog (number)        |  |      | 131   |  |  |  |       |  |  |  | 95    |      |  |  |       |  |  |  | 163   |  |  |  |       | 
|Average selling price           |  |      | 12.9  |  |  |  |       |  |  |  | 15.1  |      |  |  |       |  |  |  | 13.2  |  |  |  |       | 
|Technical achievement:          |  |      |       |  |  |  |       |  |  |  |       |      |  |  |       |  |  |  |       |  |  |  |       | 
|Immersion systems shipped       |  |      | 3     |  |  |  |       |  |  |  | 10    |      |  |  |       |  |  |  | 23    |  |  |  |       | 
|                               
|Profitability                   |  |      |       |  |  |  |       |  |  |  |       |      |  |  |       |  |  |  |       |  |  |  |       | 
|Gross profit                    |  |      | 906   |  |  |  | 36.7% |  |  |  | 974   |      |  |  | 38.5% |  |  |  | 1,462 |  |  |  | 40.6% | 
|Income from
    operations1     |  |      | 379   |  |  |  | 15.4% |  |  |  | 449   |      |  |  | 17.8% |  |  |  | 871   |  |  |  | 24.2% | 
|Net income
    (loss)1          |  |      | 235   |  |  |  | 9.6%  |  |  |  | 311   |      |  |  | 12.3% |  |  |  | 625   |  |  |  | 17.4% | 
|                               
|Liquidity                       |  |      |       |  |  |  |       |  |  |  |       |      |  |  |       |  |  |  |       |  |  |  |       | 
|Cash and cash equivalents       |  |      | 1,228 |  |  |  |       |  |  |  | 1,905 |      |  |  |       |  |  |  | 1,656 |  |  |  |       | 
|Net
    cash2                   |  |      | 425   |  |  |  |       |  |  |  | 1,037 |      |  |  |       |  |  |  | 1,276 |  |  |  |       | 
|Operating cash flow             |  |      | 251   |  |  |  |       |  |  |  | 711   |      |  |  |       |  |  |  | 478   |  |  |  |       | 
|                               



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | In 2004 ASML, Nikon Corporation and Carl Zeiss SMT AG agreed to
    a comprehensive settlement of legal proceedings and
    cross-license of patents related to lithography equipment. This
    agreement had the following effects on ASMLs results for
    the twelve months ended December 31, 2004 (i) an
    increase of EUR 49 million in our Research and Development
    costs and consequently a decrease in income from operations;
    (ii) a decrease of EUR 33 million in net income.
|2 | Net cash is calculated as the difference between cash and cash
    equivalents and convertible subordinated notes. Balances of the
    convertible subordinated notes as of December 31, 2004,
    2005 and 2006 are EUR 802.8 million, EUR 867.7 million
    and EUR 380 million respectively.                                                                                                                                                                                                    
|3 | According to the latest available data up to and including
    November 2006 as reported by SEMI, an independent semiconductor
    industry organization.                                                                                                                                                                                                                                                                                                                                          

Growth






I-line


I-line


Profitability


5-10 20-25










---



##### Table of Contents

Operating income grew by 94.0 percent from
EUR 449 million or 17.8 percent of sales in 2005
to 871 million or 24.2 percent of sales in 2006. This
EUR 422 million growth was substantially the result of
the increase of gross profit of EUR 488 million or
50.1 percent which was partially offset by an increase in
operating expenses of EUR 67 million or
12.6 percent.

Gross profit increased compared to 2005, showing a growth of
50.1 percent from EUR 974 million or
38.5 percent of net sales in 2005 to 1,462 million or
40.6 percent of net sales in 2006. The higher gross profit
was principally attributable to an increased market demand for
lithography equipment with higher ASPs, decreased product
costs resulting from our continuous cost of goods reduction
programs and increased manufacturing volumes and related
absorption partially offset by a change in product mix.

Operating expenses were EUR 67 million higher in 2006
compared to 2005 due to an increase of both
R&D expenses by 63 million and
SG&A expenses by EUR 4 million. The increase
in R&D expenses by EUR 63 million or
19.4 percent was mainly related to our decision to further
accelerate investments in our technological leadership in a time
of strong financial performance. For further details regarding
Research and development see also Item 4.B Business
Overview and Item 5 Operating and Financial
Review and Prospects, Business Strategy.

Net income in 2006 amounted to EUR 625 million,
representing EUR 1.32 per share compared with net income of
EUR 311 million or EUR 0.64 per share in 2005.

Liquidity

We strive to maintain our strategic target level of
EUR 1 billion in net cash, which is comprised of total
cash and cash equivalents minus convertible subordinated bonds.
To the extent that our net cash exceeds EUR 1 billion
and there are no alternative investment opportunities, we intend
to return excess cash to our shareholders. As of
December 31, 2006 our net cash amounted to
EUR 1.3 billion.

Our net cash decreased from EUR 1,905 million as of
December 31, 2005 to EUR 1,656 million as of
December 31, 2006. We generated cash from operations of
EUR 478 million in 2006 offset by a negative cash flow
of EUR 648 million from financing activities mainly as
result of our 2006 share buy back programs
(EUR 678 million) and EUR 66 million cash
used in investing activities mainly related to production
facilities, equipment and information technology.





A. Operating Results

Critical accounting policies using significant estimates

Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
U.S. GAAP. The preparation of our financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, net sales and expenses,
and related disclosure of contingent assets and liabilities. On
an ongoing basis, we evaluate our estimates, including those
related to revenue recognition, warranty, long-lived assets,
inventories, accounts receivable, restructuring, contingencies
and litigation, income tax and share-based compensation
expenses. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under
the circumstances. While we regularly evaluate our estimates and
assumptions, actual results may differ from these estimates if
these assumptions prove incorrect. To the extent there are
material differences between actual results and these estimates,
our future results of operations could be materially and
adversely affected. We believe that the accounting policies
described below require us to make significant judgments and
estimates in the preparation of our consolidated financial
statements.

Revenue recognition

In general, we recognize the revenue from the sale of a system
upon shipment and the revenue from the installation of a system
upon completion of that installation at the customer site. Each
system undergoes, prior to shipment, a Factory Acceptance
Test in our clean room facilities, effectively replicating
the operating conditions that will be present on the
customers site, in order to verify whether the system will
meet its standard specifications and any additional technical
and performance criteria agreed with the customer. A system is
shipped, and revenue is recognized, only after all
specifications are met and customer sign-off is received or
waived. Although each systems performance is re-tested
upon installation at the customers site, we have never
failed to successfully complete installation of a system at a
customers premises.

We anticipate that, in connection with future introductions of
new technology, we will initially defer revenue recognition
until completion of installation and acceptance of the new
technology at customer premises. This deferral would continue
until we are able to conclude that installation of the
technology in question would occur consistently within a
predetermined time period and that the performance of the new
technology would not reasonably be different from that exhibited
in the pre-shipment Factory Acceptance Test. Any such deferral
of revenues, however, could have a material effect on our
results of operations for the fiscal period in which the
deferral occurred and on the succeeding fiscal period. At
December 31, 2006 and 2005 we had no deferred revenue from
shipments of new technology. During the three years ended
December 31, 2006, no revenue from new technology



ASML ANNUAL REPORT 2006

23



---



##### Table of Contents

was recorded that had been previously deferred. As our systems
are based largely on two product platforms that permit
incremental, modular upgrades, the introduction of genuinely
new technology occurs infrequently, and has occurred
on only one occasion since 1999.

A portion of our revenue is derived from contractual
arrangements with our customers that have multiple deliverables,
such as installation and training services and prepaid service
contracts. The revenue relating to the undelivered elements of
the arrangements is deferred at fair value until delivery of
these elements. The fair value is determined by vendor specific
objective evidence (VSOE). VSOE is determined based
upon the prices that we charge for installation and comparable
services (such as relocating a system to another customer site)
on a stand-alone basis, which are subject to normal price
negotiations. Revenue from installation and training services is
recognized when the services are completed. Revenue from prepaid
service contracts is recognized over the term of the contract.

The deferred revenue balance from installation and training
services amounted to approximately EUR 13 million and
EUR 27 million, respectively, at December 31,
2006. The deferred revenue balance from prepaid service
contracts amounted to approximately EUR 121 million as
of December 31, 2006.

We offer customers discounts in the normal course of sales
negotiations. These discounts are directly deducted from the
gross sales price at the moment of revenue recognition. These
discounts do not relate to future purchases or trade-ins with
the exception of volume discounts. From time to time, we offer
volume discounts to a limited number of customers. In some
instances these volume discounts can be used to purchase field
options. The related amount is recorded as a reduction in
revenue at time of shipment. Generally, there are no other
credits or adjustments recognized at shipment. From time to
time, we offer free or discounted products or services in
connection with a current revenue transaction, which are earned
by the customer at a future date only if the customer completes
a specified cumulative level of revenue transactions. As the
value of these free products or services is insignificant in
relation to the value of the transactions necessary to earn
these free products or services, a liability is recorded for the
cost of these free products or services.

Warranty

We provide standard warranty coverage on our systems for
12 months, providing labor and parts necessary to repair
systems during the warranty period. The estimated warranty costs
are accounted for by accruing these costs for each system upon
recognition of the system sale. The estimated warranty costs are
based on historical product performance and field expenses.
Based upon historical service records, we calculate the charge
of average service hours and parts per system to determine the
estimated warranty charge. We update these estimated charges
periodically. The actual product performance and/or field
expense profiles may differ, and in those cases we adjust our
warranty reserves accordingly. Future warranty expenses may
exceed our estimates, which could lead to an increase in our
cost of sales.

Evaluation of long-lived assets for impairment and costs
associated with exit or disposal activities

We evaluate our long-lived assets, including intellectual
property, for impairment whenever events or changes in
circumstances indicate that the carrying amount of those assets
may not be recoverable. If an impairment test is warranted, we
assess whether the undiscounted cash flows expected to be
generated by our long-lived assets exceed their carrying value.
If this assessment indicates that the long-lived assets are
impaired, the assets are written down to their fair value. These
assessments are based on our judgment, which includes the
estimate of future cash flows from long-lived assets and the
estimate of the fair value of an asset if it is impaired. In
determining impairments of long-lived assets, we must make
judgments and estimates to determine whether the cash flows
generated by those assets are less than their carrying value.
These estimates are based on financial plans updated with the
latest available projections of the semiconductor market
evolution, our sales expectations and our costs evaluation, and
are consistent with the plans and estimates that we use to
manage our business. It is possible, however, that the outcome
of the plans and estimates used may differ, and future adverse
changes in market conditions, may require impairment of certain
long-lived assets.

During 2006 we recorded impairment charges of
EUR 17.4 million of which we recorded
EUR 14.1 million in cost of sales,
EUR 2.0 million in research and development expenses
and EUR 1.3 million in selling, general and
administrative costs. The impairment charges recorded in 2006
mainly relate to buildings and construction
(EUR 10.2 million) and machinery and equipment
(EUR 7.1 million). The impairment charges with respect
to buildings and construction mainly relate to a subleased
building in Japan for which there are insufficient cash flows to
support its carrying amount, mainly as a result of a drop in
rental income. This drop is caused by a cancellation of one of
the subleases and unfavorable real estate market conditions at
the location of our Japan building. The impairment was
determined based on the difference between the buildings
estimated fair value and its carrying amount. The impairment
charges with respect to machinery and equipment mainly relate to
development, production and field service tooling which were no
longer used because the tools no longer meet the todays
technology requirements. The impairment charges were determined
based on the difference between the assets estimated fair
value and their carrying amount.

See Notes 2, 3 and 9 to our consolidated
financial statements.



ASML ANNUAL REPORT 2006

24



---



##### Table of Contents

Inventories

Inventories are stated at the lower of cost (first-in, first-out
method) or market value. Cost includes net prices paid for
materials purchased, charges for freight and customs duties,
production labor cost and factory overhead. Inventory provisions
are made for slow moving, obsolete or unsaleable inventory and
are reviewed on a quarterly basis. Our methodology involves
matching our on-hand and on-order inventory with our
manufacturing forecast. In determining inventory provisions, we
evaluate inventory in excess of our forecasted needs on both
technological and economical criteria and make appropriate
provisions to reflect the risk of obsolescence. This methodology
is significantly affected by our forecasted needs for inventory.
If actual demand or usage were to be lower than estimated,
additional inventory provisions for excess or obsolete inventory
may be required, which could have a material adverse effect on
our business, financial condition and results of operations. See
Note 6 to our consolidated financial statements.

Accounts receivable

A majority of our accounts receivable are derived from sales to
large multinational semiconductor manufacturers throughout the
world. In order to monitor potential credit losses, we perform
ongoing credit evaluations of our customers financial
condition. An allowance for doubtful accounts is maintained for
potential credit losses based upon managements assessment
of the expected collectibility of all accounts receivable. The
allowance for doubtful accounts is reviewed periodically to
assess the adequacy of the allowance. In making this assessment,
we take into consideration (i) any circumstances of which
we are aware regarding a customers inability to meet its
financial obligations; and (ii) our judgments as to
potential prevailing economic conditions in the industry and
their potential impact on the Companys customers. Where we
deem it prudent to do so, we may require some form of credit
enhancement, such as a letter of credit or bank guarantee,
before shipping systems to a customer that presents a credit
risk. We have not incurred any material accounts receivable
credit losses during the past three years. However, we sell a
substantial number of systems to a limited number of customers.
Our three largest customers accounted for 35 percent of
accounts receivable at December 31, 2006, compared to
49 percent at December 31, 2005. An unanticipated
business failure of one of our main customers could result in a
substantial credit loss in respect to amounts owed to the
Company by that customer, which could adversely affect our
results of operations and financial condition. See Note 19
to our consolidated financial statements.

Restructuring

We apply the criteria defined in SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities and SFAS No. 112,
Employers Accounting for Postemployment
Benefits, in order to determine when a liability for
restructuring or exit costs should be recognized.

With respect to employee termination costs, we apply
SFAS No. 146 in the case of benefit arrangements that,
in substance, do not constitute an ongoing benefit arrangement.
We apply SFAS No. 112 for termination benefits that
are provided under an ongoing benefit arrangement.
SFAS No. 146 provides that a liability for a cost
associated with an exit or disposal activity that does not
constitute an ongoing benefit arrangement shall be recognized
and measured initially at its fair value in the period in which
the liability is incurred; that is when a detailed exit or
disposal plan exists, has been committed to by management and
has been communicated to the employees. SFAS No. 112
provides that a liability for termination benefits provided
under an ongoing benefit arrangement covered by
SFAS No. 112 shall be recognized when the likelihood
of future settlement is probable and can be reasonably
estimated. As a result, whether an employee termination plan
constitutes an ongoing benefit arrangement or not, and
accordingly, whether SFAS No. 146 or
SFAS No. 112 is applied, will affect the timing of
recognition of employee termination costs, as well as the
amounts recognized. In 2003, we announced workforce reductions
of approximately 550 positions worldwide due to the
continuing downturn in the semiconductor equipment industry.
During 2003, we recorded a provision of
EUR 15.3 million as an ongoing benefit arrangement.
The amount of the provision was based upon severance
arrangements agreed with our Works Council in the Netherlands
for the previous workforce reductions announced in December
2002. Our Board of Management and our Works Council then
commenced a joint study on implementing these workforce
reductions in the Netherlands, which delayed the workforce
reductions until the beginning of 2004. Thereafter, in response
to a sharp improvement in market conditions during 2004, we
decreased the reductions to approximately 300 positions
worldwide, of which 150 were contract employees with limited
rights upon termination. As a result, in 2004 we recorded a
restructuring credit of EUR 12.1 million,
EUR 3.8 million of which was recorded in cost of sales
and EUR 8.3 million of which was recorded under
restructuring expenses.

Other exit costs include purchase and other commitments to be
settled or fulfilled. These costs are estimated based on
expected settlement fees and committed payments, taking into
account future potential benefits, if any, from those
commitments. We apply the criteria defined in
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities and
SFAS No. 112, Employers Accounting for
Postemployment Benefits, in order to determine when a
liability for restructuring or exit costs should be recognized.

Contingencies and litigation

We are party to various legal proceedings generally incidental
to our business, as disclosed in Note 14 to the
consolidated statements. In connection with these proceedings
and claims, our management evaluated, based on the relevant
facts and legal



ASML ANNUAL REPORT 2006

25



---



##### Table of Contents

principles, the likelihood of an unfavorable outcome and whether
the amount of the loss could be reasonably estimated. In each
case, management determined that either a loss was not probable
or was not reasonably estimable. As a result, no estimated
losses were recorded as a charge to our statement of operations
in 2004, 2005 and 2006. Significant subjective judgments were
required in these evaluations, including judgments regarding the
validity of asserted claims and the likely outcome of legal and
administrative proceedings. The outcome of these proceedings,
however, is subject to a number of factors beyond our control,
most notably the uncertainty associated with predicting
decisions by courts and administrative agencies. In addition,
estimates of the potential costs associated with legal and
administrative proceedings frequently cannot be subjected to any
sensitivity analysis, as damage estimates or settlement offers
by claimants may bear little or no relation to the eventual
outcome. Finally, in any particular proceeding, we may agree to
settle or to terminate a claim or proceeding in which it
believes it would ultimately prevail where we believe that doing
so, when taken together with other relevant commercial
considerations, is more cost-effective than engaging in an
expensive and protracted litigation, the outcome of which is
uncertain. Such a decision occurred when we determined to enter
into a cross-license agreement as an alternative to continuing
our intellectual property dispute with Nikon. See
Item 10.C. Material Contracts for a summary of
the Nikon-ASML Cross License Agreement and the ASML/ Zeiss
Sublicense Agreement and Item 18 Financial
Statements.

We accrue for legal costs related to litigation in our statement
of operations at the time when the related legal services are
actually provided to us.

Share-based compensation expenses

On January 1, 2006, we implemented the provisions of
SFAS No. 123(R), Share-Based Payment,
using the modified prospective transition method.
SFAS No.123(R) requires companies to recognize the cost of
employee services received (compensation expenses) in exchange
for awards of equity instruments based upon the grant-date fair
value of those instruments. The grant-date fair value of these
instruments was estimated using a Black-Scholes option valuation
model. This Black-Scholes pricing model requires the use of
assumptions, including expected stock price volatility and the
estimated life of each award. The risk-free interest rate used
in the model is determined, based on a Euro government bond with
a life equal to the expected life of the equity-settled
share-based payments. Our income before income taxes and net
income was negatively impacted with EUR 8.8 million
and EUR 7.4 million respectively due to the adoption
of SFAS No. 123(R).

Using the modified prospective transition method, we began
recognizing compensation expenses for equity-based awards
granted, modified, repurchased, or cancelled after the required
effective date of January 1, 2006. Additionally,
compensation expenses for the portion of equity-based awards for
which the requisite service has not been rendered and that are
outstanding as of January 1, 2006 are also recognized as
the requisite service is rendered on or after that date.
Compensation expenses are then amortized on a straight-line
basis over the requisite service period of the awards, which is
generally the vesting period. The total gross amount of
recognized expenses associated with share based payments was EUR
9.7 million in 2006.

Under the modified prospective transition method, no restatement
of prior interim periods and fiscal years has been made. Prior
to January 1, 2006, we measured compensation expenses for
our stock option plans using the intrinsic value method under
APB 25 Accounting for Stock Issued to Employees
and related interpretations. As the exercise price of all stock
options granted under these plans was not below the fair market
price of the underlying common stock on the grant date, no
compensation expenses were recognized in the consolidated
statements of operations.

The grant-date fair value for awards for which the requisite
service has not been rendered and that are outstanding as of
January 1, 2006 is based on the grant-date fair value of
those awards as calculated under SFAS No.123,
Accounting for Stock-Based Compensation for pro
forma disclosures under the assumption of historical volatility.
Since January 1, 2006 we are adopting implied volatility of
our actively-traded options for new issued stock options as one
of the assumptions in the Black-Scholes pricing model. As the
semiconductor industry is becoming more mature, resulting in a
decreasing cyclicality, we believe that implied volatility is
currently a better assumption for the valuation model than
historical volatility.

We make quarterly assessments of the adequacy of the
(hypothetical) tax pool to determine whether there are tax
deficiencies that require recognition in the consolidated
statements of operations. We have selected the alternative
transition method (under FSP FAS 123(R)-3) in order to
calculate the tax pool.

We did not modify outstanding stock option plans in anticipation
of the adoption of SFAS No.123(R). Our current stock option
plans do not provide for cash settlement of options.

See Note 1 to our consolidated financial statements.

Income tax

We operate in various tax jurisdictions in the United States,
Europe and Asia and must comply with the tax laws of each of
these jurisdictions.



ASML ANNUAL REPORT 2006

26



---



##### Table of Contents

We use the asset and liability method in accounting for income
taxes. Under this method, deferred tax assets and liabilities
are recognized for tax consequences attributable to differences
between the balance sheet carrying amounts of existing assets
and liabilities and their respective tax bases. Furthermore tax
assets are recognized for the tax effect of incurred net
operating losses. If it is more likely than not that the
carrying amounts of deferred tax assets will not be realized, a
valuation allowance will be recorded to reduce the carrying
amounts of those assets.

We assess our ability to realize our deferred tax assets
resulting from net operating loss carry-forwards on an ongoing
basis. The total amount of loss carry-forwards as of
December 31, 2006 was EUR 276 million, which
resides completely with ASML US, Inc. We believe that it is
more likely than not that all losses will be offset by future
taxable income before our ability to utilize those losses
expires. This analysis takes into account our projected future
taxable income from operations, possible tax planning
alternatives available to us, and a realignment of group assets
that we affected during the period 2001 through 2003 that
included the transfer of certain tangible and intangible assets
of ASML US, Inc. to ASML Netherlands B.V. The value of the
assets transferred is expected to result in additional income to
ASML US, Inc., which we believe, together with projected future
taxable income from operations, will, more likely than not, be
sufficient to absorb the net operating losses that ASML US, Inc.
has incurred, prior to the expiry of those losses. In order to
determine with certainty the tax consequences and value of this
asset transfer, in 2002 we requested a bilateral advance pricing
agreement (APA) from the United States and
Netherlands tax authorities. Since December 2002, management has
held numerous meetings with representatives of those
authorities. The most recent meetings with the United States and
Netherlands tax authorities took place in June and July 2006.
Based on these meetings, and feedback from both authorities, we
are confident that our APA request will be successful. The
specific timing for completion of the APA however remains in the
control of those tax authorities. See Note 15 to our
consolidated financial statements.

The calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax laws. Our
estimate for the potential outcome of any uncertain tax issue is
highly judgmental. However, we believe that we have adequately
reserved for tax contingencies. Settlement of these
uncertainties in a manner inconsistent with our expectations
could have a material impact on our results of operations,
financial condition and cash flows. We account for the income
tax contingencies in accordance with SFAS No. 5,
Accounting for Contingencies. The tax contingencies
mainly relate to transfer pricing positions, operational
activities in countries where we are not tax registered and tax
deductible costs. We provide for these tax contingencies for the
duration of the statue of limitation which differs per tax
jurisdiction and generally ranges up to 7 years. As of
December 31, 2006 the tax contingencies amount to
EUR 130.7 million (December 31, 2005:
EUR 127.9 million) and are included in Deferred tax
and other liabilities on the consolidated balance sheets.

Results of Operations

The following discussion and analysis of results of operations
should be viewed in the context of the risks affecting our
business strategy, described in Item 3.D. Risk
Factors.

Set forth below are our consolidated statements of operations
data for the three years ended December 31, 2006 (in
thousands):

|                                               |  |      |       |   |      |  |       |      |  |  |       |  
|---------------------------------------------- |  | ---- | ----- | - | ---- |  | ----- | ---- |  |  | ----- | -
|                                               | 
|Year ended December 31                         |  | 2004 |       |   | 2005 |  |       | 2006 | 
|(in millions)                                  |  | EUR  |       |   | EUR  |  |       | EUR  | 
|                                               | 
|Total net sales                                |  |      | 2,465 |   |      |  | 2,529 |      |  |  | 3,597 |  
|Cost of sales                                  |  |      | 1,559 | 1 |      |  | 1,555 |      |  |  | 2,135 |  
|Gross profit on sales                          |  |      | 906   |   |      |  | 974   |      |  |  | 1,462 |  
|Research and development costs                 |  |      | 353   | 2 |      |  | 348   |      |  |  | 414   |  
|Research and development credits               |  |      | (22   | ) |      |  | (24   | )    |  |  | (28   | )
|Selling, general and administrative
    costs  |  |      | 202   |   |      |  | 201   |      |  |  | 205   |  
|Restructuring (credits)                        |  |      | (6    | ) |      |  | 0     |      |  |  | 0     |  
|Income from operations                         |  |      | 379   |   |      |  | 449   |      |  |  | 871   |  
|Interest expense, net                          |  |      | 16    |   |      |  | 14    |      |  |  | 1     |  
|Income from operations before
    income taxes |  |      | 363   |   |      |  | 435   |      |  |  | 870   |  
|Provision for income taxes                     |  |      | 128   |   |      |  | 124   |      |  |  | 245   |  
|Net income                                     |  |      | 235   | 2 |      |  | 311   |      |  |  | 625   |  
|                                              



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Includes reversal of restructuring charges of
    EUR 3 million.                                                                                                                                                                                                                                                                                                                                                                                                                              
|2 | In 2004, ASML, Nikon Corporation and Carl Zeiss SMT AG agreed to
    a comprehensive settlement of legal proceedings and
    cross-license of patents related to lithography equipment. This
    agreement had the following effects on ASMLs results for
    the year ended December 31, 2004 (i) an increase of
    EUR 49 million in our Research and Development costs and
    consequently a decrease in income from operations and
    (ii) a decrease of EUR 33 million in net income.









---



##### Table of Contents

Set forth below are our consolidated statements of operations
from continuing operations data for the three years ended
December 31, 2006, expressed as a percentage of our total
net sales:

|                                               |  |      |       |   |      |  |       |      |  |  |       |  
|---------------------------------------------- |  | ---- | ----- | - | ---- |  | ----- | ---- |  |  | ----- | -
|                                               | 
|Year ended December 31                         |  | 2004 |       |   | 2005 |  |       | 2006 | 
|                                               | 
|Total net sales                                |  |      | 100.0 | % |      |  | 100.0 | %    |  |  | 100.0 | %
|Cost of sales                                  |  |      | 63.3  | 1 |      |  | 61.5  |      |  |  | 59.4  |  
|Gross profit on sales                          |  |      | 36.7  |   |      |  | 38.5  |      |  |  | 40.6  |  
|Research and development costs                 |  |      | 14.3  | 2 |      |  | 13.8  |      |  |  | 11.5  |  
|Research and development credits               |  |      | (0.9  | ) |      |  | (1.0  | )    |  |  | (0.8  | )
|Selling, general and administrative
    costs  |  |      | 8.1   |   |      |  | 8.0   |      |  |  | 5.7   |  
|Restructuring credits                          |  |      | (0.2  | ) |      |  | 0.0   |      |  |  | 0.0   |  
|Income from operations                         |  |      | 15.4  |   |      |  | 17.8  |      |  |  | 24.2  |  
|Interest expense, net                          |  |      | 0.7   |   |      |  | 0.6   |      |  |  | 0.0   |  
|Income from operations before
    income taxes |  |      | 14.7  |   |      |  | 17.2  |      |  |  | 24.2  |  
|Provision for income taxes                     |  |      | 5.2   |   |      |  | 4.9   |      |  |  | 6.8   |  
|Net income                                     |  |      | 9.6   | 2 |      |  | 12.3  |      |  |  | 17.4  |  
|                                              



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Includes reversal of restructuring charges of 0.1 percent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2 | In 2004, ASML, Nikon Corporation and Carl Zeiss SMT AG agreed to
    a comprehensive settlement of legal proceedings and
    cross-license of patents related to lithography equipment. This
    agreement had the following effects on ASMLs results for
    year ended December 31, 2004 expressed as a percentage of
    net sales (i) an increase of 2.0 percent in our
    Research and Development costs and consequently a decrease in
    income from operations; (ii) a decrease of 1.3 percent
    in net income.

Results of operations from continuing operations 2006
compared with 2005


Consolidated sales and gross profit




|                                                     |  |           |       |  |           |  |       |      |  |  |           |  |  |           |       |  |      |  |       |  |  |  |       | 
|---------------------------------------------------- |  | --------- | ----- |  | --------- |  | ----- | ---- |  |  | --------- |  |  | --------- | ----- |  | ---- |  | ----- |  |  |  | ----- | 
|                                                     | 
|                                                     |  | 2005      |       |  |           |  | 2006  |     
|                                                     |  | First     |       |  | Second    |  |       | Full |  |  | First     |  |  | Second    |       |  | Full | 
|Year ended December 31                               |  | half year |       |  | half year |  |       | year |  |  | half year |  |  | half year |       |  | year | 
|                                                     | 
|Net sales (EUR million)                              |  |           | 1,448 |  |           |  | 1,081 |      |  |  | 2,529     |  |  |           | 1,571 |  |      |  | 2,026 |  |  |  | 3,597 | 
|Net system sales (EUR million)                       |  |           | 1,313 |  |           |  | 915   |      |  |  | 2,228     |  |  |           | 1,394 |  |      |  | 1,835 |  |  |  | 3,229 | 
|Net service and field option sales
    (EUR million) |  |           | 135   |  |           |  | 166   |      |  |  | 301       |  |  |           | 177   |  |      |  | 191   |  |  |  | 368   | 
|Total systems recognized                             |  |           | 110   |  |           |  | 86    |      |  |  | 196       |  |  |           | 123   |  |      |  | 143   |  |  |  | 266   | 
|Total new systems recognized                         |  |           | 94    |  |           |  | 62    |      |  |  | 156       |  |  |           | 97    |  |      |  | 123   |  |  |  | 220   | 
|Total used systems recognized                        |  |           | 16    |  |           |  | 24    |      |  |  | 40        |  |  |           | 26    |  |      |  | 20    |  |  |  | 46    | 
|Gross profit on sales (% of sales)                   |  |           | 39.6  |  |           |  | 37.1  |      |  |  | 38.5      |  |  |           | 40.3  |  |      |  | 40.9  |  |  |  | 40.6  | 
|ASP for systems (EUR million)                        |  |           | 11.9  |  |           |  | 10.6  |      |  |  | 11.4      |  |  |           | 11.3  |  |      |  | 12.8  |  |  |  | 12.1  | 
|ASP for new systems
    (EUR million)                |  |           | 13.5  |  |           |  | 13.6  |      |  |  | 13.5      |  |  |           | 13.6  |  |      |  | 14.3  |  |  |  | 14.0  | 
|ASP for used systems
    (EUR million)               |  |           | 2.8   |  |           |  | 2.9   |      |  |  | 2.9       |  |  |           | 2.8   |  |      |  | 3.7   |  |  |  | 3.2   | 
|                                                    





I-line










---



##### Table of Contents

From time to time, ASML repurchases systems that it has
manufactured and sold and, following factory-rebuild or
refurbishment, resells those systems to other customers. This
repurchase decision is mainly driven by market demand for
capacity expressed by other customers and not by explicit or
implicit contractual arrangements relating to the initial sale.
The number of used systems sold in 2006 increased to 46 from 40
in 2005, reflecting increased demand for older systems to
produce less complex ICs. The ASP for used systems increased
from EUR 2.9 million in 2005 to
EUR 3.2 million in 2006, reflecting a further shift
from our older PAS 2500 towards our newer PAS 5500 family and
TWINSCAN family.

Net service and field option sales showed a 22.3 percent
increase from EUR 301 million in 2005 to
EUR 368 million in 2006, resulting from increased
service as well as field option sales. The increase in service
sales was mainly driven by the growth of our system installed
base at customers. The growth of field option sales is
positively impacted by the availability and customer demand for
system upgrade packages that further enhance system performance.

Of the top 20 chipmakers worldwide, in terms of semiconductor
capital expenditures, 16 are customers of ASML. In 2006, sales
to one customer accounted for EUR 730 million, or
20 percent of our net sales. In 2005, sales to one customer
accounted for EUR 609 million, or 24 percent of our
net sales.

Gross profit increased compared to 2005, showing a growth of
50.1 percent from EUR 974 million or
38.5 percent of net sales in 2005 to 1,462 million or
40.6 percent of net sales in 2006. The increased gross margin
was positively impacted by decreased cost of goods
(5.2 percent positive impact on gross profit) reflecting
the results of our continuous cost of goods reduction program,
partly offset by a change in the product mix (2.1 percent
negative impact on gross profit) and slightly decreased prices
(0.8 percent negative impact on gross profit). The positive
impact on gross profit of the higher production volumes
(0.6 percent) and currency effects (0.4 percent) was
offset by the negative impact on gross profit of the higher cost
for obsolete inventories (0.4 percent) and the higher costs
for lens swaps (0.9 percent).

We started 2005 with an order backlog of 95 systems. In 2006, we
booked orders for 347 systems, received order cancellations or
push-outs beyond 12 months of 13 systems and recognized
sales for 266 systems. This resulted in an order backlog of
163 systems as of December 31, 2006. The total value
of our backlog as of December 31, 2006 amounted to
EUR 2.1 billion, compared with a backlog of
approximately EUR 1.4 billion as of December 31,
2005. See also Item 5.D. Trend Information.

Research and development

Research and development costs increased by 19.0 percent
from EUR 348 million in 2005 to EUR 414 million
in 2006. We further accelerated our investment in technology
leadership in 2006 through the investments in the newest
versions of our high resolution TWINSCAN systems and
enhancements of the next generation TWINSCAN systems based on
immersion, double patterning, EUV and the development of optical
mask less lithography. In the second quarter of 2006 we shipped
the first XT:1700i and the third quarter we introduced the
XT:1900i, both enhanced immersion systems. Also in the second
quarter of 2006, we shipped the industrys first EUV Alpha
Demo Tools to two research and development institutions.

Research and development credits increased from EUR
24 million in 2005 to EUR 28 million in 2006 due to an
increased volume of research and development projects that
qualified for credits under governmental funding programs.

Selling, general and administrative costs

Selling, general and administrative costs increased by only
2 percent from EUR 201 million in 2005 to
EUR 205 million in 2006 while sales grew by
42 percent. Cost reduction and efficiency programs
contributed to maintaining a near constant level of selling,
general and administrative costs.

Net interest expense

Net interest expense decreased from EUR 14 million in 2005
to EUR 1 million in 2006 due to decreased interest expenses
and increased interest income. Interest expense mainly relate to
our convertible subordinated notes, which had lower average
balances in 2006 mainly due to the conversion of the
USD 575 million 5.75 percent convertible notes
which were due October 15, 2006. Our interest income
relates primarily to interest earned on our cash and cash
equivalents. Our interest income increased in 2006 mainly as a
result of higher short term interest rates.



ASML ANNUAL REPORT 2006

29



---



##### Table of Contents

Income taxes

Income taxes represented 28.2 percent of income before
taxes in 2006, compared to 28.4 percent in 2005. The
decrease in income taxes in 2006 is mainly related to a
corporate tax rate reduction in the Netherlands.

Results of operations from continuing operations 2005
compared with 2004

Consolidated sales and gross profit

The following table sets forth a summary of sales (by revenue
and units sold), gross profit on sales and ASP data on an annual
and semi-annual basis for the years ended December 31, 2005
and 2004.

|                                                     |  |           |       |  |           |  |       |      |  |  |           |  |  |           |       |  |      |  |       |  |  |  |       | 
|---------------------------------------------------- |  | --------- | ----- |  | --------- |  | ----- | ---- |  |  | --------- |  |  | --------- | ----- |  | ---- |  | ----- |  |  |  | ----- | 
|                                                     | 
|                                                     |  | 2004      |       |  |           |  | 2005  |      |  | 
|                                                     |  | First     |       |  | Second    |  |       | Full |  |  | First     |  |  | Second    |       |  | Full | 
|Year ended December 31                               |  | half year |       |  | half year |  |       | year |  |  | half year |  |  | half year |       |  | year | 
|                                                     | 
|Net sales (EUR million)                              |  |           | 1,070 |  |           |  | 1,395 |      |  |  | 2,465     |  |  |           | 1,448 |  |      |  | 1,081 |  |  |  | 2,529 | 
|Net system sales (EUR million)                       |  |           | 933   |  |           |  | 1,242 |      |  |  | 2,175     |  |  |           | 1,313 |  |      |  | 915   |  |  |  | 2,228 | 
|Net service and field option sales
    (EUR million) |  |           | 137   |  |           |  | 153   |      |  |  | 290       |  |  |           | 135   |  |      |  | 166   |  |  |  | 301   | 
|Total systems recognized                             |  |           | 130   |  |           |  | 152   |      |  |  | 282       |  |  |           | 110   |  |      |  | 86    |  |  |  | 196   | 
|Total new systems recognized                         |  |           | 99    |  |           |  | 117   |      |  |  | 216       |  |  |           | 94    |  |      |  | 62    |  |  |  | 156   | 
|Total used systems recognized                        |  |           | 31    |  |           |  | 35    |      |  |  | 66        |  |  |           | 16    |  |      |  | 24    |  |  |  | 40    | 
|Gross profit on sales (% of sales)                   |  |           | 34.2  |  |           |  | 38.7  |      |  |  | 36.7      |  |  |           | 39.6  |  |      |  | 37.1  |  |  |  | 38.5  | 
|ASP for systems (EUR million)                        |  |           | 7.2   |  |           |  | 8.2   |      |  |  | 7.7       |  |  |           | 11.9  |  |      |  | 10.6  |  |  |  | 11.4  | 
|ASP for new systems (EUR million)                    |  |           | 8.7   |  |           |  | 9.8   |      |  |  | 9.3       |  |  |           | 13.5  |  |      |  | 13.6  |  |  |  | 13.5  | 
|ASP for used systems (EUR million)                   |  |           | 2.3   |  |           |  | 2.9   |      |  |  | 2.6       |  |  |           | 2.8   |  |      |  | 2.9   |  |  |  | 2.9   | 
|                                                    























---



##### Table of Contents

December 31, 2005 amounted to EUR 1.4 billion,
compared with a backlog of approximately EUR 1.7 billion as
of December 31, 2004.

Research and development

Research and development costs decreased from EUR
353 million in 2004 to EUR 348 million in 2005. This
decrease in research and development costs is primarily due to a
charge in 2004 of EUR 49 million with respect to a
cross-license agreement entered into with Nikon (see Note 8
to our consolidated financial statements for more information).
Excluding this one-time charge in 2004 there was an increase in
research and development spending in 2005 of 15 percent intended
to further accelerate our investment in technological
leadership. Our primary investments in research and development
in 2005 related to the newest versions of our high resolution
TWINSCAN systems and our next generation TWINSCAN systems based
on immersion and EUV.

Research and development credits increased from EUR
22 million in 2004 to EUR 24 million in 2005 due
to an increased volume of research and development projects that
qualified for credits under governmental funding programs.

Selling, general and administrative costs

Selling, general and administrative costs remained stable on a
level of approximately EUR 201 million for both 2004 and
2005. Selling, general and administrative costs as a percentage
of net sales decreased from 8.2 percent in 2004 to
8.0 percent in 2005, primarily due to higher net sales.

Restructuring costs (credits)

Restructuring credits of EUR 6 million in 2004 are
adjustments to the 2003 restructuring plans. In 2005 we did not
record any restructuring expenses or credits.

Net interest expense

Net interest expense decreased from EUR 16 million in 2004
to EUR 14 million in 2005 due to an increase in interest
income, partially offset by an increase in interest expense. Our
interest income related primarily to interest earned on our cash
and cash equivalents, which had higher balances in 2005 as a
result of an increase in cash flows from operations. Our
interest expense related primarily to our convertible
subordinated notes.

Income taxes

Income taxes represented 28.4 percent of income before
taxes in 2005, compared to 35.1 percent in 2004. The
decrease in income taxes in 2005 is mainly related to a
corporate tax rate reduction in the Netherlands.

Foreign Exchange Management

See Item 3.D. Risk Factors, Fluctuations in Foreign
Exchange Rates Could Harm Our Results of Operations,
Item 11 Quantitative and Qualitative Disclosures
About Market Risk and Note 4 to our consolidated
financial statements.

New U.S. GAAP Accounting Pronouncements

In February 2006, the FASB issued FSP FAS 123R-4,
Classification of Options and Similar Instruments Issued
as Employee Compensation That Allow for Cash Settlement Upon the
Occurrence of a Contingent Event.
SFAS No. 123 (R) originally required liability
classification for options or similar instruments if the entity
can be required under any circumstances to settle the options or
similar instruments by transferring cash or other assets. This
FSP clarifies that equity classification is appropriate, if the
occurrence of a contingent event that could require a cash
settlement feature is not probable. If the contingent event is
within the control of the employee, liability classification is
required regardless of the probability. An option or similar
instrument that is classified as equity, but subsequently
becomes a liability because the contingent cash settlement event
is considered probable, shall be accounted for similar to a
modification from an equity to liability award. The guidance in
this FSP shall be applied upon initial adoption of Statement
123 (R) on January 1, 2006. In 2006, the impact of
this FSP was insignificant on our consolidated financial
statements.

In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments.
This Statement amends SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities and
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities and permits, among other things, fair value
remeasurement for any hybrid financial instrument that contains
an embedded derivative that otherwise would require bifurcation.
SFAS No. 155 has to be adopted for all financial
instruments acquired, issued, or subject to a remeasurement (new
basis) event occurring after the beginning of an entitys
first fiscal year that begins after September 15, 2006. We
do not expect that the adoption of SFAS No. 155 will
have a material impact on our consolidated financial statements.

In June 2006, the FASB issued Interpretation 48,
Accounting for Uncertainty in Income Taxes.
FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprises financial statements in
accordance with SFAS No. 109,



ASML ANNUAL REPORT 2006

31



---



##### Table of Contents

Accounting for Income Taxes. FIN 48 prescribes
a two step approach for recognizing and measuring tax positions
taken or expected to be taken in tax return(s). Prior to
recognizing the benefit of a tax position in the financial
statements, the tax position must be more-likely-than-not to be
sustained based solely on its technical merits. Once this
recognition threshold has been met, tax positions are recognized
at the largest amount that is more-likely-than-not to be
sustained. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 will be
effective for fiscal years beginning after December 15,
2006. Any differences between the amounts recognized in the
financial statements prior to the adoption of FIN 48 and
the amounts reported after adoption will be accounted for as a
cumulative-effect adjustment recorded to the beginning balance
of retained earnings. We are currently in the process of
determining the impact of adopting the provisions of
Interpretation 48 on our consolidated financial statements.

In June 2006, the FASB ratified the consensus reached by the
EITF on Issue
No. 06-03,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation). EITF
No. 06-03 permits
registrants to elect to present vendor taxes imposed
concurrently on a specific revenue-producing transaction between
a seller and a customer on either a gross or net basis. The
scope of EITF
No. 06-03 includes
government assessed taxes that are directly imposed on
revenue-producing transactions between a seller and a customer
and may include, but is not limited to, sales, use, value added
and some excise taxes. Registrants are to be required to
disclose their policies for presenting the taxes and would
disclose any amounts presented on a gross basis. EITF
No. 06-03 will be
effective for interim and annual financial statements issued for
periods beginning after December 15, 2006. We believe that
the adoption of EITF
No. 06-03 will
have no material impact on our consolidated financial statements.

The SEC issued Staff Accounting Bulletin No. 108
(SAB 108) regarding the process of quantifying
financial statement misstatements on September 13, 2006.
SAB 108 states that registrants should use both a balance
sheet (iron curtain) approach and an income statement
(rollover) approach when quantifying and evaluating the
materiality of a (prior year) misstatement. The bulletin
furthermore contains guidance on correcting errors. The bulletin
is effective for financial statements for fiscal years ending
after November 15, 2006. We adopted SAB 108 in 2006.
SAB 108 did not have a material impact on our
(previous) consolidated financial statements.

The FASB issued SFAS No. 157, Fair Value
Measurements on September 15, 2006. The Statement
defines fair value, provides guidance on how to measure assets
and liabilities using fair value and expands disclosures about
fair value measurements. The Statement is effective for
financial statements issued for fiscal years beginning after
November 15, 2007 and should be applied prospectively (with
a limited form of retrospective application) as of the beginning
of the fiscal year in which the Statement is initially applied.
We do not believe that the adoption of SFAS No. 157
will have a material impact on our consolidated financial
statements.





B. Liquidity and Capital Resources

The following discussion and analysis of financial condition
should be viewed in the context of the risks affecting our
business, described in Item 3.D. Risk Factors.

Our balance of cash and cash equivalents amounted to EUR
1,905 million and EUR 1,656 million as of
December 31, 2005 and 2006, respectively.

We generated cash from operating activities of EUR
711 million and EUR 478 million for 2005 and 2006,
respectively. The primary components of cash provided by
operating activities in 2006 were net income (EUR
625 million) plus non-cash expenses including unpaid taxes
(EUR 189 million) mainly related to depreciation,
impairment charges and inventory obsolescence partially offset
by a cash outflow of EUR 337 million due to investments in
working capital. The investments in working capital mainly
relate to higher accounts receivable of EUR 362 million,
higher inventories of EUR 85 million, partly offset by
higher accrued liabilities of EUR 154 million.

We used EUR 61 million for investing activities in 2005 and
EUR 66 million in 2006. The majority of the 2005 and 2006
expenditures was spent on machinery and equipment and
information technology investments.

Net cash used by financing activities was EUR 648 million
in 2006 compared to a cash inflow of EUR 3 million in 2005.
Cash used for share buyback programs (including the costs of
call options bought on own shares) was approximately EUR
678 million in 2006. See also Item 16.E
Purchases of Equity Securities by the Issuer and
Affiliated Purchasers. In addition, proceeds from
financing activities included EUR 38 million with respect
to proceeds from the exercise of stock options in 2006.

Our principal sources of liquidity consist of EUR
1,656 million of cash and cash equivalents as of
December 31, 2006, EUR 400 million of available
credit facilities as of December 31, 2006 and cash flows
from operations. For further details of our credit facilities,
see Note 11 to our consolidated financial statements. In
addition to cash and available credit facilities, we may from
time to time raise additional capital in debt and equity
markets. Our liquidity needs are affected by many factors, some
of which are based on the normal ongoing operations of the
business, and others which relate to the uncertainties of global



ASML ANNUAL REPORT 2006

32



---



##### Table of Contents

economies and the semiconductor industries. Although our cash
requirements will fluctuate based on the timing and extent of
these factors, we believe that cash generated from operations,
together with the liquidity provided by existing cash balances,
are sufficient to satisfy our present requirements.

We expect to steadily improve our cash conversion cycle during
2007 although we expect substantial cash outflow from operations
due to income taxes and from investing activities due to our
intended acquisition of Brion and other capital expenditures. We
expect an increase in cash outflow in 2007 with respect to
income taxes as our tax losses carried forward in the
Netherlands were substantially utilized at the end of 2006. In
addition, we intend to acquire 100 percent of the
outstanding shares of Brion subject to approval by regulatory
authorities, for a total consideration of USD 270 million
(approximately EUR 203 million) in cash. Other capital
expenditures in 2007 are expected to be approximately EUR
250 million, up EUR 150 million above the level in
2006. A significant part of the additional 2007 capital
expenditures will be allocated to construction and upgrades of
production facilities in the Netherlands. See also
Item 4.D.Property, Plants and Equipment.

We intend to execute a program to buy back the remaining
1.7 percent of a maximum of 10 percent of outstanding
ordinary shares as authorized by the Annual General Meeting of
Shareholders on March 23, 2006. These shares will either be
used to cover outstanding stock options or be cancelled.

We reiterate our commitment to return excess cash to our
shareholders by reducing the number of shares outstanding: we
will prepare for additional potential share buyback programs to
be executed, subject to authorization by the Annual General
Meeting of Shareholders on March 28, 2007.

We have repayment obligations in 2010, amounting to EUR
380 million, on our 5.50 percent Convertible
Subordinated Notes due 2010 issued in May 2003, assuming no
conversions occur. These notes are convertible into an aggregate
of 26,573,426 ordinary shares at a conversion price of EUR 14.30
per share at any time prior to maturity. We currently intend to
fund any future repayment obligations under our convertible
notes primarily with cash on hand and cash generated through
operations. A description of our convertible notes, lines of
credit and borrowing arrangements is provided in Note 11 to
our consolidated financial statements. See also Item 3.D.
Risk Factors.

Our contractual obligations and commercial commitments are
disclosed in further detail in Item 5.F. Tabular
Disclosure of Contractual Obligations and Note 12 to
our consolidated financial statements.

See Notes 4 and 11 to our consolidated financial statements
for discussion of our funding, treasury policies and currencies
in which cash and cash equivalents are held and convertible
notes and other borrowing arrangements.





C. Research and Development, Patents and Licenses

Research and Development

See Item 4.B. Business Overview, Research and
Development and Item 5.A. Operating
Results.

Intellectual Property Matters

See Item 3.D. Risk Factors, Defending Against
Intellectual Property Claims by Others Could Harm Our
Business and Item 4.B. Business Overview,
Intellectual Property.





D. Trend Information

In 2006, ASML revenues saw strong growth due to significant
growth in semiconductor unit demand among other things due to a
strong capacity build-up by our customers, especially in flash
memory. The number of systems shipped was higher due to a change
in market demand from leading edge in 2005 to both high-volume
production and leading-edge (65nm and 45nm IC manufacturing) in
2006. The ASPs were higher due to product mix changes reflecting
the continuous shift in market demand to our leading edge
technology systems with higher ASPs driven by the shrink
roadmaps of our customers. See also Item 5 Operating
and Financial Review and Prospects, Semiconductor equipment
industry update.

Operational outlook

In view of current market forecasts by semiconductor industry
analysts, our strong position in immersion and our potential for
further market share gains across all segments, we expect 2007
to be another year of increased sales, confirming the
companys growth path towards our goal of a level of
5 billion euros in sales by 2010. Our expectation is
supported by our strong backlog and the expected industry
ramp-up of immersion volume manufacturing in 2007. We expect
front-loading of flash memory capacity build-up in the first
half of 2007 and a strong uptake of the TWINSCAN XT:1900i in the
second half of 2007. This new immersion system will serve as a
development and production vehicle for the sub-45-nanometer
node. Although exact first quarter 2007 unit bookings are
difficult to predict, due to customer lead-time variability, we
expect a healthy first quarter 2007 order level to sustain our
growth outlook for 2007.



ASML ANNUAL REPORT 2006

33



---



##### Table of Contents

Financial outlook

The following table sets forth our backlog of systems as of
December 31, 2005 and 2006.

|                                                    |  |      |       |  |      |  |       | 
|--------------------------------------------------- |  | ---- | ----- |  | ---- |  | ----- | 
|                                                    | 
|As of December 31                                   |  | 2005 |       |  | 2006 | 
|                                                    | 
|Backlog sales of new systems (units)                |  |      | 86    |  |      |  | 153   | 
|Backlog sales of used systems
    (units)           |  |      | 9     |  |      |  | 10    | 
|Backlog sales of total systems
    (units)          |  |      | 95    |  |      |  | 163   | 
|Value of backlog new systems (EUR
    million)      |  |      | 1,411 |  |      |  | 2,120 | 
|Value of backlog used systems (EUR
    million)     |  |      | 23    |  |      |  | 26    | 
|Value of backlog of total systems
    (EUR million) |  |      | 1,434 |  |      |  | 2,146 | 
|ASP for new systems (EUR million)                   |  |      | 16.4  |  |      |  | 13.9  | 
|ASP for used systems (EUR million)                  |  |      | 2.6   |  |      |  | 2.6   | 
|ASP for total systems (EUR million)                 |  |      | 15.1  |  |      |  | 13.2  | 
|                                                   












E. Off-Balance Sheet Arrangements




Variable Interest Entities
















---



##### Table of Contents

ASMLs maximum exposure to the lessors expected
losses is estimated to be approximately EUR 5.4 million.

Purchase Obligations

We enter into purchase commitments with vendors in the ordinary
course of business to ensure a smooth and continuous supply
chain for key components. Purchase obligations include medium to
long-term purchase agreements. These contracts differ and may
include certain restrictive clauses. Any identified losses that
result from purchase commitments that are forfeited are provided
for in our financial statements. As of December 31, 2006,
we had purchase commitments for a total amount of approximately
EUR 995 million, compared to EUR 676 million as of
December 31, 2005, reflecting our increased backlog level
at the end of 2006. In our negotiations with suppliers we
continuously seek to align our purchase commitments with our
business objectives. See also Item 5.F. Tabular
Disclosure of Contractual Obligations.

Other Off-Balance Sheet Arrangements

We have certain additional commitments and contingencies that
are not recorded on our balance sheet but may result in future
cash requirements.

We provide guarantees to third parties in connection with
transactions entered into in the ordinary course of business
from time to time.

Intended acquisition Brion

We intend to acquire 100 percent of the outstanding shares
of Brion, subject to approval by regulatory authorities, for a
total consideration of USD 270 million (approximately
EUR 203 million) in cash.





F. Tabular Disclosure of Contractual Obligations

Our contractual obligations as of December 31, 2006 can be
summarized as follows:

|                                                           |  |           |           |  |        |  |           |           |  |  |           |  |  |         |         |  |  |  |        | 
|---------------------------------------------------------- |  | --------- | --------- |  | ------ |  | --------- | --------- |  |  | --------- |  |  | ------- | ------- |  |  |  | ------ | 
|                                                           | 
|                                                           |  | Less than |           |  |        |  | After     |          
|Payments due by period                                     |  | Total     |           |  | 1 year |  |           | 1-3 years |  |  | 3-5 years |  |  | 5 years |        
|(in thousands)                                             |  | EUR       |           |  | EUR    |  |           | EUR       |  |  | EUR       |  |  | EUR     |        
|                                                           | 
|Long Term Debt Obligations,
    including interest expense |  |           | 455,214   |  |        |  | 21,516    |           |  |  | 42,754    |  |  |         | 390,944 |  |  |  | 0      | 
|Operating Lease Obligations                                |  |           | 187,742   |  |        |  | 31,210    |           |  |  | 50,511    |  |  |         | 35,893  |  |  |  | 70,128 | 
|Purchase Obligations                                       |  |           | 995,047   |  |        |  | 991,292   |           |  |  | 3,546     |  |  |         | 209     |  |  |  | 0      | 
|Other
    Liabilities1                                     |  |           | 30,793    |  |        |  | 6,834     |           |  |  | 23,959    |  |  |         | 0       |  |  |  | 0      | 
|                                                          
|                                                          
|Total Contractual Obligations                              |  |           | 1,668,796 |  |        |  | 1,050,852 |           |  |  | 120,770   |  |  |         | 427,046 |  |  |  | 70,128 | 
|                                                          



|  |                                                                                                                                                                                                                                                                                                                                                   
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Other liabilities relate to the additional payment to Nikon due
    in 2007 with respect to a cross-license of patents related to
    lithography equipment. (See Item 10.C. Material
    Contracts for a summary of the Nikon-ASML Cross License
    Agreement and the ASML/ Zeiss Sublicense Agreement) and system
    repurchase commitments.



|                 |  |           |        |  |        |  |       |           |  |  |           |  |  |         |       |  |  |  |        | 
|---------------- |  | --------- | ------ |  | ------ |  | ----- | --------- |  |  | --------- |  |  | ------- | ----- |  |  |  | ------ | 
|                 | 
|                 |  | Less than |        |  |        |  | After |          
|                 |  | Total     |        |  | 1 year |  |       | 1-3 years |  |  | 3-5 years |  |  | 5 years |      
|(in thousands)   |  | EUR       |        |  | EUR    |  |       | EUR       |  |  | EUR       |  |  | EUR     |      
|                 | 
|Purchase options |  |           | 61,362 |  |        |  | 0     |           |  |  | 5,627     |  |  |         | 8,250 |  |  |  | 47,485 | 
|                




G. Safe Harbor












---



##### Table of Contents

Item 6 Directors, Senior Management and Employees





A. Directors and Senior Management

The members of our Supervisory Board and our Board of Management
are as follows:

|                                  |  |                                                                                             |  |               |      |  |              |  |      | 
|--------------------------------- |  | ------------------------------------------------------------------------------------------- |  | ------------- | ---- |  | ------------ |  | ---- | 
|                                  | 
|Name                              |  | Title                                                                                       |  | Year of Birth |      |  | Term Expires | 
|                                  | 
|Henk
    Bodt1, 2,
    3          |  | Chairman of the Supervisory Board                                                           |  |               | 1938 |  |              |  | 2007 | 
|Jan A.
    Dekker1,
    4         |  | Member of the Supervisory Board                                                             |  |               | 1939 |  |              |  | 2009 | 
|Jos W.B.
    Westerburgen2,
    3 |  | Member of the Supervisory Board                                                             |  |               | 1942 |  |              |  | 2009 | 
|Fritz W.
    Fröhlich1            |  | Member of the Supervisory Board                                                             |  |               | 1942 |  |              |  | 2008 | 
|Arthur P.M. van der Poel
    3,4  |  | Member of the Supervisory Board                                                             |  |               | 1948 |  |              |  | 2008 | 
|Ieke C.J. van den
    Burg2       |  | Member of the Supervisory Board                                                             |  |               | 1952 |  |              |  | 2009 | 
|OB
    Bilous4                    |  | Member of the Supervisory Board                                                             |  |               | 1938 |  |              |  | 2009 | 
|Eric Meurice                      |  | President, Chief Executive Officer
    and Chairman of the Board of Management              |  |               | 1956 |  |              |  | 2008 | 
|Peter T.F.M. Wennink              |  | Executive Vice President, Chief
    Financial Officer and Member of the Board of Management |  |               | 1957 |  |              |  | N/A5 | 
|Martin A. van den Brink           |  | Executive Vice President Marketing
    & Technology and Member of the Board of Management   |  |               | 1957 |  |              |  | N/A5 | 
|Klaus P. Fuchs                    |  | Executive Vice President Operations
    and Member of the Board of Management               |  |               | 1958 |  |              |  | 2010 | 
|                                 



|  |                                                                                                      
|- | -----------------------------------------------------------------------------------------------------
|1 | Member of the Audit Committee                                                                        
|2 | Member of the Remuneration Committee                                                                 
|3 | Member of the Selection and Nomination Committee                                                     
|4 | Member of the Technology and Strategy Committee                                                      
|5 | There are no specified terms for members of the Board of
    Management appointed prior to March 2004







Director and Officer Biographies


Henk Bodt


Neo-Post


Jan A. Dekker




Jos W.B. Westerburgen












---



##### Table of Contents

currently serves as a member of the Supervisory Board of Rodamco
Europe N.V. and is also Vice-Chairman of the Board of the
Association Aegon.

Fritz W. Fröhlich

Mr. Fröhlich was appointed to our Supervisory Board in
March 2004. He is the former Deputy Chairman and Chief Financial
Officer of Akzo Nobel N.V. Mr. Fröhlich is the
Chairman of the Supervisory Boards of Randstad Holding N.V. and
Draka Holding N.V. and serves as a member of the Supervisory
Boards of Allianz Nederland N.V. and Gamma Holding N.V.

Arthur P.M. van der Poel

Mr. Van der Poel was appointed to our Supervisory Board in
March 2004. Until 2001 he was the Chief Executive Officer of
Philips Semiconductors. Mr. Van der Poel is a former member
of the Board of Management (until April 2003) and a former
member of the Group Management Committee of Royal Philips
Electronics. Mr. Van der Poel is the chairman of the Board
of MEDEA+, a member of the Board of Directors of Gemalto Holding
N.V., a director of the Public Utility Fund (PUF-NRE) and serves
as a member of the Supervisory Boards of PSV N.V. and DHV
Holding B.V.

Ieke C.J. van den Burg

Ms. Van den Burg was appointed to our Supervisory Board in
March 2005. She is a former member of the Dutch Social and
Economic Council and of the EU Economic and Social Committee.
Ms. Van den Burg also held various positions in Dutch and
international trade union and labor organizations. Ms. Van
den Burg has been a member of the European Parliament
(EP) since 1999 and has served on the EPs
Committee on Economic and Monetary Affairs since 1999 and on the
Committee on the Internal Market and Customer Protection since
2004.

OB Bilous

Mr. Bilous was appointed to our Supervisory Board in March
2005. From 1960 until 2000 Mr. Bilous held various
management positions at IBM, including General Manager and VP
Worldwide Manufacturing of IBMs Microelectronics Division.
He also served on the Boards of SMST, ALTIS Semiconductor and
Dominion Semiconductor. Mr. Bilous currently serves as
Chairman of the Board of Directors of International Sematech and
as Board member of Nantero, Inc.

Eric Meurice

Mr. Meurice joined ASML on October 1, 2004 as
President, Chief Executive Officer and Chairman of the Board of
Management. Prior to joining ASML, and since March 2001, he was
Executive Vice President  Thomson Television
Worldwide. Between 1995 and 2001, Mr. Meurice served as
Vice President for Dell Computer, where he ran the Western,
Eastern Europe and Dells Emerging Markets business within
EMEA. Before 1995, he gained extensive technology experience in
the semiconductor industry at ITT Semiconductors Group and Intel
Corporation, in the micro-controller group. Mr. Meurice is
currently a member of the Board of Directors of Verigy Inc.

Peter T.F.M. Wennink

Mr. Wennink was appointed as Executive Vice President and
Chief Financial Officer of ASML in 1999. Mr. Wennink has an
extensive background in finance and accounting. Prior to his
employment with ASML, Mr. Wennink worked as a partner at
Deloitte Accountants, specializing in the high technology
industry with an emphasis on the semiconductor equipment
industry. Mr. Wennink is a member of the Netherlands
Institute of Registered Accountants. Mr. Wennink is
currently a member of the Supervisory Board of Bank Insinger de
Beaufort N.V.

Martin A. van den Brink

Mr. Van den Brink was appointed as Executive Vice President
Marketing & Technology in 1999. Before that, he served as
Vice President Technology since 1995. Mr. Van den Brink was
appointed as a member of our Board of Management in July 1999.

Klaus P. Fuchs

Mr. Fuchs was appointed as Executive Vice President
Operations in 2006. Since 2003, Mr. Fuchs has served as
Vice President of Linde AG in Wiesbaden, Germany where he was
responsible for strategic direction and operations of its
industrial sector. Before that he was technical director and
member of the executive board at TRW Aerospace and he also
gained experience at Daimler Benz Aerospace as Vice President of
electronic systems.



ASML ANNUAL REPORT 2006

37



---



##### Table of Contents

B. Compensation

For details on Board of Management and Supervisory Board
remuneration as well as benefits upon termination of executive
employment, see Note 17 to our consolidated financial
statements.

Bonus and Profit-sharing plans

For details on our bonus and profit sharing plans for our
employees, see Note 13 to our consolidated financial
statements.

Pension plans

For details on our pension plans for our employees, see
Note 13 to our consolidated financial statements.





C. Board Practices

Board Practices

General

We endorse the importance of good corporate governance, in which
independent oversight, accountability and transparency are the
most significant elements. Within the framework of corporate
governance, it is important that a relationship of trust exists
between the Board of Management, the Supervisory Board, our
employees and our shareholders.

In addition to the exchange of ideas at the General Meeting of
Shareholders, other important forms of communication include the
publication of our annual and quarterly financial results as
well as press releases and publications posted on our website.
In addition, we pursue a policy of active communication with our
shareholders. Our corporate governance structure is intended to:


    provide shareholders with regular, reliable and relevant
    transparent information regarding our activities, structure,
    financial condition, performance and other information,
    including information on our social, ethical and environmental
    records and policies;
    apply high quality standards for disclosure, accounting and
    auditing; and
    apply stringent rules with regard to insider securities trading.Two-tier structure

ASML is incorporated under Netherlands law and has a two-tier
board structure. Responsibility for the management of ASML lies
with the Board of Management. Independent, non-executive members
serve on the Supervisory Board, which supervises and advises the
members of the Board of Management in performing their
management tasks. The Board of Management has the duty to keep
the Supervisory Board informed, consult with the Supervisory
Board on important matters and submit certain important
decisions to the Supervisory Board for its prior approval. The
supervision of the Board of Management by the Supervisory Board
includes (i) achievement of ASMLs objectives,
(ii) corporate strategy and management of risks inherent to
ASMLs business activities, (iii) the structure and
operation of internal risk management and control systems,
(iv) the financial reporting process and
(v) compliance with applicable legislation and regulations.

Supervisory Board members are prohibited from serving as
officers or employees of ASML, and members of the Board of
Management cannot serve on the Supervisory Board.

Board of Management

The Board of Management consists of at least two members or such
larger number of members as determined by the Supervisory Board.
Members of the Board of Management are appointed by the
Supervisory Board. The Supervisory Board must notify the General
Meeting of Shareholders of the intended appointment of a member
of the Board of Management. As a result of our compliance with
the Netherlands Corporate Governance Code, members of the Board
of Management that are appointed in 2004 or later shall be
appointed for a maximum period of four years, but may be
re-appointed. Members of the Board of Management serve until the
end of the term of their appointment, voluntary retirement, or
suspension or dismissal by the Supervisory Board. In the case of
dismissal, the Supervisory Board must first inform the General
Meeting of Shareholders of the intended removal.

The Supervisory Board determines the remuneration of the
individual members of the Board of Management, in line with the
remuneration policy adopted by the General Meeting of
Shareholders, upon a proposal of the Supervisory Board.
ASMLs remuneration policy is posted on its website.

Supervisory Board

The Supervisory Board consists of at least three members or such
larger number as determined by the Supervisory Board. The
Supervisory Board prepares a profile in relation to its size and
composition; ASMLs Supervisory Board profile is posted on
ASMLs website.



ASML ANNUAL REPORT 2006

38



---



##### Table of Contents

Members of the Supervisory Board are appointed by the General
Meeting of Shareholders from nominations of the Supervisory
Board. Nominations must be reasoned and must be made available
to the General Meeting of Shareholders and the Works Council
simultaneously. Before the Supervisory Board presents its
nominations, both the General Meeting of Shareholders and the
Works Council may make recommendations (which the Supervisory
Board may reject). In addition, the Works Council has an
enhanced right to make recommendations for nomination of at
least one-third of the members of the Supervisory Board, which
recommendation may only be rejected by the Supervisory Board:
(i) if the relevant person is unsuitable or (ii) if
the Supervisory Board would not be duly composed if the
recommended person were appointed as a Supervisory Board member.
If no agreement can be reached between the Supervisory Board and
the Works Council on these recommendations, the Supervisory
Board may request the Enterprise Chamber of the Amsterdam Court
to declare its objection legitimate. Any decision of the
Enterprise Chamber on this matter is non-appealable.

Nominations of the Supervisory Board may be overruled by the
General Meeting of Shareholders by an absolute majority of the
votes representing at least one third of the total outstanding
capital. If the votes cast in favour of such resolution do not
represent at least one third of the total outstanding capital, a
new meeting can be convened at which the nomination can be
overruled by an absolute majority. If a nomination is overruled,
the Supervisory Board must make a new nomination. If a
nomination is not overruled and the General Meeting of
Shareholders do not appoint the nominated person, the
Supervisory Board will appoint the nominated person.

Members of the Supervisory Board serve for a maximum term of
four years from the date of their appointment, or a shorter
period as set forth in the rotation schedule as adopted by the
Supervisory Board, and may be re-appointed, provided that their
entire term of office does not exceed twelve years. The General
Meeting of Shareholders may, by an absolute majority of the
votes representing at least one-third of the total outstanding
capital, dismiss the Supervisory Board in its entirety for lack
of confidence. In such event, the Enterprise Chamber of the
Amsterdam Court shall appoint one or more members of the
Supervisory Board at the request of the Board of Management.

Upon the proposal of the Supervisory Board, the General Meeting
of Shareholders determines the remuneration of the members of
the Supervisory Board. A member of the Supervisory Board shall
not be granted any shares or option rights by way of
remuneration.

Approval of Board of Management Decisions

The Board of Management requires prior approval of the General
Meeting of Shareholders for resolutions concerning an important
change in the identity or character of ASML or its business,
including in any case:


    a transfer of all or substantially all of the business of ASML
    to a third party;
    entering into or the termination of a long-term joint venture
    between ASML and a third party, if this joint venture is
    material to ASML; and
    an acquisition or divestment by ASML of an interest in the
    capital of a company with a value of at least one third of
    ASMLs assets (determined by reference to ASMLs most
    recently adopted annual accounts).Rules of Procedure

The Board of Management and the Supervisory Board have adopted
Rules of Procedure for each of the Board of Management,
Supervisory Board and the four Committees of the Supervisory
Board. These Rules of Procedure are posted on ASMLs
website.

Directors and Officers Insurance and
Indemnification

Members of the Board of Management and Supervisory Board, as
well as certain senior management members, are insured under the
ASMLs Directors and Officers Insurance Policy. Although
the insurance policy provides for a wide coverage, our directors
and officers may incur uninsured liabilities. ASML has
indemnified its Board of Management and Supervisory Board
against any claims arising in connection with their position as
director and officer of the Company, provided that such claim is
not attributable to willful misconduct or intentional
recklessness of such officer or director.

Corporate Governance Developments

ASML continuously monitors and assesses applicable corporate
governance rules, including recommendations and initiatives
regarding principles of corporate governance. These include
rules that have been promulgated in the United States both by
the NASDAQ Global Select Market (Nasdaq) and by the
SEC pursuant to the Sarbanes-Oxley Act of 2002.

The Netherlands Corporate Governance Code (the Code)
came into effect on January 1, 2004. A full report on
ASMLs compliance with the Code is required to be included
in a companys statutory annual report. Netherlands listed
companies are required to either comply with the principles and
the best practice provisions of the Code, or to explain on which
points they deviate from these best practice provisions and why.



ASML ANNUAL REPORT 2006

39



---



##### Table of Contents

Pursuant to the Codes recommendations, ASML has included a
separate chapter on corporate governance in both its annual
reports. The Code contains recommendations with regard to
corporate governance, including on the following topics:


    strengthening the role of the Supervisory Board and its
    committees and increasing its independence, quality and
    expertise;
    strengthening the role of the shareholders with respect to
    control on the functioning of the Board of Management and the
    Supervisory Board, as well as with respect to nomination and
    remuneration of members of the Board of Management and with
    respect to the nomination of members of the Supervisory Board;
    facilitating and encouraging shareholders to use their voting
    power and to actively participate in the General Meeting of
    Shareholders; and
    defining the role of the external auditor vis-à-vis the
    Supervisory Board as its principal contact.Committees of ASMLs Supervisory Board

The Supervisory Board has an Audit Committee, a Remuneration
Committee, a Selection and Nomination Committee and a Technology
and Strategy Committee. Members of these committees are
appointed from among the Supervisory Board members.

Audit Committee

ASMLs Audit Committee is composed of three members of the
Supervisory Board. The current members of our Audit Committee
are Fritz Fröhlich (chairman), Henk Bodt and Jan Dekker,
each of whom is an independent, non-executive member of the
Supervisory Board. The Supervisory Board has determined that
Fritz Fröhlich qualifies as the Audit Committee financial
expert pursuant to Section 407 of the Sarbanes-Oxley Act of
2002 and the rules promulgated thereunder. Our external auditor,
our Chief Executive Officer, our Chief Financial Officer, our
Corporate Controller as well as other ASML employees invited by
the chairman of the Audit Committee may also attend the meetings
of the Audit Committee.

The Audit Committee assists the Supervisory Board in:


    overseeing the integrity of our financial statements and related
    non-financial disclosure;
    overseeing the qualifications, independence and performance of
    the external auditor; and
    overseeing the integrity of our systems of disclosure controls
    and procedures and the system of internal controls regarding
    finance and accounting.The Audit Committee held six meetings in 2006. At these meetings
the Audit Committee, reviewed our quarterly earnings
announcements and our audited annual consolidated financial
statements, discussed the system of internal controls over
financial reporting and related audit findings, approved the
internal and external audit plan and related audit fees and
pre-approved any audit and non-audit services to be rendered by
our external auditor.

Remuneration Committee

ASMLs Remuneration Committee is composed of three members
of the Supervisory Board. The current members of our
Remuneration Committee are Jos Westerburgen (chairman), Henk
Bodt and Ieke van den Burg. The Remuneration Committee is
responsible for the preparation of the remuneration policy for
the Board of Management.

The Remuneration Committee prepares and the Supervisory Board
establishes ASMLs general compensation philosophy for
members of the Board of Management, and oversees the development
and implementation of compensation programs for members of the
Board of Management. The Remuneration Committee reviews and
proposes to the Supervisory Board corporate goals and objectives
relevant to the compensation of members of the Board of
Management. The Committee further evaluates the performance of
members of the Board of Management in view of those goals and
objectives, and makes recommendations to the Supervisory Board
on the compensation levels of the members of the Board of
Management based on this evaluation.

In proposing to the Supervisory Board the actual remuneration
elements and levels applicable to the members of the Board of
Management, the Remuneration Committee considers, among other
factors, the remuneration policy, the desired levels of and
emphasis on particular aspects of ASMLs short and
long-term performance, as well as current compensation and
benefits structures and levels benchmarked against relevant
peers. External compensation survey data and, where necessary,
external consultants are used to benchmark ASMLs
remuneration levels and structures.

In 2006, the Remuneration Committee held five regularly
scheduled meetings.

Selection and Nomination Committee

ASMLs Selection and Nomination Committee is composed of
three members of the Supervisory Board. The current members of
our Selection and Nomination Committee are Jos Westerburgen
(chairman), Henk Bodt and Arthur van der Poel.



ASML ANNUAL REPORT 2006

40



---



##### Table of Contents

The Selection and Nomination Committee assists the Supervisory
Board in:


    preparing the selection criteria and appointment procedures for
    members of the Companys Supervisory Board and Board of
    Management;
    periodically evaluating the scope and composition of the Board
    of Management and the Supervisory Board and proposing the
    profile of the Supervisory Board in relation thereto;
    periodically evaluating the functioning of individual members of
    the Board of Management and the Supervisory Board and reporting
    the results thereof to the Supervisory Board; and
    proposing (re-)appointments of members of the Board of
    Management and the Supervisory Board and supervising the policy
    of the Board of Management in relation to the selection and
    appointment criteria for senior management.The Selection and Nomination Committee held three regularly
scheduled meetings in 2006.

Technology and Strategy Committee

ASMLs Technology and Strategy Committee is composed of
three members of the Supervisory Board. The current members of
our Technology and Strategy Committee are Arthur van der Poel
(chairman), Jan Dekker and OB Bilous. In addition, the
Technology and Strategy Committee may appoint one or more
advisors from within the Company and/or from outside the
Company. The advisors to the Technology and Strategy Committee
may be invited as guests to (parts of) the meetings of the
Committee, but are not entitled to vote in the meetings.

The Technology and Strategy Committee advises the Supervisory
Board in relation to the following responsibilities and may
prepare resolutions of the Supervisory Board related thereto:


    familiarization with and risk assessment and study of potential
    strategies, required technical resources, technology roadmaps
    and product roadmaps; and
    providing advice to the Supervisory Board with respect to
    matters related thereto.The Technology and Strategy Committee holds at least two
meetings per year and held three regularly scheduled meetings in
2006.

Disclosure Committee

ASML has a Disclosure Committee to ensure compliance with
applicable disclosure requirements arising under US and
Netherlands law and applicable Stock Exchange Rules. The
Disclosure Committee reports to and assists our Chief Executive
Officer and Chief Financial Officer in the maintenance and
evaluation of disclosure controls and procedures. The Audit
Committee is kept informed about the outcome of the Disclosure
Committee meetings. The Disclosure Committee gathers all
relevant financial and non-financial information and assesses
materiality, timeliness and necessity for disclosure of such
information. The Disclosure Committee comprises various members
of senior management, including our Chief Financial Officer.
Furthermore, members of the Disclosure Committee are in close
contact with our external legal counsel and our external auditor.

During 2006, the Disclosure Committee reviewed our quarterly
earnings announcements and our audited annual consolidated
financial statements and other public announcements containing
financial information. During various meetings, the Disclosure
Committee assessed ASMLs disclosure controls and
procedures and internal control over financial reporting. In
order to assist the Disclosure Committee in preparing its advice
to our CEO and CFO in their assessment of ASMLs disclosure
controls and procedures and internal control over financial
reporting, we have an Internal Control Committee, comprising
among others three members of the Disclosure Committee.

Variations from Certain Nasdaq Corporate Governance Rules

Nasdaq rules provide that foreign private issuers may follow
home country practice in lieu of the Nasdaq corporate governance
standards subject to certain exceptions and except to the extent
that such exemptions would be contrary to US federal securities
laws. The practices followed by ASML in lieu of Nasdaq rules are
described below:


    ASML does not follow Nasdaqs quorum requirements
    applicable to meetings of ordinary shareholders. In accordance
    with Netherlands law and Netherlands generally accepted business
    practice, ASMLs Articles of Association provide that there
    are no quorum requirements generally applicable to General
    Meetings of Shareholders.
    ASML does not follow Nasdaqs requirements regarding the
    provision of proxy statements for General Meetings of
    Shareholders. Netherlands law does not have a regulatory regime
    for the solicitation of proxies and the solicitation of proxies
    is not a generally accepted business practice in the
    Netherlands. ASML does provide shareholders with an agenda and
    other relevant documents for the General Meeting of Shareholders.
    ASML does not follow Nasdaqs requirement regarding
    distribution to shareholders of copies of an annual report
    containing audited financial statements prior to the
    Companys Annual General Meeting of Shareholders. The
    distribution of annual reports to shareholders is not required
    under Netherlands corporate law, Netherlands securities laws, or
    by Euronext Amsterdam. Furthermore, it is generally accepted
    business practice for Netherlands companies not to distribute
    annual

ASML ANNUAL REPORT 2006

41



---



##### Table of Contents

reports. In part, this is because
    the Netherlands system of bearer shares has made it impractical
    to keep a current list of holders of the bearer shares in order
    to distribute the annual reports. Instead, we make our annual
    report available at our corporate head office in the Netherlands
    (and at the offices of our Netherlands listing agent as stated
    in the convening notice for the meeting) as from the day of
    convocation of the Annual General Meeting of Shareholders. In
    addition, we post a copy of our annual report on our website
    prior to the Annual General Meeting of Shareholders.



D. Employees

As of December 31, 2006, we had 5,594 employees in our
operations employed primarily in manufacturing, product
development and customer support activities. As of
December 31, 2003, 2004 and 2005, the total number of
employees in continued operations was 5,059, 5,071 and 5,055,
respectively. In addition, during 2006 we had an average of
1,290 temporary employees. For a more detailed description of
employee information, including a breakdown of our employees by
function, see Notes 13 and 18 to our consolidated financial
statements, which are incorporated herein by reference. We rely
on our ability to vary the number of temporary employees to
respond to fluctuating market demand for our products.

Our future success will depend on our ability to attract, train,
retain and motivate highly qualified, skilled and educated
employees, who are in great demand. We are particularly reliant
for our continued success on the services of several key
employees, including a number of systems development specialists
with advanced university qualifications in engineering, optics
and computing.

ASML Netherlands B.V., our operating subsidiary in the
Netherlands, has a Works Council, as required by Netherlands
law. A Works Council is a representative body of the employees
of a Netherlands company elected by the employees. The Board of
Management of any Netherlands company that runs an enterprise
with a Works Council must seek the non-binding advice of the
Works Council before taking certain decisions with respect to
the company, such as those related to a major restructuring, a
change of control, or the appointment or dismissal of a member
of the Board of Management. Other decisions directly involving
employment matters that apply either to all employees, or
certain groups of employees, may only be taken with the Works
Councils approval. Such a decision may be taken without
the prior approval of the Works Council only with the approval
of the District Court.

In early 2005, a dispute arose between the Company and the Works
Council regarding the question whether the establishment of and
amendments to bonus plans for management (the ASML Senior
and Executive Bonus Plan) should be subject to the
approval of the Works Council. In May 2005, the Works Council
initiated legal proceedings on this matter. In July 2006, ASML
and the Works Council entered into an agreement on the matter
and each party agreed to no longer pursue the court case.





E. Share Ownership

Information with respect to share ownership of members of our
Supervisory Board and Board of Management is included in
Item 7 Major Shareholders and Related Party
Transactions and Note 17 to our consolidated
financial statements, which are incorporated herein by
reference. Information with respect to the grant of shares and
stock options to employees is included in Note 13 to our
consolidated financial statements which is incorporated herein
by reference.





Item 7 Major Shareholders and Related Party
Transactions





A. Major Shareholders

The following table sets forth the total number of ordinary
shares owned by each shareholder whose beneficial ownership of
ordinary shares exceeds 5 percent of the ordinary shares issued
and outstanding, as well as the ordinary shares (including
options) owned by the members of the Supervisory Board and
members of the Board of Management (which includes those persons
specified in Item 6 Directors, Senior Management and
Employees), as a group, as of December 31, 2006. The
information set forth below is solely based on public filings
with the SEC and AFM at December 31, 2006.



ASML ANNUAL REPORT 2006

42



---



##### Table of Contents



|                                                                                             |  |        |            |  |            |  |       | 
|-------------------------------------------------------------------------------------------- |  | ------ | ---------- |  | ---------- |  | ----- | 
|                                                                                             | 
|                                                                                             |  | Shares |            |  | Percent of | 
|Identity of Person or Group                                                                  |  | Owned  |            |  | Class      | 
|                                                                                             | 
|Capital Group International,
    Inc1                                                        |  |        | 55,842,520 |  |            |  | 11.7% | 
|FMR
    Corp.2                                                                               |  |        | 70,721,194 |  |            |  | 14.8% | 
|Capital Research and Management
    Company3                                                 |  |        | 49,577,150 |  |            |  | 10.4% | 
|Members of ASMLs Supervisory
    Board and Board of Management, as a group (4
    persons)4 |  |        | 1,157,046  |  |            |  | *     | 
|                                                                                            



|  |                     
|- | --------------------
|* | Less than 1 percent.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Based solely on the
    Schedule 13-G/ A
    filed by Capital Group International, Inc. with the Commission
    on February 1, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2 | Based solely on the
    Schedule 13-G/ A
    filed by FMR Corp. with the Commission on February 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|3 | Based solely on the
    Schedule 13-G/ A
    filed by Capital Research and Management Company with the
    Commission on February 6, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|4 | Four members of our Board of Management own a total of 602,275
    unconditional options to purchase ASML shares. These members of
    our Board of Management together are also entitled to 257,263
    conditional performance stock options and 87,507 and 210,001
    conditional performance stock for 2005 and 2006, respectively.
    The number of performance stock that are ultimately awarded will
    be determined in the financial year 2008 and 2009, respectively,
    and is conditional upon the achievement of performance targets.
    See Note 17 to our consolidated financial statements for
    information on options held by and conditional performance stock
    conditionally awarded to members of our Board of Management on
    an individual basis. One member of our Board of Management owns
    22,000 of our outstanding shares. None of the members of the
    Supervisory Board hold any of our outstanding shares or options
    on shares. Certain members of our Board of Management have
    deposited their stock options with an independent fund manager
    who has authority to exercise these options and dispose of the
    underlying shares without instructions from, or consultation
    with, the respective member of the Board of Management.







Obligations of Shareholders to Disclose Holdings under
Netherlands Law


Wet op
het financieel toezicht,


Autoriteit Financiële
Markten,
















---



##### Table of Contents

For the purpose of calculating the percentage of capital
interest or voting rights, the following interests must, among
other arrangements, be taken into account: shares and votes
(i) directly held by any person, (ii) held by such
persons subsidiaries, (iii) held by a third party for
such persons account, (iv) held by a third party with
whom such person has concluded an oral or written voting
agreement (including on the basis of an unrestricted power of
attorney) and (v) held by a third party with whom such
person has agreed to temporarily transfer voting rights against
payment. Interests held jointly by multiple persons are
attributed to those persons in accordance with their
entitlement. A holder of a pledge or right of usufruct in
respect of shares can also be subject to these reporting
obligations if such person has, or can acquire, the right to
vote on the shares or, in case of depositary receipts, the
underlying shares. The managers of certain investment funds are
deemed to hold the capital interests and voting rights in the
funds managed by them.

For the same purpose, the following instruments qualify as
shares: (i) shares, (ii) depositary
receipts for shares (or negotiable instruments similar to such
receipts), (iii) negotiable instruments for acquiring the
instruments under (i) or (ii) (such as convertible bonds),
and (iv) options for acquiring the instruments under
(i) or (ii).

The AFM keeps a public registry of and publishes all
notifications made pursuant to the Act.

Non-compliance with the reporting obligations under the Act
could lead to criminal fines, administrative fines, imprisonment
or other sanctions. In addition, non-compliance with the
reporting obligations under the Act may lead to civil sanctions,
including (i) suspension of the voting rights relating to
the shares held by the offender, for a period of not more than
three years, (ii) nullification of any resolution of the
General Meeting of Shareholders of the company to the extent
that such resolution would not have been approved if the votes
at the disposal of the person or entity in violation of a duty
under the Act had not been exercised and (iii) a
prohibition on the acquisition by the offender of our shares or
the voting on our ordinary shares for a period of not more than
five years.





B. Related Party Transactions

There have been no transactions during our most recent fiscal
year, nor are there presently any proposed material
transactions, between ASML or any of its subsidiaries, and any
significant shareholder and any director or officer or any
relative or spouse thereof. During our most recent fiscal year,
there has been no, and at present there is no, outstanding
indebtedness to ASML owed or owing by any director or officer of
ASML or any associate thereof, other than the virtual financing
arrangement with respect to stock options described under
Note 13 to our consolidated financial statements.





C. Interests of Experts & Counsel

Not applicable.





Item 8 Financial Information





A. Consolidated Statements and Other Financial Information

Consolidated Statements

See Item 18 Financial Statements.

Export Sales

See Note 16 to our consolidated statements included in
Item 18 Financial Statements, which is
incorporated herein by reference.

Legal Proceedings

See Item 4.B. Business Overview, Intellectual
Property and Note 14 to our consolidated financial
statements, which are incorporated herein by reference.

Dividend Policy

We have no current intention to pay dividends on our ordinary
shares. We strive to maintain our strategic target level of
EUR 1 billion in net cash, which is comprised of total
cash and cash equivalents minus convertible subordinated bonds.
In case our net cash exceeds EUR 1 billion and there are no
alternative investment opportunities, we intend to return excess
cash to our shareholders. As of December 31, 2006 our net
cash amounts to EUR 1.3 billion. For more information see
Item 10.B. Memorandum and Articles of
Association and Item 10.D. Exchange
Controls.





B. Significant Changes

No significant changes have occurred since the date of our
consolidated financial statements. See Item 5.D.
Trend Information.



ASML ANNUAL REPORT 2006

44



---



##### Table of Contents

Item 9 The Offer and Listing





A. Listing Details

Our ordinary shares are listed for trading in the form of New
York Shares on Nasdaq and in the form of registered shares
(Amsterdam Shares) on the Eurolist by Euronext
Amsterdam. The principal trading market of our ordinary shares
is Eurolist by Euronext Amsterdam. For more information see
Item 10.B Memorandum and Articles of
Association.

The following table sets forth, for the periods indicated, the
high and low closing prices of our ordinary shares on Nasdaq, as
well as on Eurolist by Euronext Amsterdam.

|                                |  |        |       |  |                    |  |       |      |  |  |       |  |  |  |       | 
|------------------------------- |  | ------ | ----- |  | ------------------ |  | ----- | ---- |  |  | ----- |  |  |  | ----- | 
|                                | 
|                                |  | Nasdaq |       |  | Euronext Amsterdam | 
|                                |  | US$    |       |  | EUR                | 
|                                |  | High   |       |  | Low                |  |       | High |  |  | Low   | 
|                                | 
|Annual Information              |  |        |       |  |                    |  |       |      |  |  |       |  |  |  |       | 
|2002                            |  |        | 25.80 |  |                    |  | 4.95  |      |  |  | 29.79 |  |  |  | 5.13  | 
|2003                            |  |        | 20.39 |  |                    |  | 6.11  |      |  |  | 17.04 |  |  |  | 5.39  | 
|2004                            |  |        | 22.32 |  |                    |  | 12.41 |      |  |  | 17.50 |  |  |  | 10.26 | 
|2005                            |  |        | 20.13 |  |                    |  | 14.44 |      |  |  | 17.12 |  |  |  | 11.11 | 
|2006                            |  |        | 25.83 |  |                    |  | 18.46 |      |  |  | 19.90 |  |  |  | 14.49 | 
|                               
|                               
|Quarterly Information           |  |        |       |  |                    |  |       |      |  |  |       |  |  |  |       | 
|1st quarter 2005                |  |        | 18.72 |  |                    |  | 14.48 |      |  |  | 14.15 |  |  |  | 11.19 | 
|2nd quarter 2005                |  |        | 16.91 |  |                    |  | 14.44 |      |  |  | 13.97 |  |  |  | 11.11 | 
|3rd quarter 2005                |  |        | 18.09 |  |                    |  | 15.60 |      |  |  | 14.70 |  |  |  | 13.06 | 
|4th quarter 2005                |  |        | 20.13 |  |                    |  | 16.29 |      |  |  | 17.12 |  |  |  | 13.58 | 
|                               
|                               
|1st quarter 2006                |  |        | 23.57 |  |                    |  | 19.42 |      |  |  | 19.29 |  |  |  | 16.23 | 
|2nd quarter 2006                |  |        | 22.41 |  |                    |  | 18.70 |      |  |  | 17.63 |  |  |  | 14.49 | 
|3rd quarter 2006                |  |        | 23.39 |  |                    |  | 18.46 |      |  |  | 18.44 |  |  |  | 14.64 | 
|4th quarter 2006                |  |        | 25.83 |  |                    |  | 22.30 |      |  |  | 19.90 |  |  |  | 17.75 | 
|                               
|                               
|Monthly Information             |  |        |       |  |                    |  |       |      |  |  |       |  |  |  |       | 
|July 2006                       |  |        | 20.42 |  |                    |  | 18.46 |      |  |  | 15.99 |  |  |  | 14.64 | 
|August 2006                     |  |        | 22.06 |  |                    |  | 19.40 |      |  |  | 17.06 |  |  |  | 15.20 | 
|September 2006                  |  |        | 23.39 |  |                    |  | 21.82 |      |  |  | 18.44 |  |  |  | 16.96 | 
|October 2006                    |  |        | 24.29 |  |                    |  | 22.30 |      |  |  | 19.31 |  |  |  | 17.75 | 
|November 2006                   |  |        | 25.83 |  |                    |  | 22.64 |      |  |  | 19.90 |  |  |  | 17.84 | 
|December 2006                   |  |        | 25.37 |  |                    |  | 23.98 |      |  |  | 19.28 |  |  |  | 18.17 | 
|January (through Jan. 24), 2007 |  |        | 25.55 |  |                    |  | 25.14 |      |  |  | 19.67 |  |  |  | 19.11 | 
|                               






B. Plan of Distribution







C. Markets







D. Selling Shareholders







E. Dilution







F. Expenses of the Issue












---



##### Table of Contents

Item 10 Additional Information





A. Share Capital

Not applicable.





B. Memorandum and Articles of Association

The information required by Item 10.B. is incorporated by
reference to ASMLs Report on
Form 6-K, filed
with the Commission on June 28, 2006.

Current Authorizations to Issue and Repurchase Ordinary
Shares

Our Board of Management has the power to issue ordinary shares
and preference shares if and to the extent the Board of
Management has been authorized to do so by the General Meeting
of Shareholders (whether by means of a resolution or by an
amendment to our Articles of Association). However, the
Supervisory Board must approve any issuance of ordinary shares
or preference shares.

At our annual General Meeting of Shareholders, held on
March 23, 2006, the Board of Management was granted the
authorization to issue shares and/or rights thereto representing
up to a maximum of 10 percent of our issued share capital
as of the date of authorization, plus an additional
10 percent of our issued share capital as of the date of
authorization that may be issued in connection with mergers and
acquisitions. At our annual General Meeting of Shareholders to
be held on March 28, 2007, our shareholders will be asked
to authorize the Board of Management (subject to the approval of
the Supervisory Board) to issue shares and/or rights thereto
through September 28, 2008.

Holders of our ordinary shares have a pro rata preemptive right
of subscription to any issuance of ordinary shares for cash,
which right may be restricted or excluded. Ordinary shareholders
have no pro rata preemptive right of subscription to any
ordinary shares issued for consideration other than cash or
ordinary shares issued to employees. If authorized for this
purpose by the General Meeting of Shareholders (whether by means
of a resolution or by an amendment to our Articles of
Association), the Board of Management has the power, with the
approval of the Supervisory Board, to restrict or exclude the
preemptive rights of holders of ordinary shares. A designation
may be renewed. At our annual General Meeting of Shareholders,
held on March 23, 2006, the Board of Management was granted
the authorization, subject to the aforementioned approvals, to
restrict or exclude preemptive rights of holders of ordinary
shares. At our annual General Meeting of Shareholders to be held
on March 28, 2007, our shareholders will be asked to grant
this authority through September 28, 2008. At this annual
General Meeting of Shareholders, the shareholders will be asked
to grant authority to the Board of Management to issue shares or
options separately. These authorizations will each be granted
for a period of 18 months.

We may repurchase our issued ordinary shares at any time,
subject to compliance with the requirements of Netherlands law
and provided the aggregate nominal value of the ordinary shares
held by ASML or a subsidiary at any time amounts to no more than
one-tenth of our issued share capital. Any such purchases are
subject to the approval of the Supervisory Board and the
authorization (whether by means of a resolution or by an
amendment to our Articles of Association) of shareholders at our
General Meeting of Shareholders, which authorization may not be
for more than 18 months. The Board of Management is
currently authorized, subject to Supervisory Board approval, to
repurchase through September 23, 2007 up to a maximum of
10 percent of our issued share capital as of the date of
authorization (March 23, 2006) at a price between the
nominal value of the ordinary shares purchased and
110 percent of the market price of these securities on
Euronext Amsterdam or Nasdaq. At our annual General Meeting of
Shareholders to be held on March 28, 2007, our shareholders
will be asked to extend this authority through
September 28, 2008.

Shareholder Approval for Share and Share Option Arrangements
for Board of Management

In 2006, ASML submitted to the General Meeting of Shareholders
for approval a proposal regarding plans to issue shares or
rights to acquire shares to members of the Board of Management,
in accordance with the Code. We have not in the past established
and do not intend to establish in the future stock option or
purchase plans or other equity compensation arrangements for
members of our Supervisory Board.

Nasdaq rules require shareholder approval of stock option plans
available to officers, directors or employees. However, Nasdaq
has granted ASML an exemption from this requirement (foreign
private issuers are no longer required to obtain an exemption,
but may follow home country practice in lieu of Nasdaq corporate
governance rules, subject to exceptions).

Cancellation of Priority Shares

On January 18, 2006, ASML announced its decision to cancel
all issued priority shares and to dissolve the Stichting
Prioriteitsaandelen ASML Holding N.V.. The cancellation of
the priority shares became effective as per an amendment to
ASMLs Articles of Association effective on April 13,
2006.



ASML ANNUAL REPORT 2006

46



---



##### Table of Contents

C. Material Contracts

Employment Agreement with Klaus Fuchs

On September 19, 2005, the Company entered into an
employment agreement with Klaus Fuchs, to be ASMLs Chief
Operating Officer, commencing on November 1, 2005 and
terminable by the Company on not less than six months
notice and by Mr. Fuchs on not less than three months
notice. The employment agreement has a term of four years, but
can be extended with the consent of both parties. Mr. Fuchs
is entitled to receive a payment equal to one years base
salary in the event his employment agreement is terminated by
the Company. The employment agreement contains confidentiality
and non-competition provisions to which Mr. Fuchs is
subject.

The agreement entitles Mr. Fuchs to a base salary of EUR
400,000 per year, plus an annual cash bonus of up to
50 percent of base salary if certain performance targets
are met. Pursuant to the agreement, Mr. Fuchs received
22,000 sign-on stock as well as 22,000 sign-on stock options at
the first possible moment of grant and is entitled to receive
annually, if certain performance targets are met, (i) stock
options with a value equal to up to 25 percent of base
salary and (ii) stock with a value equal to up to
25 percent of base salary. Mr. Fuchs is also entitled
to pension benefits under a defined contribution plan. For
additional information on Mr. Fuchs remuneration, see
Note 17 to our consolidated financial statements.

Consultancy Agreement with David Chavoustie

Effective December 31, 2005, Mr. Chavoustie retired
from our Board of Management. ASML and Mr. Chavoustie
entered into a consultancy agreement, effective January 1,
2006, whereby Mr. Chavoustie will perform consulting
services for ASML, including services relating to certain
activities of ASML in the United States and our operations in
Asia. Under the terms of the agreement, ASML will pay
Mr. Chavoustie a fee of $800 per half day segment. The
agreement has a term of one year and may be extended with the
consent of both parties.





D. Exchange Controls

There are currently no limitations, either under the laws of the
Netherlands or in the Articles of Association of ASML, to the
rights of non-residents to hold or vote ordinary shares. Cash
distributions, if any, payable in euro on Amsterdam registered
shares and on ASMLs Amsterdam shares may be officially
transferred from the Netherlands and converted into any other
currency without being subject to any Netherlands legal
restrictions. However, for statistical purposes, such payments
and transactions must be reported by ASML to the Netherlands
Central Bank. Furthermore, no payments, including dividend
payments, may be made to jurisdictions subject to certain
sanctions, adopted by the government of the Netherlands,
implementing resolutions of the Security Council of the United
Nations. Cash distributions, if any, on New York Shares shall be
paid in US dollars, converted at the rate of exchange on
Euronext Amsterdam at the close of business on the date fixed
for that purpose by the Board of Management in accordance with
the Articles of Association. ASML has no current intention to
pay dividends on its ordinary shares.





E. Taxation

Netherlands Taxation

The statements below represent a summary of current Netherlands
tax laws, regulations and judicial interpretations thereof. The
description is limited to the material tax implications for a
holder of ordinary shares who is not, or is not deemed to be, a
resident of the Netherlands for Netherlands tax purposes (a
Non-resident Holder). This description does not
address special rules that may apply to special classes of
holders of ordinary shares and should not be read as extending
by implication to matters not specifically referred to herein.
As to individual tax consequences, each investor in ordinary
shares should consult his or her tax counsel.

General

The acquisition of ordinary shares by a non-resident of the
Netherlands should not be treated as a taxable event for
Netherlands tax purposes. The income consequences in connection
with owning and disposing of our ordinary shares are discussed
below.

Substantial Interest

A person that, directly or indirectly, owns 5 percent or
more of our share capital, or holds options to purchase
5 percent or more of our share capital, is deemed to have a
substantial interest in our shares, respectively, our options,
as applicable. A deemed substantial interest also exists if
(part of) a substantial interest has been disposed of, or is
deemed to be disposed of, in a transaction where no taxable gain
has been recognized. Special attribution rules exist in
determining the presence of a substantial interest.



ASML ANNUAL REPORT 2006

47



---



##### Table of Contents

Income Tax Consequences for Individual Non-resident
Holders on Owning and Disposing of the Ordinary Shares

An individual who is a Non-resident Holder will not be subject
to Netherlands income tax on received income in respect of our
ordinary shares or capital gains derived from the sale, exchange
or other disposition of our ordinary shares, provided that such
holder:


    does not carry on and has not carried on a business in the
    Netherlands through a permanent establishment or a permanent
    representative to which the ordinary shares are attributable;
    does not hold and has not held a (deemed) substantial
    interest in our share capital or, in the event the Non-resident
    Holder holds or has held a (deemed) substantial interest in
    our share capital, such interest is, respectively was, a
    business asset in the hands of the holder;
    does not share and has not shared directly (through the
    beneficial ownership of ordinary shares or similar securities)
    in the profits of an enterprise managed and controlled in the
    Netherlands which (is deemed to) own(s), respectively (is deemed
    to have) has owned, our ordinary shares;
    does not carry out and has not carried out any activities which
    generate taxable profit or taxable wages to which the holding of
    our ordinary shares was connected;
    does not carry out and has not carried out employment activities
    in the Netherlands, does not serve and has not served as a
    director or board member of any entity resident in the
    Netherlands, and does not serve and has not served as a civil
    servant of a Netherlands public entity with which the holding of
    our ordinary shares is or was connected; and
    is not an individual that has elected to be taxed as a resident
    of the Netherlands.Corporate Income Tax Consequences for Corporate
Non-resident Holders

Income derived from ordinary shares or capital gains derived
from the sale, exchange or disposition of ordinary shares by a
corporate Non-resident Holder is taxable if:


    the holder carries on a business in the Netherlands through a
    permanent establishment or a permanent agent in the Netherlands
    (Netherlands enterprise) and the ordinary shares are
    attributable to this permanent establishment or permanent agent,
    unless the participation exemption (discussed below) applies; or
    the holder has a substantial interest in our share capital,
    which is not allocable to his enterprise; or
    certain assets of the holder are deemed to be treated as a
    Netherlands enterprise under Netherlands tax law and the
    ordinary shares are attributable to this Netherlands enterprise.To qualify for the Netherlands participation exemption, the
holder must generally hold at least 5 percent of our
nominal paid-in capital and meet certain other requirements.

Dividend Withholding Tax

In general, a dividend distributed by us in respect of our
ordinary shares will be subject to a withholding tax imposed by
the Netherlands at the statutory rate of 25 percent.

Dividends include:


    dividends in cash and in kind;
    deemed and constructive dividends;
    consideration for the repurchase or redemption of ordinary
    shares (including a purchase by a direct or indirect ASML
    subsidiary) in excess of qualifying average paid-in capital
    unless such repurchase is made for temporary investment purposes
    or is exempt by law;
    stock dividends up to their nominal value (unless distributed
    out of qualifying paid-in capital);
    any (partial) repayment of paid-in capital not qualifying
    as capital for Netherlands dividend withholding tax purposes; and
    liquidation proceeds in excess of qualifying average paid-in
    capital for Netherlands dividend withholding tax purposes.A reduction of Netherlands dividend withholding tax can be
obtained if:


    the participation exemption applies and the ordinary shares are
    attributable to a business carried out in the Netherlands;
    the dividends are distributed to a qualifying EU corporate
    holder satisfying the conditions of the EU Parent-Subsidiary
    Directive; or
    the rate is reduced by a tax treaty.A Non-resident Holder of ordinary shares can be eligible for a
partial or complete exemption or refund of all or a portion of
the above withholding tax under a tax treaty that is in effect
between the Netherlands and the Non-resident Holders
country of residence. The Netherlands has concluded such
treaties with the United States, Canada, Switzerland, Japan,
most European Union member states, as well as many other
countries. Under the Treaty between the United States of America
and the Netherlands for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income
(the Tax Treaty), dividends paid by us to a
Non-resident Holder that is a resident of the United States as
defined in the Tax Treaty (other than an exempt organization or
exempt pension trust, as discussed below) are generally eligible
for a reduction of the 25 percent Netherlands withholding
tax to 15 percent or, in the case of certain United States
corporate shareholders owning at



ASML ANNUAL REPORT 2006

48



---



##### Table of Contents

least 10 percent of our voting power, to 5 percent,
provided that it does not have an enterprise or an interest in
an enterprise that is, in whole or in part, carried on through a
permanent establishment or permanent representative in the
Netherlands to which the dividends are attributable. The Tax
Treaty provides for a complete exemption from tax on dividends
received by exempt pension trusts and exempt organizations, as
defined therein. Except in the case of exempt organizations, the
reduced dividend withholding tax rate (or exemption from
withholding) can be applied at the source upon payment of the
dividends, provided that the proper forms have been filed in
advance of the payment. Exempt organizations remain subject to
the statutory withholding rate of 25 percent and are
required to file for a refund of such withholding.

A Non-resident Holder may not claim the benefits of the Tax
Treaty unless (i) it is a resident of the United States as
defined therein, or (ii) it is deemed to be a resident on
the basis of the provisions of article 24(4) of the Tax Treaty,
and (iii) its entitlement to those benefits is not limited
by the provisions of article 26 (limitation on benefits) of the
Tax Treaty.

In this respect it is noted that the United States and the
Netherlands have agreed on a protocol to the Tax Treaty. It
provides for (among others) a 0 percent dividend withholding tax
rate on dividends, provided certain requirements are met. In
addition, abovementioned article 26 (limitation on benefits) has
been adjusted. Some requirements to the various tests mentioned
in article 26 will become more severe and others will be
moderated.

Dividend Stripping Rules

Under Netherlands tax legislation regarding anti-dividend
stripping, no exemption from, or refund of, Netherlands dividend
withholding tax is granted if the recipient of dividends paid by
us is not considered the beneficial owner of such dividends.

Gift or Inheritance Taxes

Netherlands gift or inheritance taxes will not be levied on the
transfer of ordinary shares by way of gift, or upon the death of
a Non-resident Holder, unless:

(1) the transfer is construed as an inheritance or as a
gift made by or on behalf of a person who, at the time of the
gift or death, is deemed to be, resident of the Netherlands; or

(2) the ordinary shares are attributable to an enterprise
or part thereof that is carried on through a permanent
establishment or a permanent representative in the Netherlands.

For purposes of Netherlands gift and inheritance tax, an
individual of Netherlands nationality is deemed to be a resident
of the Netherlands if he has been a resident thereof at any time
during the ten years preceding the time of the gift or death.
For purposes of Netherlands gift tax, a person not possessing
Netherlands nationality is deemed to be a resident of the
Netherlands if he has resided therein at any time in the twelve
months preceding the gift.

Value Added Tax

No Netherlands value added tax is imposed on dividends in
respect of our ordinary shares or on the transfer of our shares.

Residence

A Non-resident Holder will not become resident, or be deemed to
be resident, in the Netherlands solely as a result of holding
our ordinary shares or of the execution, performance, delivery
and/or enforcement of rights in respect of our ordinary shares.

United States Taxation

The following is a discussion of the material United States
federal income tax consequences relating to the acquisition,
ownership and disposition of ordinary shares by a United States
Holder (as defined below). This discussion deals only with
ordinary shares held as capital assets and does not deal with
the tax consequences applicable to all categories of investors,
some of which (such as tax-exempt entities, passive foreign
investment companies, banks, broker-dealers, investors owning
directly, indirectly or constructively 10 percent or more of our
outstanding voting shares, investors who hold ordinary shares as
part of hedging or conversion transactions and investors whose
functional currency is not the U.S. dollar) may be subject to
special rules. In addition, the discussion does not address any
alternative minimum tax or any state, local or non-United States
tax consequences. The following discussion is based on United
States tax laws, and judicial and administrative interpretations
thereof as in effect on the date hereof, all of which are
subject to change, potentially retroactively.

This discussion is based on the Internal Revenue Code of 1986,
as amended to the date hereof, final, temporary and proposed
Treasury Department regulations promulgated, and administrative
and judicial interpretations thereof, changes to any of which
subsequent to the date hereof, possibly with retroactive effect,
may affect the tax consequences described herein. In addition,
there can be no assurance that the Internal Revenue Service will
not challenge one or more of the tax consequences described
herein, and we have not obtained, nor do we intend to obtain, a
ruling from the Internal Revenue Service or an opinion of
counsel with respect to the United States federal income tax
consequences of acquiring or holding shares. Prospective



ASML ANNUAL REPORT 2006

49



---



##### Table of Contents

purchasers of ordinary shares are advised to consult their tax
advisers with respect to their particular circumstances and with
respect to the effects of United States federal, state, local or
non-United States tax laws to which they may be subject.

As used herein, the term United States Holder means
a beneficial owner of ordinary shares that for United States
federal income tax purposes is:


    an individual citizen or resident of the United States;
    a corporation or other entity treated as a corporation for
    United States federal income tax purposes created or organized
    in or under the laws of the United States or of any political
    subdivision thereof;
    an estate of which the income is subject to United States
    federal income taxation regardless of its source;
    a trust whose administration is subject to the primary
    supervision of a court within the United States and which has
    one or more United States persons who have the authority to
    control all of its substantial decisions.If an entity treated as a partnership for United States federal
income tax purposes owns ordinary shares, the United States
federal income tax treatment of a partner in such partnership
will generally depend upon the status of the partner and the
activities of the partnership. A partnership that owns ordinary
shares and the partners in such partnership should consult their
tax advisors about the United States federal income tax
consequences of holding and disposing of the ordinary shares.

Taxation of Dividends

United States Holders will include in gross income as
foreign-source dividend income the gross amount of any
distribution (before reduction for Netherlands withholding
taxes) ASML makes out of its current or accumulated earnings and
profits (as determined for United States federal income tax
purposes) when the distribution is actually or constructively
received by the United States Holder. Distributions will not be
eligible for the dividends-received deduction generally allowed
to United States corporations in respect of dividends received
from other United States corporations. The amount of the
dividend distribution includible in income of a United States
Holder should be the U.S. dollar value of the foreign currency
(e.g. euro) paid, determined by the spot rate of exchange on the
date of the distribution, regardless of whether the payment is
in fact converted into U.S. dollars. Distributions in excess of
current and accumulated earnings and profits, as determined for
United States federal income tax purposes, will be treated as a
non-taxable return of capital to the extent of the United States
Holders basis in the ordinary shares and thereafter as
taxable capital gain. ASML does not maintain calculations of its
earnings and profits under United States federal income tax
principles.

Subject to limitations provided in the United States Internal
Revenue Code, a United States Holder may generally deduct from
its United States federal taxable income, or credit against its
United States federal income tax liability, the amount of
qualified Netherlands withholding taxes. However, Netherlands
withholding tax may be deducted only if the United States Holder
does not claim a credit for any Netherlands or other non-United
States taxes paid or accrued in that year. In addition,
Netherlands dividend withholding taxes will likely not be
creditable against the United States Holders United States
tax liability to the extent ASML is not required to pay over the
amount withheld to the Netherlands Tax Administration.
Currently, a Netherlands corporation that receives dividends
from qualifying non-Netherlands subsidiaries may credit source
country tax withheld from those dividends against Netherlands
withholding tax imposed on a dividend paid by a Netherlands
corporation, up to a maximum of 3 percent of the dividend
paid by the Netherlands corporation. The credit reduces the
amount of dividend withholding that ASML is required to pay to
the Netherlands Tax Administration but does not reduce the
amount of tax ASML is required to withhold from dividends.

Recently enacted United States tax legislation (the 2003
Tax Act) reduces to 15 percent the maximum tax rate
for certain dividends received by individuals through taxable
years beginning on or before December 31, 2008, so long as
the stock has been held for more than 60 days during the
120 day period beginning 60 days before the
ex-dividend date. Dividends received from qualified
foreign corporations generally qualify for the reduced
rate. A non-United States corporation (other than a foreign
personal holding company, foreign investment company, or passive
foreign investment company) generally will be considered to be a
qualified foreign corporation if (i) the shares of the
non-United States corporation are readily tradable on an
established securities market in the United States or
(ii) the non-United States corporation is eligible with
respect to substantially all of its income for the benefits of a
comprehensive income tax treaty with the United States which
contains an exchange of information program. The Tax Treaty has
been identified as a qualifying treaty. Individual United States
Holders should consult their tax advisors regarding the impact
of the provisions of the 2003 Tax Act on their particular
situations.

Taxation on Sale or Other Disposition of Ordinary Shares

Upon a sale or other disposition of ordinary shares, a United
States Holders will generally recognize capital gain or loss for
United States federal income tax purposes in an amount equal to
the difference between the amount realized, if paid in
U.S. dollars, or the U.S. dollar value of the amount
realized (determined at the spot rate on the settlement date of
the sale) if proceeds are paid in currency other than the U.S.
dollar, as the case may be, and the United States Holders
tax basis (determined in U.S. dollars) in such ordinary shares.
Generally, the capital gain or loss will be long-term capital
gain or loss if the holding period of the United States Holder
in the ordinary shares exceeds one year at the time of the sale
or other disposition. The deductibility of capital losses is
subject to limitations for United States federal income tax
purposes. Gain or



ASML ANNUAL REPORT 2006

50



---



##### Table of Contents

loss from the sale or other disposition of ordinary shares
generally will be treated as United States source income or loss
for United States foreign tax credit purposes. Generally, any
gain or loss resulting from currency fluctuations during the
period between the date of the sale of the ordinary shares and
the date the sale proceeds are converted into U.S. dollars will
be treated as ordinary income or loss from sources within the
United States. Each United States Holder should consult its tax
advisor with regard to the translation rules of its adjusted
basis and the amount realized upon a sale or other disposition
of its ordinary shares if purchased in, or sold or disposed of
for, a currency other than U.S. dollar.

Information Reporting and Backup Withholding

Information returns may be filed with the Internal Revenue
Service (IRS) in connection with payments on the
ordinary shares or proceeds from a sale, redemption or other
disposition of the ordinary shares. A backup
withholding tax may apply to these payments if the
beneficial owner fails to provide a correct taxpayer
identification number to the paying agent and to comply with
certain certification procedures or otherwise establish an
exemption from backup withholding. Any amounts withheld under
the backup withholding rules might be refunded (or credited
against the beneficial owners United States federal income
tax liability, if any) depending on the facts and provided that
the required information is furnished to the IRS.

The discussion set forth above is included for general
information only and may not be applicable depending upon a
holders particular situation. Holders should consult their
tax advisors with respect to the tax consequences to them of the
purchase, ownership and disposition of shares including the tax
consequences under state, local and other tax laws and the
possible effects of changes in United States federal and other
tax laws.





F. Dividends and Paying Agents

Not applicable.





G. Statement by Experts

Not applicable.





H. Documents on Display

We are subject to certain of the reporting requirements of the
US Securities Exchange Act of 1934 (the Exchange
Act). As a foreign private issuer, we are
exempt from the rules under the Exchange Act prescribing certain
disclosure and procedural requirements for proxy solicitations,
and our officers, directors and principal shareholders are
exempt from the reporting and short-swing profit
recovery provisions contained in Section 16 of the Exchange
Act, with respect to their purchases and sales of shares. In
addition, we are not required to file reports and financial
statements with the Commission as frequently or as promptly as
companies that are not foreign private issuers whose securities
are registered under the Exchange Act. However, we are required
to file with the Commission, within six months after the end of
each fiscal year, an annual report on
Form 20-F
containing financial statements audited by an independent
accounting firm. We publish unaudited interim financial
information after the end of each quarter. We furnish this
quarterly financial information to the Commission under cover of
a Form 6-K.

You may read and copy any document we file with the Commission
at its public reference facilities at 450 Fifth Street, N.W.,
Washington, DC 20549, Woolworth Building, 233 Broadway, New
York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. You may
also obtain copies of the documents at prescribed rates by
writing to the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington DC 20549. The Commission also
maintains a website that contains reports and other information
regarding registrants that are required to file electronically
with the Commission. The address of this website is
http://www.sec.gov. Please call the Commission at 1-800-SEC-0330
for further information on the operation of the public reference
facilities.





I. Subsidiary Information

See Item 4.C. Organizational Structure.





Item 11 Quantitative and Qualitative Disclosures About
Market Risk

We are subject to market risks including changes in foreign
exchange rates and interest rates. In order to hedge the risks
of changes in foreign exchange rates and interest rates, we use
derivative instruments in accordance with established policies.
None of these transactions are entered into for trading purposes.

Foreign currency exchange rate risk

We operate globally and are thus exposed to foreign exchange
risk arising from volatility in currency exchange rates.

We price most of our product sales in euro. However, a portion
of our sales, cost of sales and expenses are denominated in U.S.
dollars and Japanese Yen, and we expect that this will continue
to be so for the foreseeable future. We hedge material foreign
exchange transaction risk exposure, such as sales transactions,
forecasted purchase transactions, accounts receivable



ASML ANNUAL REPORT 2006

51



---



##### Table of Contents

and accounts payable. This exposure is mainly hedged with
financial instruments such as foreign exchange forward contracts
and foreign exchange options. We closely monitor the
effectiveness of our outstanding hedge contracts throughout the
life of the hedges. The majority of financial instruments that
we use to hedge foreign exchange risk have a duration of less
than one year.

As of December 31, 2006, we anticipate other comprehensive
gain of EUR 4.1 million (December 31, 2005: EUR
9.9 million loss) to represent the total anticipated gain
to be released to sales and other comprehensive loss of EUR
2.1 million (December 31, 2005: EUR 1.2 million
loss) to represent the total anticipated loss to be charged to
cost of sales over the next 12 months as the forecasted
sales and purchase transactions occur.

Since we have subsidiaries outside the euro-zone, a part of our
shareholders equity is denominated in foreign currency
and, as a result, exposed to fluctuations in exchange rates. It
is our policy to manage material translation exposures resulting
predominantly from ASMLs U.S. dollar net investments.
Throughout 2004 and 2005 a proportion of our USD
575 million 5.75 percent Convertible Subordinated
Notes due 2006 was assigned to hedge a certain part of our U.S.
dollar net investments. As from December 2005 onwards, forward
contracts have been assigned to hedge this exposure. The related
foreign currency translation amounts (gross of taxes) included
in cumulative translation adjustment for the years ended
December 31, 2004, 2005 and 2006 were EUR 10.8 million
gain, EUR 28.2 million loss and EUR 16.0 million gain,
respectively.

Interest rate risk

Our exposure to the market risk of changes in interest rates
relates primarily to our debt obligations and our cash balance.
Interest rate swaps that we use to hedge the fair value of fixed
loan coupons payable are designated as fair value hedges, with
changes in fair value recorded under interest income and expense
in our statement of operations. The accumulated change in fair
value is intended to offset the change in the fair value of the
underlying fixed loan coupons, which is recorded accordingly.
Interest rate swaps that we use to hedge changes in the
variability of future interest receipts are designated as cash
flow hedges. The critical terms of the hedging instruments are
the same as those for the underlying assets. Accordingly, all
changes in fair value of these derivative instruments are
recorded as other comprehensive income. The accumulated changes
in fair value of the derivatives are intended to offset changes
in future interest cash flows on the assets. The hedging
relationship between interest rate swaps and hedged fixed loan
coupons is highly effective.

As of December 31, 2006 we had two EUR interest rate swaps
outstanding with nominal values of EUR 380 million in total
on which we pay a floating interest of 3.59 percent. These
interest rate swaps, which are designated as cash flow hedges,
have fixed interest receipts at an average of 3.69 percent
for periods up until May 2010 and have floating interest
payments at 3 months EURIBOR.

See Notes 1, 4 and 11 to our consolidated financial
statements, which are incorporated herein by reference.

Credit risk

Financial instruments that potentially subject us to significant
concentrations of credit risk consist principally of cash and
cash equivalents, accounts receivable and derivative financial
instruments used in hedging activities.

Financial instruments contain an element of risk of the
counterparties being unable to meet their obligations. This
financial credit risk is monitored and minimized per type of
financial instrument by limiting our counterparties to a
sufficient number of major financial institutions and issuers of
commercial paper. We do not expect the counterparties to default
given their high credit quality.

Our customers consist of integrated circuit manufacturers
located throughout the world. We perform ongoing credit
evaluations of its customers financial condition and
generally requires no collateral to secure accounts receivable,
we maintain an allowance for potentially uncollectible accounts
receivable. We regularly review the allowance by considering
factors such as historical payment experience, credit quality,
age of the accounts receivable balances, and current economic
conditions that may affect a customers ability to pay. In
addition, we utilize letters of credit to mitigate credit risk
when considered appropriate.

Sensitivity analysis derivative financial instruments

We use foreign exchange derivatives to manage our foreign
exchange rate risk and interest rate swaps to manage our
interest rate risk.

The following table summarizes our derivative financial
instruments, their fair values and their sensitivity to an
instantaneous 10 percent decrease of the euro against other
currencies and an instantaneous 1 percent non-favorable
increase in interest rates from their levels of
December 31, 2005 and 2006 respectively, with all other
variables held constant.



ASML ANNUAL REPORT 2006

52



---



##### Table of Contents



|                                 |  |                   |         |     |              |  |             |               |  |       |          |   |  |  |         |  
|-------------------------------- |  | ----------------- | ------- | --- | ------------ |  | ----------- | ------------- |  | ----- | -------- | - |  |  | ------- | -
|                                 | 
|                                 |  | Fair Value change |        
|                                 |  |                   |         | 10% |             
|                                 |  | 1% non-           |         |     | weakening of | 
|                                 |  | favorable         |         |     | euro against | 
|                                 |  | Notional          |         |     |              |  | increase in |               |  | other |         
|                                 |  | Amount2           |         |     | Fair Value   |  |             | interest rate |  |       | currency |  
|(in thousands)                   |  | EUR               |         |     | EUR          |  |             | EUR           |  |       | EUR      |  
|                                 | 
|As of December 31,
    2005      |  |                   |         |     |              |  |             |               |  |       |          |   |  |  |         |  
|Forward
    contracts1           |  |                   | 93,260  |     |              |  | (6,508      | )             |  |       | N/A      |   |  |  | (8,942  | )
|Currency options                 |  |                   | (29,843 | )   |              |  | (1,369      | )             |  |       | N/A      |   |  |  | 3,002   |  
|Interest rate swaps              |  |                   | 917,395 |     |              |  | (4,896      | )             |  |       | (3,283   | ) |  |  | (500    | )
|                                
|Year ended December 31,
    2006 |  |                   |         |     |              |  |             |               |  |       |          |   |  |  |         |  
|Forward
    contracts1           |  |                   | 480,489 |     |              |  | 1,642       |               |  |       | N/A      |   |  |  | (53,388 | )
|Currency options                 |  |                   | 73,049  |     |              |  | 2,740       |               |  |       | N/A      |   |  |  | (3,227  | )
|Interest rate swaps              |  |                   | 429,900 |     |              |  | (4,447      | )             |  |       | (10,481  | ) |  |  | N/A     |  
|                                



|  |                                                                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Includes forward contracts on U.S. Dollars, Hong Kong Dollars,
    British Pounds, Swiss Francs, Israeli Shekel, Japanese Yen,
    Singapore Dollars, Taiwanese Dollars and Korean Wons.   
|2 | Net amount of forward and option contracts assigned as a hedge
    to sales and purchase transactions, to monetary assets and
    liabilities and to net investments in foreign operations.










Item 12 Description of Securities Other Than Equity
Securities












---



##### Table of Contents

Part II





Item 13 Defaults, Dividend Arrearages and
Delinquencies

None.





Item 14 Material Modifications to the Rights of Security
Holders and Use of Proceeds

None.





Item 15 Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this report, management
of ASML conducted an evaluation, under the supervision and with
the participation of ASMLs Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and
operation of ASMLs disclosure controls and procedures (as
defined in 17 CFR 240.13a-15(e) or 240.15d-15(e)) based on
the evaluation of these controls and procedures required by
paragraph (b) of 17 CFR 240.13a-15 or 240.15d-15.

Managements Report on Internal Control over Financial
Reporting

ASMLs management is responsible for establishing and
maintaining adequate internal control over financial reporting,
as such term is defined in 17 CFR 240.13a-15(f)for
ASML. Under the supervision and with the participation of
ASMLs Chief Executive Officer and Chief Financial Officer,
ASMLs management conducted an evaluation of the
effectiveness of ASMLs internal control over financial
reporting based upon the framework in Internal
Control  Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
as of the end of the period covered by this report. Based on
that evaluation, management has concluded that ASMLs
internal control over financial reporting was effective as of
December 31, 2006 at providing reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States of America.

Deloitte Accountants B.V., an independent registered public
accounting firm, has audited the consolidated financial
statements included in this annual report on
Form 20-F and, as
part of the audit, has issued a report, included herein, on
ASMLs managements assessment of the effectiveness of
ASMLs internal control over financial reporting and the
effectiveness of ASMLs internal control over financial
reporting.

Changes in Internal Control over Financial Reporting

During the year ended December 31, 2006 there have been no
changes in our internal control over financial reporting that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.

Inherent Limitations of Disclosure Controls and Procedures in
Internal Control over Financial Reporting

It should be noted that any system of controls, however well
designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system will be
met. In addition, the design of any control system is based in
part upon certain assumptions about the likelihood of future
events.





Item 16





A. Audit Committee Financial Expert

Our Supervisory Board has determined that effective
March 18, 2004, Mr. Fritz Fröhlich, an
independent member of the Supervisory Board, qualifies as the
Audit Committee Financial Expert.





B. Code of Ethics

ASMLs Code on Ethical Business Conduct

ASML has adopted its Principles of Ethical Business
Conduct, which contain ASMLs ethical principles in
relation to various subjects. These Principles have been
developed into day-to-day guidelines (the Internal
Guidelines on Ethical Business Conduct). The Internal
Guidelines on Ethical Business Conduct apply to ASML employees
worldwide, including ASMLs



ASML ANNUAL REPORT 2006

54



---



##### Table of Contents

Supervisory Board and Board of Management. Our Principles of
Ethical Business Conduct and Internal Guidelines on Ethical
Business Conduct are posted on our website (www.asml.com).

The Internal Guidelines on Ethical Business Conduct contain,
among others, written standards that are reasonably designed to
deter wrongdoing and to promote:


    honest and ethical conduct, including the ethical handling of
    actual or apparent conflicts of interest between personal and
    professional relationships;
    full, fair, accurate, timely, and understandable disclosure in
    reports and documents that ASML files with, or submits to, the
    SEC and in other public communications made by ASML;
    compliance with applicable governmental laws, rules and
    regulations;
    prompt internal reporting of violations on the Internal
    Guidelines on Ethical Business Conduct to an appropriate person
    or persons identified in these guidelines; and
    accountability for adherence to the guidelines.



C. Principal Accountant Fees and Services

Deloitte Accountants B.V. has served as our independent
registered public accounting firm for each of the three years in
the period ended December 31, 2006. The following table
sets forth the aggregate fees for professional audit services
and other services rendered by Deloitte Accountants B.V. in 2005
and 2006.

|                       |  |      |       |  |      |  |       | 
|---------------------- |  | ---- | ----- |  | ---- |  | ----- | 
|                       | 
|Year ended December 31 |  | 2005 |       |  | 2006 | 
|(in thousands)         |  | EUR  |       |  | EUR  | 
|                       | 
|Audit Fees             |  |      | 1,333 |  |      |  | 1,438 | 
|Audit-related Fees     |  |      | 92    |  |      |  | 266   | 
|Tax Fees               |  |      | 448   |  |      |  | 216   | 
|                      
|Total                  |  |      | 1,873 |  |      |  | 1,920 | 
|                      

Audit fees


20-F,


Audit-related fees




Tax fees




|                                             |  |      |     |  |      |  |     | 
|-------------------------------------------- |  | ---- | --- |  | ---- |  | --- | 
|                                             | 
|Year ended December 31                       |  | 2005 |     |  | 2006 | 
|(in thousands)                               |  | EUR  |     |  | EUR  | 
|                                             | 
|Corporate Income Tax compliance
    services |  |      | 185 |  |      |  | 59  | 
|Tax assistance for expatriate
    employees  |  |      | 186 |  |      |  | 70  | 
|Other tax advisory and compliance            |  |      | 77  |  |      |  | 87  | 
|                                            
|Total                                        |  |      | 448 |  |      |  | 216 | 
|                                            











---



##### Table of Contents

D. Exemptions from the Listing Standards for Audit
Committees

Not applicable.





E. Purchases of Equity Securities by the Issuer and
Affiliated Purchasers

At March 23, 2006 the General Meeting of Shareholders
authorized the Board of Management, subject to approval of the
Supervisory Board, to repurchase up to a maximum of
10 percent of our issued shares through September 23,
2006 at a price between the nominal value of the ordinary shares
purchased and 110 percent of the market price of these
securities on Euronext Amsterdam or Nasdaq.

Pursuant to this authorization by the annual General Meeting of
Shareholders, we executed two share buy back programs in 2006 to
return excess cash to shareholders through the reduction of the
number of outstanding shares. The aggregate number of shares
bought back under these programs was 40,385,139 or
8.3 percent of outstanding shares. For more details about
the two programs, see below.

We intend to execute a program to buy back the remaining
1.7 percent of the maximum of 10 percent of
outstanding shares in 2007. These shares shall either be used to
cover outstanding stock options or be cancelled.

Share buyback program I

The aggregate number of shares bought back in this Repurchase
Program was 25,450,296, representing 100 percent of the
announced objective of maximum EUR 400 million and
5.25 percent of outstanding shares. This 2006 Repurchase
Program was completed in the third quarter of 2006. Shares
repurchased have been recorded at cost and are classified within
shareholders equity. ASML intends to cancel these
repurchased shares.

The following table provides a summary of shares repurchased by
the Company in 2006 under this program:

|                |  |                     |            |  |                       |  |       |                    |  |  |                   |  |  |  |     | 
|--------------- |  | ------------------- | ---------- |  | --------------------- |  | ----- | ------------------ |  |  | ----------------- |  |  |  | --- | 
|                | 
|                |  | Total Number of     |            |  | Total Value of Shares | 
|                |  | Shares Purchased as |            |  | Purchased as Part of  | 
|                |  | Part of Publicly    |            |  | Publicly Announced    | 
|                |  | Total Number of     |            |  | Average Price Paid    |  |       | Announced Plans or |  |  | Plans or Programs | 
|Period          |  | Shares purchased    |            |  | per Share (EUR)       |  |       | Programs           |  |  | (In EUR million)  | 
|                | 
|May 17-26, 2006 |  |                     | 6,412,920  |  |                       |  | 15.59 |                    |  |  | 6,412,920         |  |  |  | 100 | 
|June 7-30, 2006 |  |                     | 13,517,078 |  |                       |  | 15.81 |                    |  |  | 19,929,998        |  |  |  | 314 | 
|July 3-13, 2006 |  |                     | 5,520,298  |  |                       |  | 15.62 |                    |  |  | 25,450,296        |  |  |  | 400 | 
|               

Share buyback program II






|                 |  |                     |            |  |                       |  |       |                    |  |  |                   |  |  |  |     | 
|---------------- |  | ------------------- | ---------- |  | --------------------- |  | ----- | ------------------ |  |  | ----------------- |  |  |  | --- | 
|                 | 
|                 |  | Total Number of     |            |  | Total Value of Shares | 
|                 |  | Shares Purchased as |            |  | Purchased as Part of  | 
|                 |  | Part of Publicly    |            |  | Publicly Announced    | 
|                 |  | Total Number of     |            |  | Average Price Paid    |  |       | Announced Plans or |  |  | Plans or Programs | 
|Period           |  | Shares purchased    |            |  | per Share (EUR)       |  |       | Programs           |  |  | (In EUR million)  | 
|                 | 
|October 12, 2006 |  |                     | 14,934,843 |  |                       |  | 18.55 |                    |  |  | 14,934,843        |  |  |  | 277 | 
|                









---



##### Table of Contents

Part III





Item 17 Financial Statements

Not applicable.





Item 18 Financial Statements

In response to this item, the Company incorporates herein by
reference the consolidated financial statements of the Company
set forth on pages F-2 through F-46 hereto.

Item 19 Exhibits

|            |  |                                                                                                                                                                                                                                                                                                                                       
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                           
|           
|1           |  | Articles of Association of ASML
    Holding N.V. (English translation) (Incorporated by reference to
    Amendment No. 9 to the Registrants Registration
    Statement on Form 8-A/A, filed with the Commission on
    June 28, 2006)                                                                                                
|2.1         |  | Paying Agent, Conversion Agent and
    Registrar Agreement between ASML Holding N.V. and the Bank of
    New York relating to the Registrants 5.50 percent
    Convertible Subordinated Notes due 2010 (Incorporated by
    reference to the Registrants Annual Report on
    Form 20-F for the fiscal year ended December 31, 2003)
|4.1         |  | Agreement between ASML Lithography
    B.V. and Carl Zeiss, dated March 17, 2000 (Incorporated by
    reference to the Registrants Annual Report on
    Form 20-F for the fiscal year ended December 31, 2000) #                                                                                                                     
|4.2         |  | Agreement between ASML Holding N.V.
    and Carl Zeiss, dated October 24, 2003 (Incorporated by
    reference to the Registrants Annual Report on
    Form 20-F for the year ended December 31, 2003) #                                                                                                                              
|4.3         |  | Form of Indemnity Agreement between
    ASML Holding N.V. and members of its Board of Management
    (Incorporated by reference to the Registrants Annual
    Report on Form 20-F for the year ended December 31, 2003)                                                                                                              
|4.4         |  | Form of Indemnity Agreement between
    ASML Holding N.V. and members of its Supervisory Board
    (Incorporated by reference to the Registrants Annual
    Report on Form 20-F for the year ended December 31,
    2003)                                                                                                            
|4.5         |  | Employment Agreement between ASML
    Holding N.V. and Klaus Fuchs (Incorporated by reference to the
    Registrants Annual Report on Form 20-F for the fiscal
    year ended December 31, 2005)                                                                                                                                     
|4.6         |  | Employment Agreement between ASML
    Holding N.V. and Eric Meurice (Incorporated by reference to the
    Registrants Annual Report on Form 20-F for the fiscal
    year ended December 31, 2004)                                                                                                                                    
|4.7         |  | Form of Employment Agreement for
    members of the Board of Management (Incorporated by reference to
    the Registrants Annual Report on Form 20-F for the
    fiscal year ended December 31, 2003)                                                                                                                                
|4.8         |  | Nikon-ASML Patent Cross License
    Agreement, dated December 10, 2004, between ASML Holding N.V.
    and Nikon Corporation (Incorporated by reference to the
    Registrants Annual Report on Form 20-F for the fiscal
    year ended December 31, 2004) #                                                                          
|4.9         |  | ASML/Zeiss Sublicense Agreement,
    2004, dated December 10, 2004, between Carl Zeiss SMT AG and
    ASML Holding N.V. (Incorporated by reference to the
    Registrants Annual Report on Form 20-F for the fiscal
    year ended December 31, 2004) #                                                                              
|4.10        |  | ASML New Hires and Incentive Stock
    Option Plan For Management (Version 2003) (Incorporated by
    reference to exhibit 4.4 to the Registrants Statement on
    Form S-8, filed with the Commission on September 2,
    2003) (file No. 333-109154)                                                                               
|4.11        |  | ASML Option Plan for Management of
    ASML Holding Group Companies (Incorporated by reference to the
    Registrants Registration Statement on Form S-8 filed
    with the Commission on June 30, 2005
    (file No. 333-126340))                                                                                                   
|4.12        |  | Consultancy Agreement between David
    Chavoustie and ASML Holding N.V. (Incorporated by reference to
    the Registrants Annual Report on Form 20-F for the
    fiscal year ended December 31, 2005)                                                                                                                               
|4.13        |  | ASML Stock Option Plan for New Hire
    Options granted to Members of the Board of Management (Version
    April 2006) (Incorporated by reference to the Registrants
    Registration Statement on Form S-8 filed with the
    Commission on August 7, 2006 (file No. 333-136362))                                                   
|4.15        |  | ASML Stock Option Plan for
    Incentive or New Hire Options granted to Senior and Executive
    Management (Version April 2006) (Incorporated by reference to
    the Registrants Registration Statement on Form S-8
    filed with the Commission on August 7, 2006
    (file No. 333-136362))                                     
|4.16        |  | ASML Stock Option Plan for
    Incentive or New Hire Options granted to Senior and Executive
    Management (Version July 2006) (Incorporated by reference to the
    Registrants Registration Statement on Form S-8 filed
    with the Commission on August 7, 2006
    (file No. 333-136362))                                      
|4.17        |  | ASML Stock Option Plan for
    Incentive or New Hire Options granted to Senior and Executive
    Management (Version October 2006) (Incorporated by reference to
    the Registrants Registration Statement on Form S-8
    filed with the Commission on August 7, 2006
    (file No. 333-136362))                                   
|8.1         |  | List of Material Subsidiaries*                                                                                                                                                                                                                                                                                                        
|12.1        |  | Certification of CEO and CFO
    Pursuant to Rule 13a-14(a) of the Securities Exchange Act of
    1934*                                                                                                                                                                                                                               
|13.1        |  | Certification of CEO and CFO
    Pursuant to Rule 13a-14(b) of the Securities Exchange Act of
    1934 and 18 U.S.C. Section 1350 as Adopted Pursuant to Section
    906 of the Sarbanes-Oxley Act of 2002*                                                                                                                           
|15.1        |  | Consent of Deloitte Accountants
    B.V.*                                                                                                                                                                                                                                                                                             
|           



|  |                                                                                                                                                  
|- | -------------------------------------------------------------------------------------------------------------------------------------------------
|* | Filed at the Commission herewith                                                                                                                 
|# | Certain information omitted pursuant to a request for
    confidential treatment filed separately with the Securities and
    Exchange Commission









---



##### Table of Contents

Signatures

ASML Holding N.V. hereby certifies that it meets all of the
requirements for filing on
Form 20-F and that
it has duly caused and authorized the undersigned to sign this
annual report on its behalf.

ASML Holding N.V.

(Registrant)

/s/ Eric Meurice

President, Chief Executive Officer and Chairman of the Board of
Management

Dated: January 26, 2007

/s/ Peter T.F.M. Wennink

Executive Vice President, Chief Financial Officer and Member of
the Board of Management

Dated: January 26, 2007



ASML ANNUAL REPORT 2006

58



---



##### Table of Contents

Index to Financial Statements

|     |  |                                                                                                             
|---- |  | ------------------------------------------------------------------------------------------------------------
|F-2  |  | Consolidated Statements of
    Operations for the years ended December 31, 2004, 2005 and 2006              
|F-3  |  | Consolidated Statements of
    Comprehensive Income for the years ended December 31, 2004, 2005
    and 2006
|F-3  |  | Consolidated Balance Sheets as of
    December 31, 2005 and 2006                                            
|F-4  |  | Consolidated Statements of
    Shareholders Equity for the years ended December 31, 2004,
    2005 and 2006
|F-5  |  | Consolidated Statements of Cash
    Flows for the years ended December 31, 2004, 2005 and 2006              
|F-6  |  | Notes to the Consolidated Financial
    Statements                                                          
|F-39 |  | Report of Independent Registered
    Public Accounting Firm                                                 









---



##### Table of Contents

Consolidated Statements of Operations

|      |  |                                                                                  |  |      |           |   |      |  |           |      |  |  |           |  
|----- |  | -------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- |  | --------- | ---- |  |  | --------- | -
|      | 
|      |  | Year ended December 31                                                           |  | 2004 |           |   | 2005 |  |           | 2006 | 
|Notes |  | (in thousands, except per share data)                                            |  | EUR  |           |   | EUR  |  |           | EUR  | 
|      | 
|16    |  | Net system sales                                                                 |  |      | 2,174,908 |   |      |  | 2,227,678 |      |  |  | 3,229,065 |  
|      |  | Net service and field option sales                                               |  |      | 290,469   |   |      |  | 301,289   |      |  |  | 368,039   |  
|     
|     
|      |  | Total net sales                                                                  |  |      | 2,465,377 |   |      |  | 2,528,967 |      |  |  | 3,597,104 |  
|      |  | Cost of system sales                                                             |  |      | 1,372,056 |   |      |  | 1,366,026 |      |  |  | 1,911,362 |  
|      |  | Cost of service and field option
    sales                                       |  |      | 187,682   |   |      |  | 188,746   |      |  |  | 223,724   |  
|     
|     
|3     |  | Total cost of sales                                                              |  |      | 1,559,738 |   |      |  | 1,554,772 |      |  |  | 2,135,086 |  
|     
|     
|      |  | Gross profit on sales                                                            |  |      | 905,639   |   |      |  | 974,195   |      |  |  | 1,462,018 |  
|      |  | Research and development costs                                                   |  |      | 352,920   |   |      |  | 347,901   |      |  |  | 413,708   |  
|      |  | Research and development credits                                                 |  |      | (21,961   | ) |      |  | (24,027   | )    |  |  | (27,141   | )
|      |  | Selling, general and administrative
    costs                                    |  |      | 201,629   |   |      |  | 201,204   |      |  |  | 204,799   |  
|3     |  | Restructuring charges (credits)                                                  |  |      | (5,862    | ) |      |  | 0         |      |  |  | 0         |  
|     
|     
|      |  | Income from operations                                                           |  |      | 378,913   |   |      |  | 449,117   |      |  |  | 870,652   |  
|      |  | Interest income                                                                  |  |      | 27,998    |   |      |  | 38,429    |      |  |  | 49,634    |  
|      |  | Interest expense                                                                 |  |      | (44,071   | ) |      |  | (52,523   | )    |  |  | (50,488   | )
|     
|     
|      |  | Income from operations before
    income taxes                                   |  |      | 362,840   |   |      |  | 435,023   |      |  |  | 869,798   |  
|15    |  | Provision for income taxes                                                       |  |      | (127,380  | ) |      |  | (123,559  | )    |  |  | (245,109  | )
|     
|     
|      |  | Net income                                                                       |  |      | 235,460   |   |      |  | 311,464   |      |  |  | 624,689   |  
|      |  | Basic net income per ordinary share                                              |  |      | 0.49      |   |      |  | 0.64      |      |  |  | 1.32      |  
|      |  | Diluted net income per ordinary
    share                                        |  |      | 0.49      |   |      |  | 0.64      |      |  |  | 1.27      |  
|      |  | Number of ordinary shares used in
    computing per share amounts (in thousands) |  |      |           |   |      |  |           |      |  |  |           |  
|      |  | Basic                                                                            |  |      | 483,380   |   |      |  | 484,103   |      |  |  | 474,860   |  
|      |  | Diluted                                                                          |  |      | 484,661   |   |      |  | 542,979   |      |  |  | 503,983   |  
|     









---



##### Table of Contents

Consolidated Statements of Comprehensive Income

|                                               |  |      |         |   |      |  |         |      |  |  |         |  
|---------------------------------------------- |  | ---- | ------- | - | ---- |  | ------- | ---- |  |  | ------- | -
|                                               | 
|Year ended December 31                         |  | 2004 |         |   | 2005 |  |         | 2006 | 
|(in thousands)                                 |  | EUR  |         |   | EUR  |  |         | EUR  | 
|                                               | 
|Net income                                     |  |      | 235,460 |   |      |  | 311,464 |      |  |  | 624,689 |  
|Foreign currency translation, net
    of taxes |  |      | (21,832 | ) |      |  | 25,389  |      |  |  | (20,104 | )
|Gain (loss) on derivative
    instruments      |  |      | 16,736  |   |      |  | (38,365 | )    |  |  | 11,240  |  
|                                              
|                                              
|Comprehensive income                           |  |      | 230,364 |   |      |  | 298,488 |      |  |  | 615,825 |  
|                                              

Consolidated Balance Sheets


|       |  |                                                                                                                                                                                         |  |      |           |  |      |  |           |  
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- |  | ---- |  | --------- | -
|       | 
|       |  | As of December 31                                                                                                                                                                       |  | 2005 |           |  | 2006 | 
|Notes  |  | (in thousands, except share and per share data)                                                                                                                                         |  | EUR  |           |  | EUR  | 
|       | 
|       |  | Assets                                                                                                                                                                                  |  |      |           |  |      |  |           |  
|       |  | Cash and cash equivalents                                                                                                                                                               |  |      | 1,904,609 |  |      |  | 1,655,857 |  
|5      |  | Accounts receivable, net                                                                                                                                                                |  |      | 302,572   |  |      |  | 672,762   |  
|6      |  | Inventories, net                                                                                                                                                                        |  |      | 777,200   |  |      |  | 808,481   |  
|15     |  | Deferred tax assets short term                                                                                                                                                          |  |      | 95,636    |  |      |  | 141,255   |  
|7      |  | Other current assets                                                                                                                                                                    |  |      | 125,802   |  |      |  | 147,683   |  
|      
|      
|       |  | Total current assets                                                                                                                                                                    |  |      | 3,205,819 |  |      |  | 3,426,038 |  
|      
|15     |  | Deferred tax assets                                                                                                                                                                     |  |      | 206,884   |  |      |  | 200,378   |  
|7      |  | Other assets                                                                                                                                                                            |  |      | 39,796    |  |      |  | 35,653    |  
|8      |  | Intangible assets, net                                                                                                                                                                  |  |      | 24,943    |  |      |  | 18,076    |  
|9      |  | Property, plant and equipment, net                                                                                                                                                      |  |      | 278,581   |  |      |  | 270,890   |  
|      
|      
|       |  | Total assets                                                                                                                                                                            |  |      | 3,756,023 |  |      |  | 3,951,035 |  
|      
|       |  | Liabilities and
    Shareholders Equity                                                                                                                                                |  |      |           |  |      |  |           |  
|       |  | Accounts payable                                                                                                                                                                        |  |      | 343,962   |  |      |  | 326,995   |  
|3, 10  |  | Accrued liabilities and other                                                                                                                                                           |  |      | 985,621   |  |      |  | 665,842   |  
|15     |  | Deferred tax liabilities short term                                                                                                                                                     |  |      | 390       |  |      |  | 825       |  
|       |  | Current tax liabilities                                                                                                                                                                 |  |      | 90,010    |  |      |  | 187,751   |  
|      
|      
|       |  | Total current
    liabilities                                                                                                                                                           |  |      | 1,419,983 |  |      |  | 1,181,413 |  
|      
|15     |  | Deferred tax and other liabilities                                                                                                                                                      |  |      | 224,219   |  |      |  | 223,463   |  
|12, 13 |  | Other deferred liabilities                                                                                                                                                              |  |      | 17,426    |  |      |  | 8,271     |  
|11     |  | Convertible subordinated debt                                                                                                                                                           |  |      | 380,238   |  |      |  | 380,000   |  
|11     |  | Other long term debt                                                                                                                                                                    |  |      | 2,320     |  |      |  | 1,433     |  
|      
|      
|       |  | Total liabilities                                                                                                                                                                       |  |      | 2,044,186 |  |      |  | 1,794,580 |  
|      
|12, 14 |  | Commitments and contingencies                                                                                                                                                           |  |      |           |  |      |  |           |  
|       |  | Cumulative Preference Shares, EUR
    0.02 nominal value;
    900,000,000 shares authorized; none outstanding at
    December 31, 2005 and 2006                                         |  |      | 0         |  |      |  | 0         |  
|      
|       |  | Priority Shares, EUR 0.02 nominal
    value; 23,100 shares authorized, issued and outstanding at
    December 31, 2005 and 0 at December 31, 2006                                       |  |      | 1         |  |      |  | 0         |  
|      
|       |  | Ordinary Shares, EUR 0.02 nominal
    value; 900,000,000 shares authorized; 484,670,183 shares issued
    and outstanding at December 31, 2005 and 477,099,245 at
    December 31, 2006 |  |      | 9,693     |  |      |  | 10,051    |  
|      
|       |  | Share premium                                                                                                                                                                           |  |      | 917,564   |  |      |  | 1,195,034 |  
|       |  | Treasury shares at cost                                                                                                                                                                 |  |      | 0         |  |      |  | (401,000  | )
|       |  | Retained earnings                                                                                                                                                                       |  |      | 663,034   |  |      |  | 1,239,689 |  
|       |  | Accumulated other comprehensive
    income                                                                                                                                              |  |      | 121,545   |  |      |  | 112,681   |  
|      
|      
|20     |  | Total shareholders
    equity                                                                                                                                                          |  |      | 1,711,837 |  |      |  | 2,156,455 |  
|       |  | Total liabilities and
    shareholders equity                                                                                                                                          |  |      | 3,756,023 |  |      |  | 3,951,035 |  
|      
|      









---



##### Table of Contents

Consolidated Statements of Shareholders Equity

|                                                                             |  |                        |         |     |            |             |          |          |  |       |           |  |     |               |           |     |        |  |          |       |  |  |         |   |  |  |           |  
|---------------------------------------------------------------------------- |  | ---------------------- | ------- | --- | ---------- | ----------- | -------- | -------- |  | ----- | --------- |  | --- | ------------- | --------- | --- | ------ |  | -------- | ----- |  |  | ------- | - |  |  | --------- | -
|                                                                             | 
|                                                                             |  |                        |         |     |            | Accumulated |          |          | 
|                                                                             |  | Issued and outstanding |         |     |            |             | Treasury |          |  | Other |           |  |    
|                                                                             |  | Shares                 |         |     | APIC/Share |             |          | Retained |  |       | Shares at |  |     | Comprehensive |           |     |       
|                                                                             |  | Number                 |         |     | Amount     |             |          | Premium  |  |       | Earnings  |  |     | cost          |           |     | Income |  |          | Total | 
|(in thousands)                                                               |  |                        |         | EUR |            |             | EUR      |          |  | EUR   |           |  | EUR |               |           | EUR |        |  | EUR      |      
|                                                                             | 
|Balance at January 1,
    2004                                               |  |                        | 482,514 |     |            |             | 9,651    |          |  |       | 875,829   |  |     |               | 116,110   |     |        |  | 0        |       |  |  | 139,617 |   |  |  | 1,141,207 |  
|                                                                            
|Components of comprehensive
    income:                                      |  |                        |         |     |            |             |          |          |  |       |           |  |     |               |           |     |        |  |          |       |  |  |         |   |  |  |           |  
|Net income                                                                   |  |                        |         |     |            |             |          |          |  |       |           |  |     |               | 235,460   |     |        |  |          |       |  |  |         |   |  |  | 235,460   |  
|Foreign Currency Translation                                                 |  |                        |         |     |            |             |          |          |  |       |           |  |     |               |           |     |        |  |          |       |  |  | (21,832 | ) |  |  | (21,832   | )
|Gain (loss) on derivative
    instruments                                    |  |                        |         |     |            |             |          |          |  |       |           |  |     |               |           |     |        |  |          |       |  |  | 16,736  |   |  |  | 16,736    |  
|Issuance of Shares                                                           |  |                        | 1,162   |     |            |             | 24       |          |  |       | 20,007    |  |     |               |           |     |        |  | 0        |       |  |  |         |   |  |  | 20,031    |  
|                                                                            
|                                                                            
|Balance at December 31,
    2004                                             |  |                        | 483,676 |     |            |             | 9,675    |          |  |       | 895,836   |  |     |               | 351,570   |     |        |  | 0        |       |  |  | 134,521 |   |  |  | 1,391,602 |  
|                                                                            
|Components of comprehensive
    income:                                      |  |                        |         |     |            |             |          |          |  |       |           |  |     |               |           |     |        |  |          |       |  |  |         |   |  |  |           |  
|Net income                                                                   |  |                        |         |     |            |             |          |          |  |       |           |  |     |               | 311,464   |     |        |  |          |       |  |  |         |   |  |  | 311,464   |  
|Foreign Currency Translation                                                 |  |                        |         |     |            |             |          |          |  |       |           |  |     |               |           |     |        |  |          |       |  |  | 25,389  |   |  |  | 25,389    |  
|Gain (loss) on derivative
    instruments                                    |  |                        |         |     |            |             |          |          |  |       |           |  |     |               |           |     |        |  |          |       |  |  | (38,365 | ) |  |  | (38,365   | )
|                                                                            
|Tax benefit from stock
    options                                           |  |                        |         |     |            |             |          |          |  |       | 5,919     |  |     |               |           |     |        |  |          |       |  |  |         |   |  |  | 5,919     |  
|                                                                            
|Issuance of Shares                                                           |  |                        | 994     |     |            |             | 19       |          |  |       | 15,809    |  |     |               |           |     |        |  |          |       |  |  |         |   |  |  | 15,828    |  
|                                                                            
|                                                                            
|Balance at December 31,
    2005                                             |  |                        | 484,670 |     |            |             | 9,694    |          |  |       | 917,564   |  |     |               | 663,034   |     |        |  | 0        |       |  |  | 121,545 |   |  |  | 1,711,837 |  
|                                                                            
|Components of comprehensive
    income:                                      |  |                        |         |     |            |             |          |          |  |       |           |  |     |               |           |     |        |  |          |       |  |  |         |   |  |  |           |  
|Net income                                                                   |  |                        |         |     |            |             |          |          |  |       |           |  |     |               | 624,689   |     |        |  |          |       |  |  |         |   |  |  | 624,689   |  
|Foreign Currency Translation                                                 |  |                        |         |     |            |             |          |          |  |       |           |  |     |               |           |     |        |  |          |       |  |  | (20,104 | ) |  |  | (20,104   | )
|Gain (loss) on derivative
    instruments                                    |  |                        |         |     |            |             |          |          |  |       |           |  |     |               |           |     |        |  |          |       |  |  | 11,240  |   |  |  | 11,240    |  
|                                                                            
|Purchase of treasury
    shares                                              |  |                        | (25,450 | )1  |            |             |          |          |  |       |           |  |     |               |           |     |        |  | (401,000 | )     |  |  |         |   |  |  | (401,000  | )
|Purchase of shares in
    conjunction with conversion rights of bond holders |  |                        | (14,935 | )2  |            |             | (299     | )        |  |       |           |  |     |               |           |     |        |  | (277,235 | )     |  |  |         |   |  |  | (277,534  | )
|Issuance of shares in
    conjunction with convertible bonds                 |  |                        | 30,811  |     |            |             | 616      |          |  |       | 238,862   |  |     |               | (48,034   | )   |        |  | 277,235  |       |  |  |         |   |  |  | 468,679   |  
|                                                                            
|Tax benefit from stock
    options                                           |  |                        |         |     |            |             |          |          |  |       | 2,906     |  |     |               |           |     |        |  |          |       |  |  |         |   |  |  | 2,906     |  
|                                                                            
|Issuance of shares and stock
    options                                     |  |                        | 2,003   |     |            |             | 40       |          |  |       | 35,702    |  |     |               |           |     |        |  |          |       |  |  |         |   |  |  | 35,742    |  
|                                                                            
|                                                                            
|Balance at December 31,
    2006                                             |  |                        | 477,099 |     |            |             | 10,051   |          |  |       | 1,195,034 |  |     |               | 1,239,689 |     |        |  | (401,000 | )     |  |  | 112,681 |   |  |  | 2,156,455 |  
|                                                                            



|  |                                                                                                                                                                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | ASML intends to cancel its repurchased shares.                                                                                                                                                                                                                      
|2 | In 2006 14,934,843 shares were bought back which have
    subsequently been reissued in order to satisfy the conversion
    rights of holders of our 5.75 percent Convertible Subordinated
    Notes. We paid EUR 278 million in cash for these shares in
    total.











---



##### Table of Contents

Consolidated Statements of Cash Flows

|                                                                                                         |  |      |           |   |      |  |           |      |  |  |           |  
|-------------------------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- |  | --------- | ---- |  |  | --------- | -
|                                                                                                         | 
|Year ended December 31                                                                                   |  | 2004 |           |   | 2005 |  |           | 2006 | 
|(in thousands)                                                                                           |  | EUR  |           |   | EUR  |  |           | EUR  | 
|                                                                                                         | 
|Cash Flows from Operating
    Activities                                                                 |  |      |           |   |      |  |           |      |  |  |           |  
|Net income                                                                                               |  |      | 235,460   |   |      |  | 311,464   |      |  |  | 624,689   |  
|                                                                                                        
|Adjustments to reconcile net income
    to net cash flows from operating activities:                     |  |      |           |   |      |  |           |      |  |  |           |  
|Depreciation and amortization                                                                            |  |      | 90,215    |   |      |  | 90,531    |      |  |  | 87,092    |  
|Impairment charges                                                                                       |  |      | 2,929     |   |      |  | 8,350     |      |  |  | 17,354    |  
|Allowance for doubtful debts                                                                             |  |      | 3,085     |   |      |  | 1,871     |      |  |  | 249       |  
|Allowance for obsolete inventory                                                                         |  |      | 34,336    |   |      |  | 11,811    |      |  |  | 54,181    |  
|Deferred income taxes                                                                                    |  |      | 114,701   |   |      |  | 17,830    |      |  |  | (69,451   | )
|Changes in assets and liabilities
    that provided (used) cash:                                         |  |      |           |   |      |  |           |      |  |  |           |  
|Accounts receivable                                                                                      |  |      | (192,819  | ) |      |  | 203,488   |      |  |  | (362,388  | )
|Inventories                                                                                              |  |      | (149,215  | ) |      |  | (41,397   | )    |  |  | (85,213   | )
|Other assets                                                                                             |  |      | 1,127     |   |      |  | (20,088   | )    |  |  | (31,366   | )
|Accrued liabilities                                                                                      |  |      | (5,507    | ) |      |  | 46,272    |      |  |  | 153,536   |  
|Accounts payable                                                                                         |  |      | 121,998   |   |      |  | 3,406     |      |  |  | (8,916    | )
|Income taxes payable                                                                                     |  |      | 837       |   |      |  | 79,973    |      |  |  | 97,740    |  
|                                                                                                        
|Net cash provided by operating
    activities from continuing operations                                 |  |      | 257,147   |   |      |  | 713,511   |      |  |  | 477,507   |  
|                                                                                                        
|Net cash used in operating
    activities from discontinued operations                                   |  |      | (5,880    | ) |      |  | (2,018    | )    |  |  | 0         |  
|                                                                                                        
|Net cash provided by operating
    activities from total operations                                      |  |      | 251,267   |   |      |  | 711,493   |      |  |  | 477,507   |  
|                                                                                                        
|Cash Flows from Investing
    Activities                                                                 |  |      |           |   |      |  |           |      |  |  |           |  
|Purchases of property, plant and
    equipment                                                           |  |      | (74,979   | ) |      |  | (72,660   | )    |  |  | (70,619   | )
|Proceeds from sale of property,
    plant and equipment                                                  |  |      | 15,137    |   |      |  | 13,235    |      |  |  | 5,216     |  
|Purchase of intangible assets                                                                            |  |      | (556      | ) |      |  | (1,378    | )    |  |  | (120      | )
|                                                                                                        
|Net cash used in investing
    activities from operations                                                |  |      | (60,398   | ) |      |  | (60,803   | )    |  |  | (65,523   | )
|                                                                                                        
|Cash Flows from Financing
    Activities                                                                 |  |      |           |   |      |  |           |      |  |  |           |  
|Purchase of treasury shares                                                                              |  |      | 0         |   |      |  | 0         |      |  |  | (401,000  | )
|Purchase of shares in conjunction
    with conversion rights of bond holders                             |  |      | 0         |   |      |  | 0         |      |  |  | (277,385  | )
|Net proceeds from issuance of
    shares and stock options                                               |  |      | 20,031    |   |      |  | 15,828    |      |  |  | 35,840    |  
|Excess tax benefits from stock
    options                                                               |  |      | 0         |   |      |  | 0         |      |  |  | 2,906     |  
|Redemption and/or repayment of debt                                                                      |  |      | (1,160    | ) |      |  | (12,949   | )    |  |  | (8,318    | )
|                                                                                                        
|Net cash provided by (used in)
    financing activities from operations                                  |  |      | 18,871    |   |      |  | 2,879     |      |  |  | (647,957  | )
|                                                                                                        
|Net cash flows                                                                                           |  |      | 209,740   |   |      |  | 653,569   |      |  |  | (235,973  | )
|Effect of changes in exchange rates
    on cash                                                          |  |      | (9,416    | ) |      |  | 22,910    |      |  |  | (12,779   | )
|                                                                                                        
|Net increase (decrease) in
    cash and cash equivalents                                                 |  |      | 200,324   |   |      |  | 676,479   |      |  |  | (248,752  | )
|Cash and cash equivalents at
    beginning of the year                                                   |  |      | 1,027,806 |   |      |  | 1,228,130 |      |  |  | 1,904,609 |  
|                                                                                                        
|Cash and cash equivalents at end
    of the year                                                         |  |      | 1,228,130 |   |      |  | 1,904,609 |      |  |  | 1,655,857 |  
|                                                                                                        
|Supplemental Disclosures of Cash
    Flow Information:                                                   |  |      |           |   |      |  |           |      |  |  |           |  
|Cash paid for:                                                                                           |  |      |           |   |      |  |           |      |  |  |           |  
|Interest                                                                                                 |  |      | 45,866    |   |      |  | 45,141    |      |  |  | 48,656    |  
|Taxes                                                                                                    |  |      | 7,430     |   |      |  | 15,335    |      |  |  | 217,466   |  
|                                                                                                        
|Supplemental non-cash investing
    and financing activities:                                            |  |      |           |   |      |  |           |      |  |  |           |  
|Conversion of Bonds into 0, 0 and
    30,811,215 ordinary shares respectively
    in 2004, 2005 and 2006 |  |      | 0         |   |      |  | 0         |      |  |  | 459,087   |  
|                                                                                                        









---



##### Table of Contents

Notes to the Consolidated Financial Statements

1. General information/Summary of significant accounting
policies

ASML Holding N.V., having its corporate seat in Veldhoven, the
Netherlands, is a worldwide company engaged in the development,
production, marketing, sale and servicing of advanced
semiconductor equipment systems mainly consisting of lithography
systems. ASMLs principal operations are in the
Netherlands, the United States of America and Asia.

The Companys shares are listed for trading in the form of
New York Shares on Nasdaq (Nasdaq Global Select Market) and in
the form of registered shares (Amsterdam Shares) on
the Eurolist by Euronext Amsterdam. The principal trading market
of the Companys ordinary shares is Eurolist by Euronext
Amsterdam.

The accompanying consolidated financial statements include the
Financial Statements of ASML Holding N.V. Veldhoven, the
Netherlands, and its consolidated subsidiaries (together
referred to as ASML or the Company).

ASML follows accounting principles generally accepted in the
United States of America (U.S. GAAP). ASMLs
reporting currency is the euro. The accompanying consolidated
financial statements are stated in thousands of euro
(EUR) unless otherwise indicated.

Principles of consolidation

The consolidated financial statements include the accounts of
ASML Holding N.V. and all of its majority-owned subsidiaries.
Subsidiaries are all entities over which ASML has the power to
govern the financial and operating policies generally
accompanying a shareholding of more than one half of the voting
rights. All intercompany profits, balances and transactions have
been eliminated in the consolidation.

Use of estimates

The preparation of ASMLs consolidated financial statements
in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets
and liabilities on the balance sheet dates and the reported
amounts of revenue and expense during the reported periods.
Actual results could differ from those estimates.

Foreign currency translation

The financial information for subsidiaries outside the euro-zone
is generally measured using local currencies as the functional
currency. The financial statements of those foreign subsidiaries
are translated into euro in the preparation of ASMLs
consolidated financial statements. Assets and liabilities are
translated into euro at the exchange rate in effect on the
respective balance sheet dates. Income and expenses are
translated into euro based on the average exchange rate for the
corresponding period. The resulting translation adjustments are
recorded directly in shareholders equity. Currency
differences on inter-company loans that have the nature of a
long-term investment are also accounted for directly in
shareholders equity.

Derivative financial instruments

The Company principally uses derivative foreign currency hedging
instruments for the management of foreign currency risks. In
accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities and
SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities an amendment of
SFAS No. 133, the Company measures all
derivative foreign currency hedging instruments based on fair
values derived from market prices of the instruments. The
Company adopts hedge accounting for all hedges that are highly
effective in offsetting the identified hedged risks as required
by the SFAS No. 133 effectiveness criteria.

On the date the derivative contract is entered into, ASML
designates the derivative as either a hedge of the fair value of
a recognized asset or liability in non-functional currencies
(fair value hedge), or a hedge of cash flows related
to sales transactions or purchase transactions in non-functional
currencies (cash flow hedge), or a hedge of the
foreign currency exposure of a net investment in a foreign
operation. ASML formally documents all relationships between
hedging instruments and hedged items, as well as its
risk-management objective and strategy for undertaking various
hedge transactions. ASML also formally assesses, both at the
hedges inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of
hedged items. When it is determined that a derivative is not
highly effective as a hedge or that it has ceased to be a highly
effective hedge (e.g. because of the sale, expiration and/or
termination of the derivative), ASML discontinues hedge
accounting prospectively. Changes in the fair value of a
derivative that is designated and qualifies as a fair-value
hedge, along with the loss or gain on the hedged asset or
liability that is attributable to the hedged risk, are recorded
in the statement of operations. Changes in the fair value of a
derivative that is designated and qualifies as a cash flow hedge
are recorded in other comprehensive income, until underlying
hedged transaction is recognized in the statement of operations.
In the event that the underlying hedge transaction does not
occur, or it



ASML ANNUAL REPORT 2006

F- 6



---



##### Table of Contents

becomes probable that it will not occur, the gain or loss on the
related cash flow hedge is immediately released from accumulated
other comprehensive income and included in the statement of
operations. Changes in the hedge of the foreign currency
exposure of a net investment in a foreign operation are recorded
in other comprehensive income.

Interest rate swaps that are being used to hedge changes in the
variability of future interest receipts are designated as cash
flow hedges. The critical terms of the hedging instruments are
the same as those for the underlying assets. Accordingly, all
changes in fair value of these derivative instruments are
recorded as other comprehensive income. The accumulated changes
in fair value of the derivatives are intended to offset changes
in future interest cash flows on the assets.

The maximum length of time of cash flow hedges is the time
elapsed from the moment the exposure is generated until the
actual settlement.

Interest rate swaps that are being used to hedge the fair value
of fixed loan coupons payable are designated as fair value
hedges. The change in fair value is intended to offset the
change in the fair value of the underlying fixed loan coupons,
which is recorded accordingly.

The Company records any ineffective portion of foreign currency
hedging instruments in sales or cost of sales in the statement
of operations. Ineffectiveness of hedging instruments had a
positive impact of EUR 0.3 million, EUR 0 million and
EUR 0 million in 2004, 2005 and 2006, respectively.

The ineffective portion of interest rate swaps is recorded in
interest income (expense). The Company did not have benefits or
costs due to ineffectiveness of interest rate swaps in 2004,
2005 and 2006.

Cash and cash equivalents

Cash and cash equivalents consist primarily of highly liquid
investments, such as bank deposits, commercial paper and Money
Market Funds, with insignificant interest rate risk and
remaining maturities of three months or less at the date of
acquisition.

Inventories

Inventories are stated at the lower of cost (first-in, first-out
method) or market value. Cost includes net prices paid for
materials purchased, charges for freight and customs duties,
production labor cost and factory overhead. Allowances are made
for slow moving, obsolete or unsaleable inventory.

Intangible assets

Intangible assets include acquired intellectual property rights
that are valued at cost or estimated fair value and are
amortized on a straight-line basis over the term of the rights
ranging from three to ten years.

Property, plant and equipment

Property, plant and equipment are stated at cost, less
accumulated depreciation and any accumulated impairment losses.
Depreciation is calculated using the straight-line method based
on the estimated useful lives of the related assets. In the case
of leasehold improvements, the estimated useful lives of the
related assets do not exceed the remaining term of the
corresponding lease. The following table presents the assigned
economic lives of ASMLs property, plant and equipment:

|                                            |  |                        |  | 
|------------------------------------------- |  | ---------------------- |  | 
|                                            | 
|Category                                    |  | Assigned economic life | 
|                                            | 
|Buildings and constructions                 |  | 5  40 years          
|Machinery and equipment                     |  | 2  5 years           
|Furniture, fixtures and other
    equipment |  | 3  5 years           
|Leasehold improvements                      |  | 5  10 years          
|                                           



Evaluation of long-lived assets for impairment












---



##### Table of Contents

recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the asset. Assets
held for sale are reported at the lower of the carrying amount
or fair value less the cost to sell.

Revenue recognition

ASML recognizes revenue when all four revenue recognition
criteria are met: persuasive evidence of an arrangement exists;
delivery has occurred or services have been rendered;
sellers price to buyer is fixed or determinable; and
collectibility is reasonably assured. At ASML, this policy
generally results in revenue recognition from the sale of a
system upon shipment. The revenue from the installation of a
system is generally recognized upon completion of that
installation at the customer site. Each system undergoes, prior
to shipment, a Factory Acceptance Test in
ASMLs clean room facilities, effectively replicating the
operating conditions that will be present on the customers
site, in order to verify whether the system will meet its
standard specifications and any additional technical and
performance criteria agreed with the customer. A system is
shipped, and revenue is recognized, only after all
specifications are met and customer sign-off is received or
waived. Although each systems performance is re-tested
upon installation at the customers site, ASML has never
failed to successfully complete installation of a system at a
customers premises.

We anticipate that, in connection with future introductions of
new technology, we will initially defer revenue recognition
until completion of installation and acceptance of the new
technology at customer premises. This deferral would continue
until we are able to conclude that installation of the
technology in question would occur consistently within a
predetermined time period and that the performance of the new
technology would not reasonably be different from that exhibited
in the pre-shipment Factory Acceptance Test. Any such deferral
of revenues, however, could have a material effect on
ASMLs results of operations for the fiscal period in which
the deferral occurred and on the succeeding fiscal period. At
December 31, 2006 and 2005 we had no deferred revenue from
shipments of new technology. During the three years ended
December 31, 2006, no revenue from new technology was
recorded that had been previously deferred. As our systems are
based largely on two product platforms that permit incremental,
modular upgrades, the introduction of genuinely new
technology occurs infrequently, and has occurred on only one
occasion since 1999.

ASML has no significant repurchase commitments in its general
sales terms and conditions. From time to time, the Company
repurchases systems that it has manufactured and sold and,
following refurbishment, resells those systems to other
customers. This repurchase decision is driven by market demand
expressed by other customers and not by explicit or implicit
contractual arrangements relating to the initial sale. The
Company considers reasonable offers from any vendor, including
customers, to repurchase used systems so that it can refurbish,
resell and install these systems as part of its normal business
operations. Once repurchased, the repurchase price of the used
system is recorded in work-in-process inventory during the
period it is being refurbished, following which the refurbished
system is reflected in finished products inventory until it is
sold to the customer. As of December 31, 2006 ASML has
repurchase commitments for an amount of EUR 24 million.

A portion of our revenue is derived from contractual
arrangements with our customers that have multiple deliverables,
such as installation and training services and prepaid service
contracts. The revenue relating to the undelivered elements of
the arrangements is deferred at fair value until delivery of
these elements. The fair value is determined by vendor specific
objective evidence (VSOE). VSOE is determined based
upon the prices that we charge for installation and comparable
services (such as relocating a system to another customer site)
on a stand-alone basis, which are subject to normal price
negotiations. Revenue from installation and training services is
recognized when the services are completed. Revenue from prepaid
service contracts is recognized over the term of the contract.

The deferred revenue balance from installation and training
services amounted to approximately EUR 13 million and
EUR 27 million, respectively, at December 31,
2006. The deferred revenue balance from prepaid service
contracts amounted to approximately EUR 121 million as of
December 31, 2006.

We offer customers discounts in the normal course of sales
negotiations. These discounts are directly deducted from the
gross sales price at the moment of revenue recognition. These
discounts do not relate to future purchases or trade-ins with
the exception of volume discounts. From time to time, we offer
volume discounts to a limited number of customers. In some
instances these volume discounts can be used to purchase field
options. The related amount is recorded as a reduction in
revenue at time of shipment. Generally, there are no other
credits or adjustments recognized at shipment. From time to
time, we offer free or discounted products or services in
connection with a current revenue transaction, which are earned
by the customer at a future date only if the customer completes
a specified cumulative level of revenue transactions. As the
value of these free products or services is insignificant in
relation to the value of the transactions necessary to earn
these free products or services, a liability is recorded for the
cost of these free products or services.

Accounting for shipping and handling fees and costs

ASML bills the customer for, and recognizes as revenue, any
charges for shipping and handling costs. The related costs are
recognized as cost of sales.



ASML ANNUAL REPORT 2006

F- 8



---



##### Table of Contents

Cost of sales

Costs of system sales comprise direct product costs such as
materials, labor, cost of warranty, depreciation, shipping and
handling costs and related overhead costs. ASML accrues for the
estimated cost of the warranty on its systems, which includes
the cost of labor and parts necessary to repair systems during
the warranty period. The amounts recorded in the warranty
accrual are estimated based on actual historical expenses
incurred and on estimated probable future expenses related to
current sales. Actual warranty costs are charged against the
accrued warranty reserve. Costs of service sales comprise direct
service costs such as materials, labor, depreciation and
overhead costs.

Restructuring

ASML applies the criteria defined in SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities and SFAS No. 112,
Employers Accounting for Postemployment
Benefits, in order to determine when a liability for
restructuring or exit costs should be recognized. With respect
to employee termination costs, the Company applies
SFAS No. 146 in the case of benefit arrangements that,
in substance, do not constitute an ongoing benefit arrangement.
SFAS No. 112 is applied when termination benefits are
provided under an ongoing benefit arrangement.
SFAS No. 146 establishes that a liability for a cost
associated with an exit or disposal activity shall be recognized
and measured initially at its fair value in the period in which
the liability is incurred; that is, when a detailed plan exists,
has been committed to by management and communicated to
employees. SFAS No. 112 establishes that a liability
for termination benefits provided under an ongoing benefit
arrangement covered by SFAS No. 112 is recognized when
the likelihood of future settlement is probable and can be
reasonably estimated.

Other exit costs include purchase and other commitments to be
settled or fulfilled. Related costs are estimated based on
expected settlement fees and committed payments, taking into
account future potential benefits, if any, from those
commitments.

The allocation of restructuring expenses to either cost of sales
or restructuring expenses is determined by reference to the
workforce to which the restructuring expenses relate.
Restructuring expenses relating to the Companys
manufacturing and service workforce are allocated to cost of
sales, while restructuring expenses relating to research and
development and selling, general and administrative activities
are presented as restructuring charges. Restructuring credits
are also recorded in the same line of the statement of
operations as used when the original expenses were initially
recognized.

Research and development costs and credits

Costs relating to research and development are charged to
operating expense as incurred. ASML receives subsidies and other
credits only from governmental institutes. These subsidies and
other governmental credits to cover research and development
costs relating to approved projects are recorded as research and
development credits in the period when such costs occur.

Stock options

On January 1, 2006, we implemented the provisions of
SFAS No. 123 (R), Share-Based
Payment, using the modified prospective transition method.
SFAS No. 123 (R) requires companies to recognize
the cost of employee services received (compensation expenses)
in exchange for awards of equity instruments based upon the
grant-date fair value of those instruments. The grant-date fair
value of these instruments was estimated using a Black-Scholes
option valuation model. This Black-Scholes pricing model
requires the use of assumptions, including expected stock price
volatility and the estimated life of each award. The risk-free
interest rate used in the model is determined, based on a Euro
government bond with a life equal to the expected life of the
equity-settled share-based payments. Our income before income
taxes and net income was negatively impacted with EUR
8.8 million and EUR 7.4 million, respectively due to
the adoption of SFAS No. 123 (R).

Using the modified prospective transition method, we began
recognizing compensation expenses for equity-based awards
granted, modified, repurchased, or cancelled after the required
effective date of January 1, 2006. Additionally,
compensation expenses for the portion of equity-based awards for
which the requisite service has not been rendered and that are
outstanding as of January 1, 2006 are also recognized as
the requisite service is rendered on or after that date.
Compensation expenses are then amortized on a straight-line
basis over the requisite service period of the awards, which is
generally the vesting period. The total gross amount of
recognized expenses associated with share based payments was EUR
9.7 million in 2006.

Under the modified prospective transition method, no restatement
of prior interim periods and fiscal years has been made. Prior
to January 1, 2006, we measured compensation expenses for
our stock option plans using the intrinsic value method under
APB 25 Accounting for Stock Issued to Employees and
related interpretations. As the exercise price of all stock
options granted under these plans was not below the fair market
price of the underlying common stock on the grant date, no
compensation expenses were recognized in the consolidated
statements of operations.



ASML ANNUAL REPORT 2006

F- 9



---



##### Table of Contents

Had compensation expenses been determined based upon the fair
value at the grant date for awards under the plan consistent
with the methodology prescribed under SFAS No. 123,
ASMLs net income and calculation for net income per
ordinary share would have been as follows (net of related tax
effects):

|                                                 |  |      |         |   |      |  |         |  
|------------------------------------------------ |  | ---- | ------- | - | ---- |  | ------- | -
|                                                 | 
|Year ended December 31                           |  | 2004 |         |   | 2005 | 
|(in thousands, except per share data)            |  | EUR  |         |   | EUR  | 
|                                                 | 
|Net income (loss)                                |  |      |         |   |      |  |         |  
|As reported                                      |  |      | 235,460 |   |      |  | 311,464 |  
|Compensation expenses                            |  |      | (12,437 | ) |      |  | (10,022 | )
|Pro forma                                        |  |      | 223,023 |   |      |  | 301,442 |  
|                                                
|                                                
|Basic net income (loss) per
    ordinary share   |  |      |         |   |      |  |         |  
|As reported                                      |  |      | 0.49    |   |      |  | 0.64    |  
|Pro forma                                        |  |      | 0.46    |   |      |  | 0.62    |  
|                                                
|                                                
|Diluted net income
    (loss) per ordinary share |  |      |         |   |      |  |         |  
|As reported                                      |  |      | 0.49    |   |      |  | 0.64    |  
|Pro forma                                        |  |      | 0.46    |   |      |  | 0.62    |  
|                                                

Black-Scholes


123(R)-3)




|                                          |  |      |       |  |      |  |       |      |  |  |       | 
|----------------------------------------- |  | ---- | ----- |  | ---- |  | ----- | ---- |  |  | ----- | 
|                                          | 
|Year ended December 31                    |  | 2004 |       |  | 2005 |  |       | 2006 | 
|                                          | 
|Weighted average share price (in
    EUR) |  |      | 12.35 |  |      |  | 11.52 |      |  |  | 17.81 | 
|Volatility (in percentage)                |  |      | 68.3  |  |      |  | 65.6  |      |  |  | 30.0  | 
|Expected life (in years)                  |  |      | 5     |  |      |  | 5     |      |  |  | 5     | 
|Risk free interest rate                   |  |      | 3.65  |  |      |  | 3.10  |      |  |  | 3.8   | 
|Expected dividend yield                   |  |      | 0     |  |      |  | 0     |      |  |  | 0     | 
|Forfeiture
    rate1                      |  |      | 0     |  |      |  | 0     |      |  |  | 0     | 
|                                         



|  |                                                        
|- | -------------------------------------------------------
|1 | As per year end 2006 we estimate forfeitures to be nil.



















---



##### Table of Contents

Income taxes

The asset and liability method is used in accounting for income
taxes. Under this method, deferred tax assets and liabilities
are recognized for the tax effect of incurred net operating
losses and for tax consequences attributable to differences
between the balance sheet carrying amounts of existing assets
and liabilities and their respective tax bases. If it is more
likely than not that the carrying amounts of deferred tax assets
will not be realized, a valuation allowance will be recorded to
reduce the carrying amounts of those assets.

Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in the results of operations
in the period that includes the enactment date.

Contingencies and litigation

We are party to various legal proceedings generally incidental
to our business, as disclosed in Note 14 to the
consolidated statements. In connection with these proceedings
and claims, our management evaluated, based on the relevant
facts and legal principles, the likelihood of an unfavorable
outcome and whether the amount of the loss could be reasonably
estimated. In each case, management determined that either a
loss was not probable or was not reasonably estimable. As a
result, no estimated losses were recorded as a charge to our
statement of operations in 2004, 2005 and 2006. Significant
subjective judgments were required in these evaluations,
including judgments regarding the validity of asserted claims
and the likely outcome of legal and administrative proceedings.
The outcome of these proceedings, however, is subject to a
number of factors beyond our control, most notably the
uncertainty associated with predicting decisions by courts and
administrative agencies. In addition, estimates of the potential
costs associated with legal and administrative proceedings
frequently cannot be subjected to any sensitivity analysis, as
damage estimates or settlement offers by claimants may bear
little or no relation to the eventual outcome. Finally, in any
particular proceeding, we may agree to settle or to terminate a
claim or proceeding in which it believes it would ultimately
prevail where we believe that doing so, when taken together with
other relevant commercial considerations, is more cost-effective
than engaging in an expensive and protracted litigation, the
outcome of which is uncertain.

We accrue for legal costs related to litigation in our statement
of operations at the time when the related legal services are
actually provided to us.

Net income per ordinary share

Basic net income per share is computed by dividing net income by
the weighted average ordinary shares outstanding for that
period. Diluted net income per share reflects the potential
dilution that could occur if options issued under ASMLs
stock compensation plan were exercised, and if ASMLs
convertible notes were converted, unless the exercise of the
stock options or conversion of the convertible notes would have
an anti-dilutive effect. The dilutive effect is calculated using
the if-converted method. Following this method, ASMLs
convertible bonds are considered dilutive in 2006 and 2005 and
anti-dilutive in 2004. Excluded from the diluted weighted
average share outstanding calculation are cumulative preference
shares contingently issuable to the preference share foundation,
since they represent a different class of stock than the
ordinary shares. See further discussion in Note 20.



ASML ANNUAL REPORT 2006

F- 11



---



##### Table of Contents

The earnings per share (EPS) data have been calculated in
accordance with the following schedule:

|                                                                                                          |  |      |         |  |      |  |         |      |  |  |         | 
|--------------------------------------------------------------------------------------------------------- |  | ---- | ------- |  | ---- |  | ------- | ---- |  |  | ------- | 
|                                                                                                          | 
|Year ended December 31                                                                                    |  | 2004 |         |  | 2005 |  |         | 2006 | 
|(in thousands, except per share data)                                                                     |  | EUR  |         |  | EUR  |  |         | EUR  | 
|                                                                                                          | 
|Basic EPS computation:                                                                                    |  |      |         |  |      |  |         |      |  |  |         | 
|Weighted average number of
    shares outstanding (after deduction of treasury stock) during
    the year |  |      | 483,380 |  |      |  | 484,103 |      |  |  | 474,860 | 
|                                                                                                         
|Net income available to holders
    of common shares                                                      |  |      | 235,460 |  |      |  | 311,464 |      |  |  | 624,689 | 
|                                                                                                         
|Basic earnings per
    share                                                                              |  |      | 0.49    |  |      |  | 0.64    |      |  |  | 1.32    | 
|                                                                                                         
|Diluted EPS
    computation:                                                                              |  |      |         |  |      |  |         |      |  |  |         | 
|Net income available to holders of
    common shares                                                      |  |      | 235,460 |  |      |  | 311,464 |      |  |  | 624,689 | 
|Plus interest on assumed conversion
    of convertible subordinated notes, net of taxes                   |  |      | 0       |  |      |  | 33,518  |      |  |  | 14,714  | 
|                                                                                                         
|                                                                                                         
|Net income available to holders
    of common shares plus effect of assumed conversions                   |  |      | 235,460 |  |      |  | 344,982 |      |  |  | 639,403 | 
|                                                                                                         
|Weighted average number of
    shares:                                                                    |  |      | 483,380 |  |      |  | 484,103 |      |  |  | 474,860 | 
|Plus shares applicable to:                                                                                |  |      |         |  |      |  |         |      |  |  |         | 
|Stock options                                                                                             |  |      | 1,281   |  |      |  | 1,488   |      |  |  | 2,550   | 
|Convertible subordinated notes, net
    of taxes                                                          |  |      | 0       |  |      |  | 57,388  |      |  |  | 26,573  | 
|                                                                                                         
|                                                                                                         
|Dilutive potential common
    shares                                                                      |  |      | 1,281   |  |      |  | 58,876  |      |  |  | 29,123  | 
|                                                                                                         
|                                                                                                         
|Adjusted weighted average number
    of shares                                                            |  |      | 484,661 |  |      |  | 542,979 |      |  |  | 503,983 | 
|                                                                                                         
|Diluted earnings per
    share                                                                            |  |      | 0.49    |  |      |  | 0.64    |      |  |  | 1.27    | 
|                                                                                                         

Comprehensive income




New U.S. GAAP Accounting Pronouncements
















---



##### Table of Contents

has been met, tax positions are recognized at the largest amount
that is more-likely-than-not to be sustained. FIN 48 also
provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and
transition. FIN 48 will be effective for fiscal years
beginning after December 15, 2006. Any differences between
the amounts recognized in the financial statements prior to the
adoption of FIN 48 and the amounts reported after adoption
will be accounted for as a cumulative-effect adjustment recorded
to the beginning balance of retained earnings. We are currently
in the process of determining the impact of adopting the
provisions of Interpretation 48 on its consolidated financial
statements.

In June 2006, the FASB ratified the consensus reached by the
EITF on Issue
No. 06-03,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation)
(EITF
No. 06-03).
EITF No. 06-03
permits registrants to elect to present vendor taxes imposed
concurrently on a specific revenue-producing transaction between
a seller and a customer on either a gross or net basis. The
scope of EITF
No. 06-03 includes
government assessed taxes that are directly imposed on
revenue-producing transactions between a seller and a customer
and may include, but is not limited to, sales, use, value added
and some excise taxes. Registrants are to be required to
disclose their policies for presenting the taxes and would
disclose any amounts presented on a gross basis. EITF
No. 06-03 will be
effective for interim and annual financial statements issued for
periods beginning after December 15, 2006. We believe that
the adoption of EITF
No. 06-03 will
have no material impact on our consolidated financial statements.

The SEC issued Staff Accounting Bulletin No. 108
(SAB 108) regarding the process of quantifying
financial statement misstatements on September 13, 2006.
SAB 108 states that registrants should use both a balance
sheet (iron curtain) approach and an income statement (rollover)
approach when quantifying and evaluating the materiality of a
(prior year) misstatement. The bulletin furthermore contains
guidance on correcting errors. The bulletin is effective for
financial statements for fiscal years ending after
November 15, 2006. We do not believe that the adoption of
SAB 108 has had a material impact on our (previous)
consolidated financial statements.

The FASB issued SFAS No. 157, Fair Value
Measurements on September 15, 2006. The Statement
defines fair value, provides guidance on how to measure assets
and liabilities using fair value and expands disclosures about
fair value measurements. The Statement is effective for
financial statements issued for fiscal years beginning after
November 15, 2007 and should be applied prospectively (with
a limited form of retrospective application) as of the beginning
of the fiscal year in which this Statement is initially applied.
We do not believe that the adoption of SFAS No. 157 will
have a material impact on our consolidated financial statements.

2. Discontinued operations

On December 18, 2002 ASML announced the proposed sale of
its Thermal business and the termination of its manufacturing
activities in the Track business. As of December 31, 2005,
ASML has completed the discontinuation of the Track business and
the divesture of the Thermal business.

3. Restructuring

Restructuring Plan 2001

On October 16, 2001, as a consequence of the downturn in
the semiconductor industry, ASML announced cost reductions and a
restructuring plan (Restructuring plan 2001) which
resulted in the consolidation of manufacturing facilities and
discontinuance of certain product lines related to SVG that
overlapped with products of ASML. As of December 31, 2005,
this plan had been fully effectuated.

Restructuring Plan 2003

The worldwide slowdown in the semiconductor industry continued
into 2003 and, on July 16, 2003, ASML announced further
workforce reductions of approximately 550 positions
worldwide, of which the majority was planned for the Netherlands
(Restructuring plan 2003). During 2003, ASML
recorded a provision of EUR 15.3 million as an ongoing
benefit arrangement, of which EUR 3.9 million was included
in cost of sales and EUR 11.4 million was included in
restructuring costs. The amount of the provision was based upon
the severance arrangements as agreed with our Works Council in
the Netherlands for the workforce reductions included in
ASMLs Restructuring Plan 2002. The estimated initial
annual cost savings were EUR 47 million. ASMLs Board
of Management and ASMLs Works Council then commenced a
joint study on implementing these workforce reductions in the
Netherlands, which delayed the reductions until the beginning of
2004. Thereafter, in response to a sharp improvement in market
conditions during 2004, the Company decreased the reductions to
approximately 300 positions worldwide, of which 150 were
contract employees with limited rights upon termination.

As a result, ASML recorded a restructuring credit of
EUR 12.1 million, EUR 3.8 million of which was
recorded in cost of sales and EUR 8.3 million of which was
recorded under restructuring expenses. The Companys
payments associated with these



ASML ANNUAL REPORT 2006

F- 13



---



##### Table of Contents

workforce reductions were EUR 0.5 million in 2005 and
EUR 2.5 million in 2004 and ASMLs initially
anticipated cost savings were reduced to approximately
EUR 24 million.

Also during 2003, ASML recorded restructuring costs of
approximately EUR 6.8 million relating to the consolidation
of its office and warehouse facilities at the headquarters in
Veldhoven as the Company ceased using certain of its facilities.
The facility exit charges included estimated future obligations
for non-cancelable lease payments and the impairment of property
and equipment (primarily leasehold improvements) for which there
are insufficient cash flows to support the carrying cost. During
2004, ASML recorded adjustments to the related restructuring
provision due to postponed commencement dates of sublease
agreements and higher exit costs than originally estimated. This
resulted in an additional charge of EUR 3.5 million,
EUR 1.0 million of which was recorded in cost of sales and
EUR 2.5 million of which was recorded under restructuring
charges. The Restructuring plan 2003 did not impact any
processes or products. As of December 31, 2005, this plan
had been substantially effectuated.

Tabular Disclosures of Restructuring

All restructuring charges are recorded in our statements of
operations either in cost of sales or in restructuring charges,
as summarized in the following table for the years ended
December 31, 2004, 2005 and 2006:

|                       |  |      |        |   |      |  |   |      |  |  |   | 
|---------------------- |  | ---- | ------ | - | ---- |  | - | ---- |  |  | - | 
|                       | 
|Year ended December 31 |  | 2004 |        |   | 2005 |  |   | 2006 | 
|(in thousands)         |  | EUR  |        |   | EUR  |  |   | EUR  | 
|                       | 
|Cost of sales          |  |      | (2,694 | ) |      |  | 0 |      |  |  | 0 | 
|Restructuring Charges  |  |      | (5,862 | ) |      |  | 0 |      |  |  | 0 | 
|                      
|Total                  |  |      | (8,556 | ) |      |  | 0 |      |  |  | 0 | 
|                      



|                                           |  |      |        |   |      |  |        |       |  |  |         |  
|------------------------------------------ |  | ---- | ------ | - | ---- |  | ------ | ----- |  |  | ------- | -
|                                           | 
|Restructuring plan announced in            |  | 2001 |        |   | 2003 |  |        | Total | 
|(in thousands)                             |  | EUR  |        |   | EUR  |  |        | EUR   | 
|                                           | 
|Balance as of December 31,
    2003        |  |      | 2,794  |   |      |  | 19,771 |       |  |  | 22,565  |  
|Utilization of the year                    |  |      | (2,323 | ) |      |  | (7,774 | )     |  |  | (10,097 | )
|Adjustments                                |  |      | 0      |   |      |  | (8,556 | )     |  |  | (8,556  | )
|Effect of foreign currency
    translation |  |      | 114    |   |      |  | 0      |       |  |  | 114     |  
|                                          
|Balance as of December 31,
    2004        |  |      | 585    |   |      |  | 3,441  |       |  |  | 4,026   |  
|Utilization of the year                    |  |      | (637   | ) |      |  | (1,122 | )     |  |  | (1,759  | )
|Effect of foreign currency
    translation |  |      | 52     |   |      |  | 0      |       |  |  | 52      |  
|                                          
|Balance as of December 31,
    2005        |  |      | 0      |   |      |  | 2,319  |       |  |  | 2,319   |  
|Utilization of the years                   |  |      | 0      |   |      |  | (574   | )     |  |  | (574    | )
|                                          
|Balance as of December 31,
    2006        |  |      | 0      |   |      |  | 1,745  |       |  |  | 1,745   |  
|                                          









---



##### Table of Contents

The following table summarizes, per category, the movement in
the restructuring provision for the three years ended
December 31, 2006:

|                                           |  |             |      |   |               |  |        |           |  |  |         |   |  |  |         |  
|------------------------------------------ |  | ----------- | ---- | - | ------------- |  | ------ | --------- |  |  | ------- | - |  |  | ------- | -
|                                           | 
|                                           |  | Purchase    |      |   | Building      |  |        | Severance |  |  |        
|Category                                   |  | commitments |      |   | closure costs |  |        | payments  |  |  | Total   |  
|(in thousands)                             |  | EUR         |      |   | EUR           |  |        | EUR       |  |  | EUR     |  
|                                           | 
|Balance as of December 31,
    2003        |  |             | 878  |   |               |  | 6,416  |           |  |  | 15,271  |   |  |  | 22,565  |  
|Utilization of the year                    |  |             | (914 | ) |               |  | (6,705 | )         |  |  | (2,478  | ) |  |  | (10,097 | )
|Adjustments                                |  |             | 0    |   |               |  | 3,546  |           |  |  | (12,102 | ) |  |  | (8,556  | )
|Effect of foreign currency
    translation |  |             | 36   |   |               |  | 78     |           |  |  | 0       |   |  |  | 114     |  
|                                          
|Balance as of December 31,
    2004        |  |             | 0    |   |               |  | 3,335  |           |  |  | 691     |   |  |  | 4,026   |  
|Utilization of the year                    |  |             | 0    |   |               |  | (1,289 | )         |  |  | (470    | ) |  |  | (1,759  | )
|Effect of foreign currency
    translation |  |             | 0    |   |               |  | 52     |           |  |  | 0       |   |  |  | 52      |  
|                                          
|Balance as of December 31,
    2005        |  |             | 0    |   |               |  | 2,098  |           |  |  | 221     |   |  |  | 2,319   |  
|Utilization of the year                    |  |             | 0    |   |               |  | (476   | )         |  |  | (98     | ) |  |  | (574    | )
|                                          
|Balance as of December 31,
    2006        |  |             | 0    |   |               |  | 1,622  |           |  |  | 123     |   |  |  | 1,745   |  
|                                          



4. Market risk and derivatives




Foreign currency management














Interest rate management












---



##### Table of Contents

the interest typical terms of interest bearing liabilities. The
Company still retains residual financial statement exposure risk
to the extent that the asset and liability positions do not
fully offset. It is the Companys policy to enter into
interest rate swaps to hedge this residual exposure. For this
purpose, the Company uses interest rate swaps, both to hedge
changes in market value of fixed loan coupons payable due to
changes in interest rates as well as to hedge the variability of
future interest receipts as a result of changes in market
interest rates.

As of December 31, 2006, we had two EUR interest rate
swaps outstanding with nominal values of EUR 380 million in
total on which we pay a floating interest of 3.59 percent.
These interest rate swaps, which are designated as cash flow
hedges, have fixed interest receipts at an average of
3.69 percent for periods up until May 2010 and have
floating interest payments at 3 months EURIBOR.

Financial instruments as of December 31, 2006

The Company uses foreign exchange derivatives to manage its
currency risk and interest rate swaps to manage its interest
rate risk. Most derivatives, except for the interest rate swaps,
will mature in one year or less after the balance sheet date.
The following table summarizes the notional amounts and
estimated fair values of the Companys financial
instruments:

|                       |  |          |         |   |            |  |          |         |  |  |            |  |  |  |        |  
|---------------------- |  | -------- | ------- | - | ---------- |  | -------- | ------- |  |  | ---------- |  |  |  | ------ | -
|                       | 
|                       |  | 2005     |         |   |            |  | 2006     |         |  | 
|                       |  | Notional |         |   |            |  | Notional |         |  | 
|As of December 31      |  | Amount2  |         |   | Fair Value |  |          | Amount2 |  |  | Fair Value | 
|(in thousands)         |  | EUR      |         |   | EUR        |  |          | EUR     |  |  | EUR        | 
|                       | 
|Forward
    contracts1 |  |          | 93,260  |   |            |  | (6,508   | )       |  |  | 480,489    |  |  |  | 1,642  |  
|Currency options       |  |          | (29,843 | ) |            |  | (1,369   | )       |  |  | 73,049     |  |  |  | 2,740  |  
|Interest rate swaps    |  |          | 917,395 |   |            |  | (4,896   | )       |  |  | 429,900    |  |  |  | (4,447 | )
|                      



|  |                                                                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Includes forward contracts on U.S. Dollars, Hong Kong
    Dollars, British Pounds, Swiss Francs, Israeli Shekel, Japanese
    Yen, Singapore Dollars, Taiwanese Dollars and Korean Wons.   
|2 | Net amount of forward and option contracts assigned as a hedge
    to sales and purchase transactions, to monetary assets and
    liabilities and to net investments in foreign operations.







Credit risk
















---



##### Table of Contents

5. Accounts receivable

Accounts receivable consist of the following:

|                             |  |      |         |   |      |  |         |  
|---------------------------- |  | ---- | ------- | - | ---- |  | ------- | -
|                             | 
|As of December 31            |  | 2005 |         |   | 2006 | 
|(in thousands)               |  | EUR  |         |   | EUR  | 
|                             | 
|Gross accounts receivable    |  |      | 306,847 |   |      |  | 675,150 |  
|Allowance for doubtful debts |  |      | (4,275  | ) |      |  | (2,388  | )
|                            
|Net accounts
    receivable  |  |      | 302,572 |   |      |  | 672,762 |  
|                            



|                             |  |      |        |   |      |  |        |  
|---------------------------- |  | ---- | ------ | - | ---- |  | ------ | -
|                             | 
|As of December 31            |  | 2005 |        |   | 2006 | 
|(in thousands)               |  | EUR  |        |   | EUR  | 
|                             | 
|Balance at beginning of year |  |      | (4,817 | ) |      |  | (4,275 | )
|Utilization of the provision |  |      | 2,413  |   |      |  | 2,136  |  
|Addition of the
    year1    |  |      | (1,871 | ) |      |  | (249   | )
|                            
|Balance at end of year       |  |      | (4,275 | ) |      |  | (2,388 | )
|                            



|  |                                                   
|- | --------------------------------------------------
|1 | Addition of the year is recorded in cost of sales.

6. Inventories




|                                                         |  |      |          |   |      |  |          |  
|-------------------------------------------------------- |  | ---- | -------- | - | ---- |  | -------- | -
|                                                         | 
|As of December 31                                        |  | 2005 |          |   | 2006 | 
|(in thousands)                                           |  | EUR  |          |   | EUR  | 
|                                                         | 
|Raw materials                                            |  |      | 163,817  |   |      |  | 201,471  |  
|Work-in-process                                          |  |      | 482,801  |   |      |  | 442,513  |  
|Finished products                                        |  |      | 246,774  |   |      |  | 279,915  |  
|                                                        
|Total inventories,
    gross                             |  |      | 893,392  |   |      |  | 923,899  |  
|Allowance for obsolescence and/or
    lower market value |  |      | (116,192 | ) |      |  | (115,418 | )
|                                                        
|Total inventories, net                                   |  |      | 777,200  |   |      |  | 808,481  |  
|                                                        



|                             |  |      |          |   |      |  |          |  
|---------------------------- |  | ---- | -------- | - | ---- |  | -------- | -
|                             | 
|As of December 31            |  | 2005 |          |   | 2006 | 
|(in thousands)               |  | EUR  |          |   | EUR  | 
|                             | 
|Balance at beginning of year |  |      | (163,066 | ) |      |  | (116,192 | )
|Addition of the
    year1    |  |      | (11,811  | ) |      |  | (54,181  | )
|Effect of exchange rates     |  |      | (8,461   | ) |      |  | 5,268    |  
|Utilization of the provision |  |      | 67,146   |   |      |  | 49,687   |  
|                            
|Balance at end of year       |  |      | (116,192 | ) |      |  | (115,418 | )
|                            



|  |                                                   
|- | --------------------------------------------------
|1 | Addition of the year is recorded in cost of sales.











---



##### Table of Contents

7. Other assets

Other non-current assets consist of the following:

|                                                                                  |  |      |        |  |      |  |        | 
|--------------------------------------------------------------------------------- |  | ---- | ------ |  | ---- |  | ------ | 
|                                                                                  | 
|As of December 31                                                                 |  | 2005 |        |  | 2006 | 
|(in thousands)                                                                    |  | EUR  |        |  | EUR  | 
|                                                                                  | 
|Compensation plan
    assets1                                                     |  |      | 9,605  |  |      |  | 8,087  | 
|Prepaid expenses                                                                  |  |      | 7,923  |  |      |  | 4,293  | 
|Subordinated loan granted to lessor
    in respect of Veldhoven
    headquarters2 |  |      | 5,445  |  |      |  | 5,445  | 
|Loan to
    Micronic3                                                             |  |      | 13,000 |  |      |  | 13,000 | 
|Other                                                                             |  |      | 3,823  |  |      |  | 4,828  | 
|                                                                                 
|Total other non-current
    assets                                                |  |      | 39,796 |  |      |  | 35,653 | 
|                                                                                 



|  |                                                                                                                                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | For further details on compensation plan refer to Note 13.                                                                                                                                                       
|2 | For further details on loan granted to lessor in respect of
    Veldhoven headquarters refer to Note 12.                                                                                                         
|3 | Pursuant to a license agreement between Micronic and ASML, ASML
    has paid to Micronic in 2005 an amount of EUR 20 million,
    of which EUR 13 million (December 31, 2005:
    EUR 13 million) is non-current.



|                               |  |      |         |  |      |  |         | 
|------------------------------ |  | ---- | ------- |  | ---- |  | ------- | 
|                               | 
|As of December 31              |  | 2005 |         |  | 2006 | 
|(in thousands)                 |  | EUR  |         |  | EUR  | 
|                               | 
|Advance payments to Zeiss      |  |      | 61,502  |  |      |  | 78,412  | 
|VAT                            |  |      | 27,047  |  |      |  | 22,413  | 
|Loan to
    Micronic1          |  |      | 7,000   |  |      |  | 3,500   | 
|Prepaid expenses               |  |      | 16,583  |  |      |  | 18,404  | 
|Other                          |  |      | 13,670  |  |      |  | 24,954  | 
|                              
|Total other current
    assets |  |      | 125,802 |  |      |  | 147,683 | 
|                              



|  |                                                                                                                                                                                                              
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Pursuant to a license agreement between Micronic and ASML, ASML
    has paid to Micronic in 2005 an amount of EUR 20 million,
    of which EUR 3.5 million (December 31, 2005: EUR
    7 million) is current.



8. Intangible assets
















---



##### Table of Contents

agreement. This amount was expensed as research and development
expenses in ASMLs statement of operations for the year
ended December 31, 2004.

|                                 |  |      |        |  |      |  |        | 
|-------------------------------- |  | ---- | ------ |  | ---- |  | ------ | 
|                                 | 
|Year ended December 31           |  | 2005 |        |  | 2006 | 
|(in thousands)                   |  | EUR  |        |  | EUR  | 
|                                 | 
|Cost                             |  |      |        |  |      |  |        | 
|Balance, January 1               |  |      | 45,717 |  |      |  | 47,095 | 
|Additions                        |  |      | 1,378  |  |      |  | 120    | 
|                                
|                                
|Balance, December 31             |  |      | 47,095 |  |      |  | 47,215 | 
|                                
|Accumulated
    amortization     |  |      |        |  |      |  |        | 
|Balance, January 1               |  |      | 13,899 |  |      |  | 22,152 | 
|Amortization                     |  |      | 8,253  |  |      |  | 6,987  | 
|                                
|                                
|Balance, December 31             |  |      | 22,152 |  |      |  | 29,139 | 
|                                
|Carrying amount, December
    31 |  |      | 24,943 |  |      |  | 18,076 | 
|                                



|      |  |  |        | 
|----- |  |  | ------ | 
|     
|2007: |  |  | 6,798  | 
|2008: |  |  | 6,576  | 
|2009: |  |  | 4,495  | 
|2010: |  |  | 207    | 
|2011: |  |  | 0      | 
|     
|Total |  |  | 18,076 | 
|     









---



##### Table of Contents

9. Property, plant and equipment

Property, plant and equipment consist of the following:

|                             |  |               |         |   |           |  |              |              |  |  |           |   |  |       |         |   |  |  |          |  
|---------------------------- |  | ------------- | ------- | - | --------- |  | ------------ | ------------ |  |  | --------- | - |  | ----- | ------- | - |  |  | -------- | -
|                             | 
|                             |  | Furniture,    |         |   |          
|                             |  | Machinery     |         |   |           |  | fixtures and |              |  | 
|                             |  | Buildings and |         |   | and       |  |              | Leasehold    |  |  | other     |   |  |      
|                             |  | constructions |         |   | equipment |  |              | improvements |  |  | equipment |   |  | Total |        
|(in thousands)               |  | EUR           |         |   | EUR       |  |              | EUR          |  |  | EUR       |   |  | EUR   |        
|                             | 
|Cost                         |  |               |         |   |           |  |              |              |  |  |           |   |  |       |         |   |  |  |          |  
|Balance, January 1, 2005     |  |               | 140,310 |   |           |  | 446,699      |              |  |  | 106,650   |   |  |       | 182,371 |   |  |  | 876,030  |  
|Additions                    |  |               | 1,510   |   |           |  | 30,289       |              |  |  | 15,314    |   |  |       | 31,358  |   |  |  | 78,471   |  
|Disposals                    |  |               | (24,644 | ) |           |  | (67,064      | )            |  |  | (666      | ) |  |       | (10,016 | ) |  |  | (102,390 | )
|Effect of exchange rates     |  |               | 9,775   |   |           |  | 23,900       |              |  |  | 731       |   |  |       | 3,821   |   |  |  | 38,227   |  
|                            
|                            
|                            
|Balance, December 31, 2005   |  |               | 126,951 |   |           |  | 433,824      |              |  |  | 122,029   |   |  |       | 207,534 |   |  |  | 890,338  |  
|Additions                    |  |               | 1,919   |   |           |  | 52,703       |              |  |  | 17,481    |   |  |       | 27,191  |   |  |  | 99,294   |  
|Disposals                    |  |               | (605    | ) |           |  | (37,318      | )            |  |  | (1,977    | ) |  |       | (3,262  | ) |  |  | (43,162  | )
|Effect of exchange rates     |  |               | (7,107  | ) |           |  | (14,190      | )            |  |  | (592      | ) |  |       | (2,344  | ) |  |  | (24,233  | )
|                            
|                            
|                            
|Balance, December 31, 2006   |  |               | 121,158 |   |           |  | 435,019      |              |  |  | 136,941   |   |  |       | 229,119 |   |  |  | 922,237  |  
|                            
|Accumulated
    depreciation |  |               |         |   |           |  |              |              |  |  |           |   |  |       |         |   |  |  |          |  
|Balance, January 1, 2005     |  |               | 59,022  |   |           |  | 323,079      |              |  |  | 60,814    |   |  |       | 129,424 |   |  |  | 572,339  |  
|Depreciation                 |  |               | 4,141   |   |           |  | 39,961       |              |  |  | 10,754    |   |  |       | 23,317  |   |  |  | 78,173   |  
|Impairment charges           |  |               | 0       |   |           |  | 8,350        |              |  |  | 0         |   |  |       | 0       |   |  |  | 8,350    |  
|Disposals                    |  |               | (16,668 | ) |           |  | (46,682      | )            |  |  | (221      | ) |  |       | (8,546  | ) |  |  | (72,117  | )
|Effect of exchange rates     |  |               | 4,892   |   |           |  | 16,795       |              |  |  | 461       |   |  |       | 2,864   |   |  |  | 25,012   |  
|                            
|                            
|                            
|Balance, December 31, 2005   |  |               | 51,387  |   |           |  | 341,503      |              |  |  | 71,808    |   |  |       | 147,059 |   |  |  | 611,757  |  
|Depreciation                 |  |               | 3,758   |   |           |  | 32,938       |              |  |  | 11,858    |   |  |       | 27,447  |   |  |  | 76,001   |  
|Impairment charges           |  |               | 10,222  |   |           |  | 7,132        |              |  |  | 0         |   |  |       | 0       |   |  |  | 17,354   |  
|Disposals                    |  |               | (309    | ) |           |  | (32,889      | )            |  |  | (1,343    | ) |  |       | (3,057  | ) |  |  | (37,598  | )
|Effect of exchange rates     |  |               | (3,125  | ) |           |  | (10,852      | )            |  |  | (396      | ) |  |       | (1,794  | ) |  |  | (16,167  | )
|                            
|                            
|                            
|Balance, December 31, 2006   |  |               | 61,933  |   |           |  | 337,832      |              |  |  | 81,927    |   |  |       | 169,655 |   |  |  | 651,347  |  
|                            
|Carrying
    amount1         |  |               |         |   |           |  |              |              |  |  |           |   |  |       |         |   |  |  |          |  
|December 31, 2005            |  |               | 75,564  |   |           |  | 92,321       |              |  |  | 50,221    |   |  |       | 60,475  |   |  |  | 278,581  |  
|December 31, 2006            |  |               | 59,225  |   |           |  | 97,187       |              |  |  | 55,014    |   |  |       | 59,464  |   |  |  | 270,890  |  
|                            



|  |                                                                                                                                                                                                                                                                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Includes as of December 31, 2006, 2005 and 2004 assets
    under construction, respectively, for buildings and
    constructions of EUR 1,615, EUR 1,390 and EUR 1,336,
    machinery and equipment of EUR 1,582, EUR 1,855 and EUR 2,592,
    leasehold improvements of EUR 11,524, EUR 4,473 and EUR 5,914
    and furniture, fixtures and other equipment of EUR 13,194, EUR
    9,805 and EUR 18,653.















---



##### Table of Contents

production and field service tooling which were no longer used
because the tools did no longer meet the todays technology
requirements. The impairment charges were determined based on
the difference between the assets estimated fair value and
their carrying amount.

10. Accrued liabilities and other

Accrued liabilities and other consist of the following:

|                                        |  |      |         |  |      |  |         | 
|--------------------------------------- |  | ---- | ------- |  | ---- |  | ------- | 
|                                        | 
|Year ended December 31                  |  | 2005 |         |  | 2006 | 
|(in thousands)                          |  | EUR  |         |  | EUR  | 
|                                        | 
|Deferred revenue                        |  |      | 159,410 |  |      |  | 191,234 | 
|Warranty                                |  |      | 38,215  |  |      |  | 75,297  | 
|Materials and costs to be paid          |  |      | 92,971  |  |      |  | 171,558 | 
|Current portion of long term debt       |  |      | 496,353 |  |      |  | 7,406   | 
|Advances from customers                 |  |      | 99,303  |  |      |  | 96,242  | 
|Personnel related items                 |  |      | 82,215  |  |      |  | 118,166 | 
|Investment credits                      |  |      | 1,356   |  |      |  | 3,651   | 
|Restructuring                           |  |      | 2,319   |  |      |  | 1,745   | 
|Other                                   |  |      | 13,479  |  |      |  | 543     | 
|                                       
|                                       
|                                       
|Total accrued liabilities and
    other |  |      | 985,621 |  |      |  | 665,842 | 
|                                       
|                                       





|                         |  |      |         |   |      |  |         |  
|------------------------ |  | ---- | ------- | - | ---- |  | ------- | -
|                         | 
|Year ended December 31   |  | 2005 |         |   | 2006 | 
|(in thousands)           |  | EUR  |         |   | EUR  | 
|                         | 
|Balance, January 1       |  |      | 35,150  |   |      |  | 38,215  |  
|Additions                |  |      | 42,014  |   |      |  | 83,059  |  
|Usage                    |  |      | (40,283 | ) |      |  | (42,895 | )
|Effect of exchange rates |  |      | 1,334   |   |      |  | (3,082  | )
|                        
|                        
|                        
|Balance, December 31     |  |      | 38,215  |   |      |  | 75,297  |  
|                        
|                        

11. Convertible subordinated debt and other long term debt




| |  |  |            |  |  |  |  |  |  |  |         | 
| |  |  | ---------- |  |  |  |  |  |  |  | ------- | 
| | 
|
| |  |  | 2007       |  |  |  |  |  |  |  | 573     | 
| |  |  | 2008       |  |  |  |  |  |  |  | 453     | 
| |  |  | 2009       |  |  |  |  |  |  |  | 453     | 
| |  |  | 2010       |  |  |  |  |  |  |  | 380,453 | 
| |  |  | 2011       |  |  |  |  |  |  |  | 35      | 
| |  |  | Thereafter |  |  |  |  |  |  |  | 0       | 
|
|
|
| |  |  | Total      |  |  |  |  |  |  |  | 381,967 | 
|
|









---



##### Table of Contents

Convertible subordinated debt

The following table summarizes the Companys outstanding
convertible notes as of December 31, 2006 and 2005,
including fair value of interest rate swaps used to hedge the
fair value of the interest bearing convertible debts:

|                                   |  |      |         |  |      |  |         | 
|---------------------------------- |  | ---- | ------- |  | ---- |  | ------- | 
|                                   | 
|Year ended December 31             |  | 2005 |         |  | 2006 | 
|(in thousands)                     |  | EUR  |         |  | EUR  | 
|                                   | 
|5.75 percent convertible
    notes |  |      |         |  |      |  |         | 
|Principal amount                   |  |      | 487,497 |  |      |  | 0       | 
|Fair value interest rate swaps     |  |      | 0       |  |      |  | 0       | 
|Total                              |  |      | 487,497 |  |      |  | 0       | 
|                                  
|                                  
|5.50 percent convertible
    notes |  |      |         |  |      |  |         | 
|Principal amount                   |  |      | 380,000 |  |      |  | 380,000 | 
|Fair value interest rate swaps     |  |      | 2381    |  |      |  | 0       | 
|Total                              |  |      | 380,238 |  |      |  | 380,000 | 
|                                  
|                                  
|Total                              |  |      | 867,735 |  |      |  | 380,000 | 
|                                  



|  |                                                                                                                                                                                                                                                                                       
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | In 2005 we used interest rate swaps to hedge the risk from
    interest rate fluctuations. As of December 31, 2005,
    deferred interest rate swap proceeds amounting to EUR
    0.2 million have been recorded as an addition to our
    outstanding Convertible Subordinated Notes.







|                               |  |           |         |  |            |  |           |        |  |  |            |  |  |  |         | 
|------------------------------ |  | --------- | ------- |  | ---------- |  | --------- | ------ |  |  | ---------- |  |  |  | ------- | 
|                               | 
|                               |  | 2005      |         |  |            |  | 2006      |        |  | 
|                               |  | Principal |         |  |            |  | Principal |        |  | 
|Year ended December 31         |  | Amount    |         |  | Fair Value |  |           | Amount |  |  | Fair Value | 
|(in thousands)                 |  | EUR       |         |  | EUR        |  |           | EUR    |  |  | EUR        | 
|                               | 
|5.75 percent convertible notes |  |           | 487,497 |  |            |  | 559,587   |        |  |  | 0          |  |  |  | 0       | 
|5.50 percent convertible notes |  |           | 380,000 |  |            |  | 510,891   |        |  |  | 380,000    |  |  |  | 531,050 | 
|                              





Other financial debt














---



##### Table of Contents

Lines of credit

At December 31, 2006, the Company had available credit
facilities for a total of EUR 400 million (2005: EUR
400 million), all of which expire in November 2009.

No amounts were outstanding under these credit facilities at the
end of 2006 and 2005. The credit facilities contain certain
restrictive covenants, including a requirement that the Company
maintains a minimum financial condition ratio, calculated in
accordance with a contractually agreed formula. ASML was in
compliance with these covenants at December 31, 2006 and
2005. ASML does not currently anticipate any difficulty in
continuing to meet these covenant requirements.

Outstanding amounts under these credit facilities will bear
interest at the European Interbank Offered Rate
(EURIBOR) or the London Interbank Offered Rate
(LIBOR) plus a margin that is dependent on the
Companys liquidity position.

12. Commitments, contingencies and guarantees

The Company has various contractual obligations, some of which
are required to be recorded as liabilities in the Companys
consolidated financial statements, including long- and
short-term debt. Others, namely operating lease commitments,
purchase obligations and guarantees, are generally not required
to be recognized as liabilities on the Companys balance
sheet but are required to be disclosed.

Lease Commitments and Variable Interests

The Company leases equipment and buildings under various
operating leases. Operating leases are charged to expense on a
straight-line basis. See Tabular Disclosure of Contractual
Obligations below.

In December 2003, the FASB issued FIN 46 (R),
Consolidation of Variable Interest Entities. Under
FIN 46 (R), an enterprise must consolidate a variable
interest entity if that enterprise has a variable interest (or
combination of variable interests) that will absorb a majority
of the entitys expected losses if they occur, receive a
majority of the entitys expected residual returns if they
occur, or both.

In 2003, ASML moved to its current Veldhoven headquarters. The
Company is leasing these headquarters for a period of
15 years from an entity (the lessor) that was
incorporated by a syndicate of 3 banks
(shareholders) solely for the purpose of leasing
this building. The lessors shareholders equity amounts to
EUR 1.9 million. Furthermore the shareholders each granted
a loan of EUR 11.6 million and a fourth bank granted a loan
of EUR 12.3 million. ASML provided the lessor with a
subordinated loan of EUR 5.4 million and has a purchase
option that is exercisable either at the end of the lease in
2018, at a pre-determined price of EUR 24.5 million, or
during the lease at the book value of the assets. The total
assets of the lessor entity amounted to approximately EUR
54 million at inception of the lease.

ASML believes that it holds a variable interest in this entity
and that the entity is a variable interest entity
(VIE) because it is subject to consolidation in
accordance with the provisions of paragraph 5 of
FIN 46 (R). The total equity investment at risk is
approximately 3.6 percent of the lessors total assets
and is not considered and cannot be demonstrated, qualitatively
or quantitatively, to be sufficient to permit the lessor to
finance its activities without additional subordinated financial
support provided by any parties, including the shareholders.
ASML determined that it is not appropriate to consolidate the
VIE as it is not the primary beneficiary. To make this
determination, the expected losses and expected residual returns
of the lessor were allocated to each variable interest holder
based on their contractual right to absorb expected losses and
residual returns. The analysis of expected losses and expected
residual returns involved determining the expected negative and
positive variability in the fair value of the lessors net
assets exclusive of variable interests through various cash flow
scenarios based upon the expected market value of the
lessors net assets. Based on this analysis, ASML
determined that other variable interest holders will absorb the
majority of the lessors expected losses, and as a result,
ASML is not the primary beneficiary.

ASMLs maximum exposure to the lessors expected
losses is estimated to be approximately EUR 5.4 million.

Purchase Obligations

The Company enters into purchase commitments with vendors in the
ordinary course of business to ensure a smooth and continuous
supply chain for key components. Purchase obligations include
medium to long-term purchase agreements. These contracts differ
and may include certain restrictive clauses. Any identified
losses that result from purchase commitments that are forfeited
are provided for in the Companys financial statements. As
of December 31, 2006, the Company had purchase commitments
for a total amount of approximately EUR 995 million
(December 31, 2005: EUR 676 million), reflecting its
backlog level at the end of 2006. In its negotiations with
suppliers the Company continuously seeks to align its purchase
commitments with its business objectives. See Tabular Disclosure
of Contractual Obligations below.



ASML ANNUAL REPORT 2006

F- 23



---



##### Table of Contents

Tabular Disclosure of Contractual Obligations

The Companys contractual obligations with respect to long
term debt, operating lease obligations, purchase obligations and
other deferred liabilities as of December 31, 2006 can be
summarized as follows:

|                                                                     |  |           |           |  |        |  |           |       |  |  |         |  |  |       |         |  |  |  |        | 
|-------------------------------------------------------------------- |  | --------- | --------- |  | ------ |  | --------- | ----- |  |  | ------- |  |  | ----- | ------- |  |  |  | ------ | 
|                                                                     | 
|                                                                     |  | Less than |           |  | 1-3    |  |           | 3-5   |  |  | After 5 | 
|Payments due by period                                               |  | Total     |           |  | 1 year |  |           | years |  |  | years   |  |  | years |        
|(in thousands)                                                       |  | EUR       |           |  | EUR    |  |           | EUR   |  |  | EUR     |  |  | EUR   |        
|                                                                     | 
|Long Term Debt Obligations,
    including
    interest
    expenses1 |  |           | 455,214   |  |        |  | 21,516    |       |  |  | 42,754  |  |  |       | 390,944 |  |  |  | 0      | 
|Operating Lease Obligations                                          |  |           | 187,742   |  |        |  | 31,210    |       |  |  | 50,511  |  |  |       | 35,893  |  |  |  | 70,128 | 
|Purchase Obligations                                                 |  |           | 995,047   |  |        |  | 991,292   |       |  |  | 3,546   |  |  |       | 209     |  |  |  | 0      | 
|Other
    Liabilities2                                               |  |           | 30,793    |  |        |  | 6,834     |       |  |  | 23,959  |  |  |       | 0       |  |  |  | 0      | 
|                                                                    
|Total Contractual Obligations                                        |  |           | 1,668,796 |  |        |  | 1,050,852 |       |  |  | 120,770 |  |  |       | 427,046 |  |  |  | 70,128 | 
|                                                                    



|  |                                                                                                                                                                                               
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | We refer to Note 11 to the consolidated financial
    statements for the amounts excluding interest expenses.                                                                                 
| 
|2 | Other liabilities relate to the additional payment to Nikon due
    in 2007 with respect to a cross-license of patents related to
    lithography equipment and system repurchase commitments.





|                               |  |           |        |  |        |  |   |       |  |  |         |  |  |       |   |  |  |  |        | 
|------------------------------ |  | --------- | ------ |  | ------ |  | - | ----- |  |  | ------- |  |  | ----- | - |  |  |  | ------ | 
|                               | 
|                               |  | Less than |        |  | 1-3    |  |   | 3-5   |  |  | After 5 | 
|Purchase options due by period |  | Total     |        |  | 1 year |  |   | years |  |  | years   |  |  | years |  
|(in thousands)                 |  | EUR       |        |  | EUR    |  |   | EUR   |  |  | EUR     |  |  | EUR   |  
|                               | 
|Purchase options               |  |           | 61,362 |  |        |  | 0 |       |  |  | 5,627   |  |  |       | 0 |  |  |  | 55,735 | 
|                              

Other Off-Balance Sheet Arrangements






Intended acquisition Brion




13. Employee benefits














---



##### Table of Contents

investments available in the plan. Participants elect to receive
their funds in future periods after the earlier of their
employment termination or their withdrawal election, at least
5 years after deferral. There were minor plan expenses in
2006. On December 31, 2004, 2005 and 2006, the
Companys liability under the deferred compensation plan
was EUR 3 million, EUR 3 million and EUR
5 million, respectively.

Pension plans

ASML maintains various pension plans covering substantially all
of its employees. The Companys approximately
2,800 employees in the Netherlands participate in a
multi-employer union plan (Bedrijfstakpensioenfonds
Metalektro) determined in accordance with the collective
bargaining agreements effective for the industry in which ASML
operates. This multi-employer plan spans approximately 1,300
companies and 147,000 contributing members. The plan monitors
its risks on a global basis, not by company or employee, and is
subject to regulation by Dutch governmental authorities. By law
(the Dutch Pensions and Savings Act), a multi-employer union
plan must be monitored against specific criteria, including the
coverage ratio of the plans assets to its obligations.
This coverage ratio must exceed 100 percent for the total
plan. Every company participating in a Dutch multi-employer
union plan contributes a premium calculated as a percentage of
its total pensionable salaries, with each company subject to the
same percentage contribution rate. The pension rights of each
employee are based upon the employees average salary
during employment.

ASMLs net periodic pension cost for this multi-employer
plan for any fiscal period is the amount of the required
contribution for that period. However, a contingent liability
may arise from, for example, possible actuarial losses relating
to other participating entities because each entity that
participates in a multi-employer plan shares in the actuarial
risks of every other participating entity or any responsibility
under the terms of a plan to finance any shortfall in the plan
if other entities cease to participate.

ASML also participates in several defined contribution pension
plans, with ASMLs expenses for these plans equaling the
contributions made in the relevant fiscal period.

The Companys pension costs for all employees for the three
years ended December 31, 2006 were:

|                                                    |  |      |        |  |      |  |        |      |  |  |        | 
|--------------------------------------------------- |  | ---- | ------ |  | ---- |  | ------ | ---- |  |  | ------ | 
|                                                    | 
|Year ended December 31                              |  | 2004 |        |  | 2005 |  |        | 2006 | 
|(in thousands)                                      |  | EUR  |        |  | EUR  |  |        | EUR  | 
|                                                    | 
|Pension plan based on
    multi-employer union plan |  |      | 17,747 |  |      |  | 20,143 |      |  |  | 21,407 | 
|Pension plans based on defined
    contribution     |  |      | 8,103  |  |      |  | 7,254  |      |  |  | 7,538  | 
|                                                   
|                                                   
|Total                                               |  |      | 25,850 |  |      |  | 27,397 |      |  |  | 28,945 | 
|                                                   

Bonus plan




|                       |  |      |       |  |      |  |       |      |  |  |       | 
|---------------------- |  | ---- | ----- |  | ---- |  | ----- | ---- |  |  | ----- | 
|                       | 
|Year ended December 31 |  | 2004 |       |  | 2005 |  |       | 2006 | 
|(in thousands)         |  | EUR  |       |  | EUR  |  |       | EUR  | 
|                       | 
|Bonus expenses         |  |      | 7,481 |  |      |  | 8,555 |      |  |  | 8,202 | 
|                      













---



##### Table of Contents

Profit-sharing plan

ASML has a profit-sharing plan covering all employees, who are
not members of the Board of Management or senior management.
Under the plan, eligible employees receive an annual
profit-sharing bonus, based on a percentage of net income
relative to sales ranging from 0 to 20 percent of annual
salary. The profit-sharing percentage for the years 2004, 2005
and 2006 was 5 percent, 8 percent and 12 percent,
respectively. This profit-sharing bonus is accrued for in the
statement of operations for the year ended December 31,
2006 for an amount of EUR 27.8 million, expected to be paid
in the first quarter of 2007.

Stock options

The Company has adopted various stock option plans for its
employees. Each year, the Board of Management determines, by
category of ASML personnel, the total available number of stock
options that can be granted in that year. The determination is
subject to the approval of the Supervisory Board of the Company.
Options granted under ASMLs stock option plans have fixed
exercise prices equal to the closing price of the Companys
ordinary shares on Euronext on the applicable grant dates.
Granted stock options generally vest over a three-year period
with any unexercised stock options expiring ten years after the
grant date.

Stock option transactions are summarized as follows:

|                                   |  |           |            |   |                                |  |       | 
|---------------------------------- |  | --------- | ---------- | - | ------------------------------ |  | ----- | 
|                                   | 
|                                   |  | Number of |            |   | Weighted average               | 
|                                   |  | shares    |            |   | exercise price per share (EUR) | 
|                                   | 
|Outstanding, December 31, 2003     |  |           | 24,571,024 |   |                                |  | 24.58 | 
|Granted                            |  |           | 2,485,782  |   |                                |  | 12.35 | 
|Exercised                          |  |           | (875,530   | ) |                                |  | 9.76  | 
|Expired                            |  |           | (561,282   | ) |                                |  | 17.73 | 
|                                  
|Outstanding, December 31, 2004     |  |           | 25,619,994 |   |                                |  | 23.19 | 
|Granted                            |  |           | 2,685,6811 |   |                                |  | 11.56 | 
|Exercised                          |  |           | (991,700   | ) |                                |  | 11.68 | 
|Expired                            |  |           | (1,522,674 | ) |                                |  | 15.04 | 
|                                  
|Outstanding, December 31, 2005     |  |           | 25,791,301 |   |                                |  | 23.09 | 
|Granted                            |  |           | 1,185,863  |   |                                |  | 17.81 | 
|Exercised                          |  |           | (1,964,268 | ) |                                |  | 14.40 | 
|Expired                            |  |           | (1,589,546 | ) |                                |  | 33.01 | 
|                                  
|Outstanding, December 31,
    2006 |  |           | 23,423,350 |   |                                |  | 23.40 | 
|Exercisable, December 31, 2006     |  |           | 17,258,450 |   |                                |  | 27.15 | 
|Exercisable, December 31, 2005     |  |           | 18,251,813 |   |                                |  | 28.06 | 
|Exercisable, December 31, 2004     |  |           | 19,568,177 |   |                                |  | 26.65 | 
|                                  



|  |                                                                                                                                                      
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Actual number of performance stock options which are awarded in
    2006 for 2005 achievements. These options were conditionally
    granted in 2005.



|                  |  |                   |            |  |                   |         |            |              |  |  |                |  |  |  |       | 
|----------------- |  | ----------------- | ---------- |  | ----------------- | ------- | ---------- | ------------ |  |  | -------------- |  |  |  | ----- | 
|                  | 
|                  |  | Weighted          |            |  | Weighted          |        
|Options           |  |                   | average    |  |                   | average |           
|outstanding       |  | Number            |            |  | Number            |         |            | remaining    |  |  | exercise price | 
|Range of exercise |  | outstanding       |            |  | exercisable       |         |            | contractual  |  |  | of outstanding | 
|prices (EUR)      |  | December 31, 2006 |            |  | December 31, 2006 |         |            | life (years) |  |  | options (EUR)  | 
|                  | 
|5.29  7.94       |  |                   | 316,820    |  |                   |         | 316,820    |              |  |  | 5.43           |  |  |  | 7.30  | 
|8.17  12.26      |  |                   | 8,257,562  |  |                   |         | 3,470,376  |              |  |  | 6.14           |  |  |  | 11.38 | 
|12.75  19.13     |  |                   | 2,784,987  |  |                   |         | 1,407,273  |              |  |  | 5.02           |  |  |  | 15.99 | 
|19.45  29.18     |  |                   | 3,565,222  |  |                   |         | 3,565,222  |              |  |  | 0.97           |  |  |  | 20.58 | 
|29.65  44.48     |  |                   | 4,928,829  |  |                   |         | 4,928,829  |              |  |  | 0.09           |  |  |  | 34.39 | 
|45.02  67.53     |  |                   | 3,569,930  |  |                   |         | 3,569,930  |              |  |  | 5.07           |  |  |  | 46.02 | 
|                 
|Total             |  |                   | 23,423,350 |  |                   |         | 17,258,450 |              |  |  | 3.77           |  |  |  | 23.40 | 
|                 









---



##### Table of Contents

Details with respect to stock options are set forth in the
following table:

|                                                                                  |  |      |       |  |      |  |       |      |  |  |        | 
|--------------------------------------------------------------------------------- |  | ---- | ----- |  | ---- |  | ----- | ---- |  |  | ------ | 
|                                                                                  | 
|Year ended December 31                                                            |  | 2004 |       |  | 2005 |  |       | 2006 | 
|(in thousands, except for contractual term)                                       |  |      |       |  |      | 
|                                                                                  | 
|Aggregate intrinsic value of stock
    options exercised (EUR)                    |  |      | 1,437 |  |      |  | 1,894 |      |  |  | 12,162 | 
|Total fair value of shares vested
    during the year (EUR)                       |  |      | 0     |  |      |  | 0     |      |  |  | 362    | 
|Aggregate remaining contractual
    term of currently exercisable options (years) |  |      | 3.78  |  |      |  | 2.80  |      |  |  | 2.21   | 
|Aggregate intrinsic value of
    exercisable stock options (EUR)                  |  |      | 0     |  |      |  | 0     |      |  |  | 0      | 
|Aggregate intrinsic value of
    outstanding stock options (EUR)                  |  |      | 0     |  |      |  | 0     |      |  |  | 0      | 
|                                                                                 

Stock Option Extension Plans and Financing








Policy for issuing shares upon exercise




14. Legal contingencies






Patent litigation with Nikon














---



##### Table of Contents

payments of US$ 9 million (approximately EUR
8 million) in both 2005 and 2006, and is obligated to make
an additional payment to Nikon of US$ 9 million in 2007.
Zeiss made an initial payment to Nikon of US$ 40 million
(approximately EUR 32 million) in 2004, further made
payments of US$ 6 million (approximately EUR
4 million) in both 2005 and 2006, and is required to make
an additional payment to Nikon of US$ 6 million in 2007.

Patent litigation with Ultratech Stepper, Inc

In May 2000, Ultratech Stepper, Inc. (Ultratech)
filed a lawsuit against ASML. Ultratech alleges that ASML is
infringing Ultratechs rights under a United States patent
in connection with its manufacture and commercialization in the
United States of advanced photolithography equipment embodying
technology that, in particular, is used in Step & Scan
equipment.

Ultratechs patent infringement claims were tried before a
jury in Oakland, California, in May and June of 2005. On
June 21, 2005 the jury unanimously determined that each of
the claims of Ultratechs patent that Ultratech had
asserted against ASML was invalid, and thus that ASML was not
liable for patent infringement, notwithstanding the jurys
finding that each of these claims was infringed by ASML and
certain of its customers. The Court entered judgment in favor of
ASML following receipt of the jury verdict.

Ultratech filed motions with the Court seeking to overturn the
jurys finding that the asserted claims of its patent are
invalid or, in the alternative, seeking a new trial. The Court
denied each of Ultratechs motions. Ultratech then filed an
appeal with the United States Court of Appeals for the Federal
Circuit challenging the finding that the asserted claims of
Ultratechs patent are invalid. Briefing is ongoing in
connection with this appeal, and no hearing date has been set
yet. In the event the appeals court overturns the jurys
finding that the asserted claims of Ultratechs patent are
invalid and ASML is held to infringe any valid claims of
Ultratechs patent, it could result in a substantial
damages award and an injunction that could substantially
restrict or prohibit ASMLs sales in the United States,
either of which could have a material adverse effect on the
Companys financial position and results of operations.

Arbitration with Aviza Technology

On December 1, 2006, Aviza Technology (Aviza)
initiated arbitration proceedings against ASML Holding N.V.,
ASML U.S., Inc. and various other affiliates and subsidiaries
(collectively, the ASML parties). Avizas
arbitration demand alleges that the ASML parties engaged in
fraud and made negligent misrepresentations or omissions in
connection with a 2002 license agreement between ASML and IPS,
Ltd. that was assigned to Aviza in connection with the 2003
divestiture of ASMLs Thermal Division.

ASML believes that there are meritorious defenses to
Avizas allegations, and it intends to vigorously defend
itself in the arbitration proceeding, and accordingly, that the
outcome of the proceeding will not have a material adverse
effect on its financial position or results of operations.
However, there can be no assurance that ASML will prevail, given
the inherently uncertain nature of arbitration proceedings. If
Aviza were to prevail, it could result in a substantial damages
award and have a material adverse effect on ASMLs
financial position and results of operations.

15. Income taxes

The components of income before income taxes are as follows:

|                       |  |      |         |  |      |  |         |      |  |  |         | 
|---------------------- |  | ---- | ------- |  | ---- |  | ------- | ---- |  |  | ------- | 
|                       | 
|Year ended December 31 |  | 2004 |         |  | 2005 |  |         | 2006 | 
|(in thousands)         |  | EUR  |         |  | EUR  |  |         | EUR  | 
|                       | 
|Domestic               |  |      | 216,790 |  |      |  | 256,874 |      |  |  | 654,985 | 
|Foreign                |  |      | 146,050 |  |      |  | 178,149 |      |  |  | 214,813 | 
|                      
|                      
|Total                  |  |      | 362,840 |  |      |  | 435,023 |      |  |  | 869,798 | 
|                      













---



##### Table of Contents

The reconciliation between the provision for income taxes shown
in the consolidated statement of operations, based on the
effective tax rate, and expense based on the domestic tax rate,
is as follows:

|                                                                        |  |      |         |   |   |  |       |     |  |  |         |      |  |     |       |   |   |  |         |   |  |  |       |  
|----------------------------------------------------------------------- |  | ---- | ------- | - | - |  | ----- | --- |  |  | ------- | ---- |  | --- | ----- | - | - |  | ------- | - |  |  | ----- | -
|                                                                        | 
|Year ended December 31                                                  |  | 2004 |         |   |   |  | 2005  |     |  |  |         | 2006 |  |     |      
|(in thousands)                                                          |  | EUR  |         |   | % |  |       | EUR |  |  | %       |      |  | EUR |       |   | % | 
|                                                                        | 
|Income before income
    taxes                                          |  |      | 362,840 |   |   |  | 100.0 |     |  |  | 435,023 |      |  |     | 100.0 |   |   |  | 869,798 |   |  |  | 100.0 |  
|Income tax expense based on
    domestic
    rate1                      |  |      | 125,180 |   |   |  | 34.5  |     |  |  | 137,032 |      |  |     | 31.5  |   |   |  | 257,460 |   |  |  | 29.6  |  
|Change in statutory tax
    rate2                                       |  |      | 14,544  |   |   |  | 4.0   |     |  |  | (2,056  | )    |  |     | (0.5  | ) |   |  | (3,435  | ) |  |  | (0.4  | )
|Different tax
    rates3                                                |  |      | (24,477 | ) |   |  | (6.7  | )   |  |  | (19,478 | )    |  |     | (4.5  | ) |   |  | (19,710 | ) |  |  | (2.3  | )
|Other credits and non-taxable
    items4                                |  |      | 12,133  |   |   |  | 3.3   |     |  |  | 8,061   |      |  |     | 1.9   |   |   |  | 10,794  |   |  |  | 1.3   |  
|                                                                       
|                                                                       
|Provision for income taxes
    shown
    in the statement of operations |  |      | 127,380 |   |   |  | 35.1  |     |  |  | 123,559 |      |  |     | 28.4  |   |   |  | 245,109 |   |  |  | 28.2  |  
|                                                                       



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Income tax expense based on domestic rate reflects the tax
    expense that would have been applicable if all of our income
    were derived from our Dutch operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|2 | At the end of 2004, the Netherlands Government has enacted a
    corporate tax rate reduction. As a result of this law change the
    Netherlands statutory tax rate was planned to be reduced in
    steps to 30 percent through 2007. This led to a
    remeasurement of our deferred tax assets and liabilities,
    resulting in a one time increase in the tax charge of EUR
    14.5 million in 2004. At the end of 2005, the Netherlands
    Government enacted a further tax rate reduction to 29.6 percent
    in 2006 and 29.1 percent in 2007. This led to an additional
    remeasurement of our deferred tax assets and liabilities,
    resulting in a one time tax benefit of EUR 2.1 million in
    2005 since we had a net deferred tax liability position in the
    Netherlands tax jurisdiction. At the end of 2006, the
    Netherlands Government has enacted a tax rate reduction again.
    As a result of this law change the Netherlands statutory tax
    rate was reduced to 25.5 percent for 2007 and following
    years. This led to a remeasurement of our deferred tax assets
    and liabilities, resulting in a one time tax benefit of
    EUR 3.4 million in 2006 since we had a net deferred
    tax liability position in the Netherlands tax jurisdiction.
|3 | Our results are not solely realized in the Netherlands but also
    in other countries where different tax rates are applicable.
    Different tax rates reflects the adjustment necessary to give
    effect to the differing tax rates applicable in these non-Dutch
    jurisdictions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4 | Other credits and non-taxable items reflect the impact on
    statutory rates of permanent non-deductible and non- taxable
    items such as non-deductible taxes and dues, non-deductible
    interest expense, and non-deductible meals and entertainment, as
    well as the impact of various tax credits on our provision for
    income taxes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              



|                       |  |      |         |  |      |  |         |      |  |  |         |  
|---------------------- |  | ---- | ------- |  | ---- |  | ------- | ---- |  |  | ------- | -
|                       | 
|Year ended December 31 |  | 2004 |         |  | 2005 |  |         | 2006 | 
|(in thousands)         |  | EUR  |         |  | EUR  |  |         | EUR  | 
|                       | 
|Current                |  |      |         |  |      |  |         |      |  |  |         |  
|Domestic               |  |      | 1,318   |  |      |  | 2,216   |      |  |  | 190,844 |  
|Foreign                |  |      | 6,375   |  |      |  | 4,517   |      |  |  | 27,459  |  
|Deferred               |  |      |         |  |      |  |         |      |  |  |         |  
|Domestic               |  |      | 96,053  |  |      |  | 68,954  |      |  |  | (235    | )
|Foreign                |  |      | 23,634  |  |      |  | 47,872  |      |  |  | 27,041  |  
|                      
|                      
|Total                  |  |      | 127,380 |  |      |  | 123,559 |      |  |  | 245,109 |  
|                      



|                       |  |      |          |   |      |  |          |  
|---------------------- |  | ---- | -------- | - | ---- |  | -------- | -
|                       | 
|Year ended December 31 |  | 2005 |          |   | 2006 | 
|(in thousands)         |  | EUR  |          |   | EUR  | 
|                       | 
|Deferred tax position  |  |      | 205,775  |   |      |  | 248,006  |  
|Tax contingencies      |  |      | (127,864 | ) |      |  | (130,661 | )
|                      
|                      
|Total                  |  |      | 77,911   |   |      |  | 117,345  |  
|                      











---



##### Table of Contents

The deferred tax position is classified in the consolidated
financial statements as follows:

|                                          |  |      |         |   |      |  |         |  
|----------------------------------------- |  | ---- | ------- | - | ---- |  | ------- | -
|                                          | 
|Year ended December 31                    |  | 2005 |         |   | 2006 | 
|(in thousands)                            |  | EUR  |         |   | EUR  | 
|                                          | 
|Deferred tax assets 
    short term      |  |      | 95,636  |   |      |  | 141,255 |  
|Deferred tax assets 
    long term       |  |      | 206,884 |   |      |  | 200,378 |  
|Deferred tax
    liabilities  short term |  |      | (390    | ) |      |  | (825    | )
|Deferred tax
    liabilities  long term  |  |      | (96,355 | ) |      |  | (92,802 | )
|                                         
|                                         
|Total                                     |  |      | 205,775 |   |      |  | 248,006 |  
|                                         



|                                    |  |      |         |   |      |  |         |  
|----------------------------------- |  | ---- | ------- | - | ---- |  | ------- | -
|                                    | 
|Year ended December 31              |  | 2005 |         |   | 2006 | 
|(in thousands)                      |  | EUR  |         |   | EUR  | 
|                                    | 
|Tax effect carry-forward losses     |  |      | 134,220 |   |      |  | 109,554 |  
|Bilateral Advance Pricing Agreement |  |      | 66,740  |   |      |  | 57,213  |  
|Research and Development Costs      |  |      | 23,773  |   |      |  | 46,422  |  
|Inventories                         |  |      | 13,167  |   |      |  | 30,851  |  
|Temporary depreciation investments  |  |      | (50,781 | ) |      |  | (9,998  | )
|Other temporary differences         |  |      | 18,656  |   |      |  | 13,964  |  
|                                   
|                                   
|Total                               |  |      | 205,775 |   |      |  | 248,006 |  
|                                   















---



##### Table of Contents

Pursuant to Netherlands tax laws, we have temporarily
depreciated part of our investment in our United States group
companies. This depreciation has been deducted from the taxable
base in the Netherlands and resulted in a temporary tax refund
of EUR 152 million. This temporary depreciation must
be added back on a straight-line basis to the taxable base in
the period 2006 through 2010. As of December 31, 2006, the
remaining net tax effect of this repayment obligation amounted
to EUR 10 million, of which EUR 90 million
is recorded as a long-term deferred tax liability and
EUR 80 million as a current tax asset in the
Companys financial statements.

We are subject to tax audits in the various tax jurisdictions we
operate in. During such audits, local tax authorities may
challenge the positions taken by us.

16. Segment disclosure

Segment information has been prepared in accordance with
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information.

ASML operates in one reportable segment for the development,
manufacture, marketing and servicing of lithography equipment.
In accordance with SFAS No. 131
(SFAS 131), Disclosures about Segments of
an Enterprise and Related Information, ASMLs chief
operating decision-maker has been identified as the Chief
Executive Officer, who reviews operating results to make
decisions about allocating resources and assessing performance
for the entire company.

Since the beginning of 2005, management reporting includes net
system sales figures of our product lines: 300 millimeter new
systems, 200 millimeter new systems and used systems. Net sales
for these product lines in 2005 and 2006 were as follows:

|                           |  |      |           |  |      |  |           | 
|-------------------------- |  | ---- | --------- |  | ---- |  | --------- | 
|                           | 
|Year ended December 31     |  | 2005 |           |  | 2006 | 
|(in thousands)             |  | EUR  |           |  | EUR  | 
|                           | 
|300 millimeter new systems |  |      | 1,932,976 |  |      |  | 2,918,073 | 
|200 millimeter new systems |  |      | 179,228   |  |      |  | 165,069   | 
|used systems               |  |      | 115,474   |  |      |  | 145,923   | 
|                          
|                          
|Total net system sales     |  |      | 2,227,678 |  |      |  | 3,229,065 | 
|                          









---



##### Table of Contents

For geographical reporting, net sales are attributed to the
geographic location in which the customers facilities are
located. Identifiable assets are attributed to the geographic
location in which they are located. Net sales and identifiable
assets by geographic region were as follows:

|                       |  |           |           |  |                     |  |           | 
|---------------------- |  | --------- | --------- |  | ------------------- |  | --------- | 
|                       | 
|Year ended December 31 |  | Net sales |           |  | Identifiable assets | 
|(in thousands)         |  | EUR       |           |  | EUR                 | 
|                       | 
|2004                   |  |           |           |  |                     |  |           | 
|Korea                  |  |           | 472,112   |  |                     |  | 11,460    | 
|Taiwan                 |  |           | 658,765   |  |                     |  | 19,344    | 
|Rest of Asia           |  |           | 534,039   |  |                     |  | 706,709   | 
|Europe                 |  |           | 304,051   |  |                     |  | 2,016,066 | 
|United States          |  |           | 496,410   |  |                     |  | 455,674   | 
|                      
|                      
|Total                  |  |           | 2,465,377 |  |                     |  | 3,209,253 | 
|                      
|2005                   |  |           |           |  |                     |  |           | 
|Korea                  |  |           | 877,681   |  |                     |  | 12,839    | 
|Taiwan                 |  |           | 457,942   |  |                     |  | 14,013    | 
|Rest of Asia           |  |           | 368,301   |  |                     |  | 769,274   | 
|Europe                 |  |           | 217,944   |  |                     |  | 2,498,299 | 
|United States          |  |           | 607,099   |  |                     |  | 436,655   | 
|                      
|                      
|Total                  |  |           | 2,528,967 |  |                     |  | 3,731,080 | 
|                      
|2006                   |  |           |           |  |                     |  |           | 
|Korea                  |  |           | 1,085,497 |  |                     |  | 13,730    | 
|Taiwan                 |  |           | 739,432   |  |                     |  | 16,058    | 
|Rest of Asia           |  |           | 470,915   |  |                     |  | 937,107   | 
|Europe                 |  |           | 369,289   |  |                     |  | 2,145,710 | 
|United States          |  |           | 931,971   |  |                     |  | 740,036   | 
|                      
|                      
|Total                  |  |           | 3,597,104 |  |                     |  | 3,852,641 | 
|                      





17. Board of Management and Supervisory Board remuneration


Board of Management












---



##### Table of Contents

Base salary, benefits and short-term performance cash
bonus

The remuneration in euros of the members of the Board of
Management was as follows:

|                       |  |      |           |  |      |  |           |      |  |  |           | 
|---------------------- |  | ---- | --------- |  | ---- |  | --------- | ---- |  |  | --------- | 
|                       | 
|                       |  | 2004 |           |  | 2005 |  |           | 2006 | 
|Year ended December 31 |  | EUR  |           |  | EUR  |  |           | EUR  | 
|                       | 
|Salaries               |  |      | 2,176,085 |  |      |  | 1,860,359 |      |  |  | 1,921,375 | 
|Bonuses                |  |      | 1,305,651 |  |      |  | 905,488   |      |  |  | 882,872   | 
|Pension cost           |  |      | 486,045   |  |      |  | 218,791   |      |  |  | 196,887   | 
|Other
    benefits1,2  |  |      | 827,574   |  |      |  | 227,798   |      |  |  | 243,917   | 
|                      
|                      
|Total                  |  |      | 4,795,355 |  |      |  | 3,212,436 |      |  |  | 3,245,051 | 
|                      



|  |                                                                                                                                                                                                                                                                                               
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Other benefits include housing costs, company cars, social
    security costs, health and disability insurance and
    representation allowances.                                                                                                                                             
|2 | Other benefits include housing costs, company cars, social
    security costs, health and disability insurance, representation
    allowances and expenses totaling EUR 589,845 pursuant to an
    agreement with Mr. McIntosh in connection with retirement
    from the Board of Management.



|                   |  |             |         |  |             |  |         |           |  |  |        |  |  |  |           | 
|------------------ |  | ----------- | ------- |  | ----------- |  | ------- | --------- |  |  | ------ |  |  |  | --------- | 
|                   | 
|                   |  | Received    |         |  | Earned Cash |  |         | Other     |  |  |       
|                   |  | Base Salary |         |  | Bonus1      |  |         | benefits2 |  |  | Total  | 
|                   |  | EUR         |         |  | EUR         |  |         | EUR       |  |  | EUR    | 
|                   | 
|E. Meurice         |  |             | 660,000 |  |             |  | 303,270 |           |  |  | 91,127 |  |  |  | 1,054,397 | 
|P.T.F.M. Wennink   |  |             | 420,000 |  |             |  | 192,990 |           |  |  | 47,638 |  |  |  | 660,628   | 
|M.A. van den Brink |  |             | 441,375 |  |             |  | 202,812 |           |  |  | 36,333 |  |  |  | 680,520   | 
|K.P. Fuchs         |  |             | 400,000 |  |             |  | 183,800 |           |  |  | 68,819 |  |  |  | 652,619   | 
|                  



|  |                                                                                                                                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | The statement of operations for the year ended December 31,
    2006 includes the actual short-term performance cash bonus
    earned over the year 2006, which will be payable in the first
    quarter of 2007.
|2 | Other benefits include housing costs, company cars, social
    security costs and disability insurance.                                                                                                          



1


|                   |  |      |  |  |  |  |  |  |  |  |  |  |  |  |        | 
|------------------ |  | ---- |  |  |  |  |  |  |  |  |  |  |  |  | ------ | 
|                   | 
|                   |  | 2006 | 
|                   | 
|E. Meurice         |  |      |  |  |  |  |  |  |  |  |  |  |  |  | 68,086 | 
|P.T.F.M. Wennink   |  |      |  |  |  |  |  |  |  |  |  |  |  |  | 42,886 | 
|M.A. van den Brink |  |      |  |  |  |  |  |  |  |  |  |  |  |  | 45,130 | 
|K.P. Fuchs         |  |      |  |  |  |  |  |  |  |  |  |  |  |  | 40,785 | 
|                  



|  |                                                                                                                                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Since the pension arrangement for members of the Board of
    Management is a defined contribution plan, the Company does not
    have additional pension obligations beyond the annual premium
    contribution.









---



##### Table of Contents

Performance Stock Options

Details of options held by members of the Board of Management to
purchase ordinary shares of ASML Holding N.V. are set forth
below:

|                   |  |         |         |     |           |  |        |        |  |             |          |  |  |          |         |  |             |  |       |            |  |  |       |  |  |  |            | 
|------------------ |  | ------- | ------- | --- | --------- |  | ------ | ------ |  | ----------- | -------- |  |  | -------- | ------- |  | ----------- |  | ----- | ---------- |  |  | ----- |  |  |  | ---------- | 
|                   | 
|                   |  | Granted |         |     | Exercised |  |        |        |  | Share price |          |  | 
|                   |  | Jan. 1, |         |     | during    |  |        | during |  |             | Dec. 31, |  |  | Exercise |         |  | on exercise |  |       | Expiration | 
|                   |  | 2006    |         |     | 20064     |  |        | 2006   |  |             | 2006     |  |  | price    |         |  | date        |  |       | date       | 
|                   | 
|E. Meurice         |  |         | 125,000 |     |           |  |       |        |  |             |         |  |  |          | 125,000 |  |             |  | 10.62 |            |  |  |      |  |  |  | 15-10-2014 | 
|                   |  |         | 12,500  |     |           |  |        |        |  |             |         |  |  |          | 12,500  |  |             |  | 11.52 |            |  |  |      |  |  |  | 21-01-2015 | 
|                   |  |         | 57,770  | 1   |           |  |        |        |  |             |         |  |  |          | 57,770  |  |             |  | 11.53 |            |  |  |      |  |  |  | 18-01-2015 | 
|                   |  |         |        |     |           |  | 88,371 |        |  |             |         |  |  |          | 88,371  |  |             |  | 17.90 |            |  |  |      |  |  |  | 18-01-2016 | 
|P.T.F.M. Wennink   |  |         | 31,500  |     |           |  |        |        |  |             |         |  |  |          | 31,500  |  |             |  | 58.00 |            |  |  |      |  |  |  | 20-01-2012 | 
|                   |  |         | 15,660  |     |           |  |        |        |  |             |         |  |  |          | 15,660  |  |             |  | 40.40 |            |  |  |      |  |  |  | 22-01-2007 | 
|                   |  |         | 50,000  |     |           |  |        |        |  |             |         |  |  |          | 50,000  |  |             |  | 29.92 |            |  |  |      |  |  |  | 22-01-2007 | 
|                   |  |         | 20,960  |     |           |  |        |        |  |             |         |  |  |          | 20,960  |  |             |  | 22.12 |            |  |  |      |  |  |  | 20-07-2007 | 
|                   |  |         | 20,000  |     |           |  |        |        |  |             |         |  |  |          | 20,000  |  |             |  | 20.28 |            |  |  |      |  |  |  | 21-01-2008 | 
|                   |  |         | 20,000  |     |           |  |        |        |  |             |         |  |  |          | 20,000  |  |             |  | 7.02  |            |  |  |      |  |  |  | 22-04-2013 | 
|                   |  |         | 20,000  |     |           |  |        |        |  |             |         |  |  |          | 20,000  |  |             |  | 14.23 |            |  |  |      |  |  |  | 23-04-2014 | 
|                   |  |         | 32,379  | 1   |           |  |        |        |  |             |         |  |  |          | 32,379  |  |             |  | 11.53 |            |  |  |      |  |  |  | 18-01-2015 | 
|                   |  |         |        |     |           |  | 56,236 |        |  |             |         |  |  |          | 56,236  |  |             |  | 17.90 |            |  |  |      |  |  |  | 18-01-2016 | 
|M.A. van den Brink |  |         | 31,500  |     |           |  |        |        |  |             |         |  |  |          | 31,500  |  |             |  | 58.00 |            |  |  |      |  |  |  | 20-01-2012 | 
|                   |  |         | 19,860  |     |           |  |        |        |  |             |         |  |  |          | 19,860  |  |             |  | 40.40 |            |  |  |      |  |  |  | 22-01-2007 | 
|                   |  |         | 26,560  |     |           |  |        |        |  |             |         |  |  |          | 26,560  |  |             |  | 22.12 |            |  |  |      |  |  |  | 20-07-2007 | 
|                   |  |         | 20,000  |     |           |  |        |        |  |             |         |  |  |          | 20,000  |  |             |  | 20.28 |            |  |  |      |  |  |  | 21-01-2008 | 
|                   |  |         | 20,000  |     |           |  |        |        |  |             | 10,000   |  |  |          | 10,000  |  |             |  | 7.02  |            |  |  | 19.18 |  |  |  | 22-04-2013 | 
|                   |  |         | 20,000  |     |           |  |        |        |  |             |         |  |  |          | 20,000  |  |             |  | 14.23 |            |  |  |      |  |  |  | 23-04-2014 | 
|                   |  |         | 40,473  | 1   |           |  |        |        |  |             |         |  |  |          | 40,473  |  |             |  | 11.53 |            |  |  |      |  |  |  | 18-01-2015 | 
|                   |  |         |        |     |           |  | 59,098 |        |  |             |          |  |  |          | 59,098  |  |             |  | 17.90 |            |  |  |      |  |  |  | 18-01-2016 | 
|K.P. Fuchs         |  |         | 6,113   | 1,2 |           |  |       |        |  |             |         |  |  |          | 6,113   |  |             |  | 11.53 |            |  |  |      |  |  |  | 18-01-2015 | 
|                   |  |         |        |     |           |  | 22,000 | 3      |  |             |         |  |  |          | 22,000  |  |             |  | 17.61 |            |  |  |      |  |  |  | 20-04-2016 | 
|                   |  |         |        |     |           |  | 53,558 |        |  |             |         |  |  |          | 53,558  |  |             |  | 17.90 |            |  |  |      |  |  |  | 18-01-2016 | 
|                  



|  |                                                                                                                                                                                                                                                                      
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Granted in 2005 and awarded in 2006 for 2005 actual achievement.                                                                                                                                                                                                     
|2 | The stock options granted to Mr. K.P. Fuchs are performance
    stock options which were granted in 2006 in relation to
    performance throughout the period November 1, 2005 through
    December 31, 2005.                                                        
|3 | The stock options granted to Mr. K.P. Fuchs are sign on
    stock options. The Board of Management was authorized by the
    annual general meeting of shareholders as per March 23,
    2006 to issue these stock options on the first possible moment
    of grant.
|4 | Granted in 2006 and awarded in 2007 for 2006 actual achievement.                                                                                                                                                                                                     



Conditional Performance Stock Options












---



##### Table of Contents

The actual number of performance stock options which will be
awarded in 2007 in relation to performance achievements over
2006 are as follows:

|                   |  |                                                      
|------------------ |  | -----------------------------------------------------
|                  
|                   |  | Actual number of performance stock options which will
|                   |  | be awarded in 2007 for 2006 actual achievement       
|                  
|E. Meurice         |  | 88,371                                               
|P.T.F.M. Wennink   |  | 56,236                                               
|M.A. van den Brink |  | 59,098                                               
|K.P. Fuchs         |  | 53,558                                               
|                  

Conditional Performance Stock






|                   |  |                           |        |  |                           |  |        | 
|------------------ |  | ------------------------- | ------ |  | ------------------------- |  | ------ | 
|                   | 
|                   |  | Maximum number of         |        |  | Maximum number of         | 
|                   |  | performance stock granted |        |  | performance stock granted | 
|                   |  | in 2005 to be awarded in  |        |  | in 2006 to be awarded in  | 
|                   |  | 2008                      |        |  | 2009                      | 
|                   | 
|E. Meurice         |  |                           | 36,972 |  |                           |  | 72,136 | 
|P.T.F.M. Wennink   |  |                           | 20,721 |  |                           |  | 45,905 | 
|M.A. van den Brink |  |                           | 25,902 |  |                           |  | 48,241 | 
|K.P. Fuchs         |  |                           | 3,912  |  |                           |  | 43,719 | 
|                  

Benefits upon termination of employment








Supervisory Board












---



##### Table of Contents

At our annual General Meeting of Shareholders held on
March 25, 2003, our shareholders adopted a new remuneration
package for Supervisory Board members. The annual remuneration
for individual members is EUR 25,000 and for the Chairman EUR
40,000. Additionally, the membership of committees of the
Supervisory Board is compensated by an amount of EUR 10,000
per Committee. At our annual General Meeting of Shareholders
held on March 24, 2005, our shareholders adopted an
additional remuneration package of EUR 5,000 for the Chairman of
the Audit Committee and EUR 10,000 for the US Supervisory Board
Member.

During 2005 and 2006, ASML paid out the following amounts to the
individual members of the Supervisory Board (in euro):

|                         |  |      |  |     |      |  |        |  |  |  |        | 
|------------------------ |  | ---- |  | --- | ---- |  | ------ |  |  |  | ------ | 
|                         | 
|                         |  | 2005 |  |     | 2006 | 
|Year ended December 31   |  |      |  | EUR |      |  | EUR    | 
|                         | 
|H. Bodt                  |  |      |  |     |      |  | 70,000 |  |  |  | 70,000 | 
|P.H.
    Grassmann1      |  |      |  |     |      |  | 25,000 |  |  |  | 35,000 | 
|OB
    Bilous2           |  |      |  |     |      |  | 0      |  |  |  | 45,000 | 
|J.A. Dekker              |  |      |  |     |      |  | 45,000 |  |  |  | 45,000 | 
|M.J.
    Attardo3        |  |      |  |     |      |  | 35,000 |  |  |  | 0      | 
|J.W.B. Westerburgen      |  |      |  |     |      |  | 45,000 |  |  |  | 45,000 | 
|F. Fröhlich              |  |      |  |     |      |  | 35,000 |  |  |  | 40,000 | 
|A. van der Poel          |  |      |  |     |      |  | 25,000 |  |  |  | 45,000 | 
|H.C.J. van den
    Burg2 |  |      |  |     |      |  | 0      |  |  |  | 35,000 | 
|                        



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Membership ended March 23, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|2 | Membership started March 25, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|3 | As of December 31, 2004, Mr. Attardo owns 19,290
    options on shares of the Company. During 2004, Mr. Attardo
    exercised 15,432 options on shares of the Company. In addition,
    in 2006 ASML made an ex gratia payment of USD 63,528 to Michael
    Attardo, a former member of the Supervisory Board, in connection
    with the expiration of stock options that Mr. Attardo had
    been granted while a board member of Silicon Valley Group, which
    ASML acquired in 2001.



|                    |  |  |  |  |  |  |        |  |  |  |  | 
|------------------- |  |  |  |  |  |  | ------ |  |  |  |  | 
|                    | 
|H. Bodt             |  |  |  |  |  |  | 70,000 |  |  |  |  | 
|OB Bilous           |  |  |  |  |  |  | 45,000 |  |  |  |  | 
|J.A. Dekker         |  |  |  |  |  |  | 45,000 |  |  |  |  | 
|J.W.B. Westerburgen |  |  |  |  |  |  | 45,000 |  |  |  |  | 
|F. Fröhlich         |  |  |  |  |  |  | 40,000 |  |  |  |  | 
|A. van der Poel     |  |  |  |  |  |  | 45,000 |  |  |  |  | 
|H.C.J. van den Burg |  |  |  |  |  |  | 35,000 |  |  |  |  | 
|                   



18. Selected operating expenses and additional information




|                                |  |      |         |  |      |  |         |      |  |  |         | 
|------------------------------- |  | ---- | ------- |  | ---- |  | ------- | ---- |  |  | ------- | 
|                                | 
|Year ended December 31          |  | 2004 |         |  | 2005 |  |         | 2006 | 
|(in thousands)                  |  | EUR  |         |  | EUR  |  |         | EUR  | 
|                                | 
|Wages and salaries              |  |      | 345,026 |  |      |  | 347,956 |      |  |  | 406,307 | 
|Social security expenses        |  |      | 24,517  |  |      |  | 27,423  |      |  |  | 31,958  | 
|Pension and retirement expenses |  |      | 25,850  |  |      |  | 27,397  |      |  |  | 28,945  | 
|                               
|Total                           |  |      | 395,393 |  |      |  | 402,776 |      |  |  | 467,210 | 
|                               









---



##### Table of Contents

The average number of employees from continuing operations
during 2004, 2005 and 2006 was 4,949, 4,972 and 5,320
respectively. The total number of personnel employed per sector
was:

|                          |  |      |       |  |      |  |       |      |  |  |       | 
|------------------------- |  | ---- | ----- |  | ---- |  | ----- | ---- |  |  | ----- | 
|                          | 
|Year ended December 31    |  | 2004 |       |  | 2005 |  |       | 2006 | 
|                          | 
|Research and development  |  |      | 1,401 |  |      |  | 1,337 |      |  |  | 1,480 | 
|Goodsflow                 |  |      | 1,207 |  |      |  | 1,215 |      |  |  | 1,450 | 
|Customer Support          |  |      | 1,818 |  |      |  | 1,872 |      |  |  | 2,128 | 
|General                   |  |      | 509   |  |      |  | 497   |      |  |  | 402   | 
|Sales                     |  |      | 136   |  |      |  | 134   |      |  |  | 134   | 
|Total number of employees |  |      | 5,071 |  |      |  | 5,055 |      |  |  | 5,594 | 
|                         



19. Vulnerability due to certain concentrations






20. Capital stock


Share capital






Ordinary shares














---



##### Table of Contents

the Board of Management to issue shares or options separately.
These authorizations will each be granted for a period of
18 months.

The Company may repurchase its issued ordinary shares at any
time, subject to compliance with the requirements of Netherlands
law and provided the aggregate nominal value of the ordinary
shares held by ASML or a subsidiary at any time amounts to no
more than one-tenth of our issued share capital. Any such
purchases are subject to the approval of the Supervisory Board
and the authorization (whether by means of a resolution or by an
amendment to our Articles of Association) of shareholders at our
General Meeting of Shareholders, which authorization may not be
for more than 18 months. The Board of Management is
currently authorized, subject to Supervisory Board approval, to
repurchase through September 23, 2007 up to a maximum of
10 percent of our issued share capital as of the date of
authorization (March 23, 2006) at a price between the
nominal value of the ordinary shares purchased and 110 percent
of the market price of these securities on Euronext Amsterdam or
Nasdaq. At our annual General Meeting of Shareholders to be held
on March 28, 2007, our shareholders will be asked to extend
this authority through September 28, 2008.

Cumulative preference shares

In 1998, the Company granted to the preference share foundation,
Stichting Preferente Aandelen ASML (the
Foundation) an option to acquire cumulative
preference shares in the capital of the Company (the
Preference Share Option). This option was amended
and extended in 2003. The object of the Foundation is to protect
the interests of the Company and the enterprises maintained by
it. The cumulative preference shares have the same voting rights
as ordinary shares but are entitled to dividends on a
preferential basis at a percentage based on EURIBOR plus
2 percent.

The Preference Share Option gives the Foundation the right to
acquire a number of cumulative preference shares equal to the
number of ordinary shares outstanding at the time of exercise of
the Preference Share Option for a subscription price equal to
their EUR 0.02 nominal value. Only one-fourth of this
subscription price is payable at the time of initial issuance of
the cumulative preference shares. The cumulative preference
shares may be cancelled and repaid by the Company upon the
authorization by the General Meeting of Shareholders of a
proposal to do so by the Board of Management approved by the
Supervisory Board. Exercise of the Preference Share Option would
effectively dilute the voting power of the ordinary shares then
outstanding by one-half. The practical effect of any such
exercise could be to prevent attempts by third parties to
acquire control of the Company.

Declaration of Independence

The Board of Directors of the Foundation and the Board of
Management of the Company together declare that the Foundation
is independent of the Company as defined in article A. of
Appendix X to A-2.7 of the General Rules of Euronext
Amsterdam. The Board of the Foundation comprises three
voting members from the Netherlands business and academic
communities, Mr. R.E. Selman, Mr. F.H.M. Grapperhaus
and Mr. M.W. den Boogert, and one non-voting member, the
Chairman of the Companys Supervisory Board, Mr. H.
Bodt.

Veldhoven, the Netherlands

January 26, 2007

/s/ Eric Meurice,

Chief Executive Officer

/s/ Peter T.F.M. Wennink,

Chief Financial Officer



ASML ANNUAL REPORT 2006

F- 38



---



##### Table of Contents

Report of Independent Registered Public Accounting Firm

To the Supervisory Board and Shareholders of ASML Holding N.V.:

We have audited the accompanying consolidated balance sheets of
ASML Holding N.V. and its subsidiaries (collectively, the
Company) as of December 31, 2006 and 2005, and
the related consolidated statements of operations, comprehensive
income, shareholders equity and cash flows for each of the
three years in the period ended December 31, 2006 (all
expressed in euros). We also have audited managements
assessment, included in the accompanying Managements
Report on Internal Control Over Financial Reporting, that the
Company maintained effective internal control over financial
reporting as of December 31, 2006, based on criteria
established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
these financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on these financial
statements, an opinion on managements assessment, and an
opinion on the effectiveness of the Companys internal
control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audit of financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included
obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.

A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.

Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.



ASML ANNUAL REPORT 2006

F- 39



---



##### Table of Contents

In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of ASML Holding N.V. and subsidiaries as of
December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2006, in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, managements assessment that
the Company maintained effective internal control over financial
reporting as of December 31, 2006, is fairly stated, in all
material respects, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2006, based on the criteria
established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission.

/s/ Deloitte Accountants B.V.

Eindhoven, The Netherlands

January 26, 2007



ASML ANNUAL REPORT 2006

F- 40



---



##### Table of Contents

Exhibit Index

|            |  |                                                                                                                                                                                                                                                                                                                                       
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                           
|           
|1           |  | Articles of Association of ASML
    Holding N.V. (English translation) (Incorporated by reference to
    Amendment No. 9 to the Registrants Registration Statement
    on Form 8-A/A, filed with the Commission on June 28, 2006)                                                                                                    
|2.1         |  | Paying Agent, Conversion Agent and
    Registrar Agreement between ASML Holding N.V. and the Bank of
    New York relating to the Registrants 5.50 percent
    Convertible Subordinated Notes due 2010 (Incorporated by
    reference to the Registrants Annual Report on Form 20-F
    for the fiscal year ended December 31, 2003)
|4.1         |  | Agreement between ASML Lithography
    B.V. and Carl Zeiss, dated March 17, 2000 (Incorporated by
    reference to the Registrants Annual Report on Form 20-F
    for the fiscal year ended December 31, 2000)#                                                                                                                      
|4.2         |  | Agreement between ASML Holding N.V.
    and Carl Zeiss, dated October 24, 2003 (Incorporated by
    reference to the Registrants Annual Report on Form 20-F
    for the year ended December 31, 2003)#                                                                                                                               
|4.3         |  | Form of Indemnity Agreement between
    ASML Holding N.V. and members of its Board of Management
    (Incorporated by reference to the Registrants Annual
    Report on Form 20-F for the year ended December 31, 2003)                                                                                                              
|4.4         |  | Form of Indemnity Agreement between
    ASML Holding N.V. and members of its Supervisory Board
    (Incorporated by reference to the Registrants Annual
    Report on Form 20-F for the year ended December 31, 2003)                                                                                                                
|4.5         |  | Employment Agreement between ASML
    Holding N.V. and Klaus Fuchs (Incorporated by reference to the
    Registrants Annual Report on Form 20-F for the fiscal year
    ended December 31, 2005)                                                                                                                                     
|4.6         |  | Employment Agreement between ASML
    Holding N.V. and Eric Meurice (Incorporated by reference to the
    Registrants Annual Report on Form 20-F for the fiscal year
    ended December 31, 2004)                                                                                                                                    
|4.7         |  | Form of Employment Agreement for
    members of the Board of Management (Incorporated by reference to
    the Registrants Annual Report on Form 20-F for the fiscal
    year ended December 31, 2003)                                                                                                                                
|4.8         |  | Nikon-ASML Patent Cross License
    Agreement, dated December 10, 2004, between ASML Holding N.V.
    and Nikon Corporation (Incorporated by reference to the
    Registrants Annual Report on Form 20-F for the fiscal year
    ended December 31, 2004)#                                                                           
|4.9         |  | ASML/Zeiss Sublicense Agreement,
    2004, dated December 10, 2004, between Carl Zeiss SMT AG and
    ASML Holding N.V. (Incorporated by reference to the
    Registrants Annual Report on Form 20-F for the fiscal year
    ended December 31, 2004)#                                                                               
|4.10        |  | ASML New Hires and Incentive Stock
    Option Plan For Management (Version 2003) (Incorporated by
    reference to exhibit 4.4 to the Registrants Statement on
    Form S-8, filed with the Commission on September 2, 2003) (File
    No. 333-109154)                                                                               
|4.11        |  | ASML Option Plan for Management of
    ASML Holding Group Companies (Incorporated by reference to the
    Registrants Registration Statement on Form S-8 filed with
    the Commission on June 30, 2005 (file No. 333-126340))                                                                                                       
|4.12        |  | Consultancy Agreement between David
    Chavoustie and ASML Holding N.V. (Incorporated by reference to
    the Registrants Annual Report on Form 20-F for the fiscal
    year ended December 31, 2005)                                                                                                                               
|4.13        |  | ASML Stock Option Plan for New Hire
    Options granted to Members of the Board of Management (Version
    April 2006) (Incorporated by reference to the Registrants
    Registration Statement on Form S-8 filed with the Commission on
    August 7, 2006 (file No. 333-136362))                                                   
|4.15        |  | ASML Stock Option Plan for
    Incentive or New Hire Options granted to Senior and Executive
    Management (Version April 2006) (Incorporated by reference to
    the Registrants Registration Statement on Form S-8 filed
    with the Commission on August 7, 2006 (file No. 333-136362))                                         
|4.16        |  | ASML Stock Option Plan for
    Incentive or New Hire Options granted to Senior and Executive
    Management (Version July 2006) (Incorporated by reference to the
    Registrants Registration Statement on Form S-8 filed with
    the Commission on August 7, 2006 (file No. 333-136362))                                          
|4.17        |  | ASML Stock Option Plan for
    Incentive or New Hire Options granted to Senior and Executive
    Management (Version October 2006) (Incorporated by reference to
    the Registrants Registration Statement on Form S-8 filed
    with the Commission on August 7, 2006 (file No. 333-136362))                                       
|8.1         |  | List of
    Material Subsidiaries*                                                                                                                                                                                                                                                                                                    
|12.1        |  | Certification
    of CEO and CFO Pursuant to Rule 13a-14(a) of the Securities
    Exchange Act of 1934*                                                                                                                                                                                                                               
|13.1        |  | Certification
    of CEO and CFO Pursuant to Rule 13a-14(b) of the Securities
    Exchange Act of 1934 and 18 U.S.C. Section 1350 as Adopted
    Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*                                                                                                                           
|15.1        |  | Consent of
    Deloitte Accountants B.V.*                                                                                                                                                                                                                                                                                             
|           



|  |                                                                                                                                                  
|- | -------------------------------------------------------------------------------------------------------------------------------------------------
|* | Filed at the Commission herewith                                                                                                                 
|# | Certain information omitted pursuant to a request for
    confidential treatment filed separately with the Securities and
    Exchange Commission