##### Table of Contents



Form 20-F 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, 2004
 Commission file number 025566 ASML HOLDING N.V.  THE NETHERLANDS  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:
None
(Title of Class) Securities registered or to be registered pursuant to
Section 12(g) of the Act:
Ordinary Shares
(nominal value Eur 0.02 per share)
(Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class) Indicate the number of outstanding shares of each of the issuers classes of capital or common stock
as of the close of the period covered by the annual report. 483,676,483 Ordinary Shares
(nominal value Eur 0.02 per share)
23,100 Priority Shares
(nominal value Eur 0.02 per share) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ o
 Indicate by check mark which financial statement item the registrant has elected to follow. o þ
 Name and address of person authorized to receive notices and communications from the Securities and Exchange Commission: Richard A. Ely
Skadden, Arps, Slate, Meagher & Flom (UK) LLP
40 Bank Street, Canary Wharf
London E14 5DS England




---



##### Table of Contents



Contents Part IItem 1 Identity of Directors, Senior Management and AdvisorsItem 2 Offer Statistics and Expected TimetableItem 3 Key InformationA. Selected Financial DataB. Capitalization and IndebtednessC. Reasons for the Offer and Use of ProceedsD. Risk FactorsItem 4 Information on the CompanyA. History and Development of the CompanyB. Business OverviewC. Organizational StructureD. Property,Plants and EquipmentItem 5 Operating and Financial Review and ProspectsA. Operating ResultsB. Liquidity and Capital ResourcesC. Research and Development, Patents and LicensesD. Trend InformationE. Off-Balance Sheet ArrangementsF. Tabular Disclosure of Contractual ObligationsG. Safe HarborItem 6 Directors, Senior Management and EmployeesA. Directors and Senior ManagementB. CompensationC. Board PracticesD. EmployeesE. Share OwnershipItem 7 Major Shareholders and Related Party TransactionsA. Major ShareholdersB. Related Party TransactionsC. Interests of Experts & CounselItem 8 Financial InformationA. Consolidated Statements and Other Financial InformationB. Significant ChangesItem 9 The Offer and ListingA. Listing DetailsB. Plan of DistributionC. MarketsD. Selling ShareholderE. DilutionF. Expenses of the IssueItem 10 Additional InformationA. Share CapitalB. Memorandum and Articles of AssociationC. Material ContractsD. Exchange ControlsE. TaxationF. Dividends and Paying AgentsG. Statement by ExpertsH. Documents on DisplayI. Subsidiary Information
 2




---



##### Table of Contents



Item 11 Quantitative and Qualitative Disclosures About Market RiskItem 12 Description of Securities Other Than Equity SecuritiesPart IIItem 13 Defaults, Dividend Arrearages and DelinquenciesItem 14 Material Modifications to the Rights of Security Holders and Use of ProceedsItem 15 Controls and ProceduresItem 16A. Audit Committee Financial ExpertB. Code of EthicsC. Principal Accountant Fees and ServicesD. Exemptions from the Listing Standards for Audit CommitteesE. Purchases of Equity Securities by the Issuer and Affiliated PurchasersPart IIIItem 17 Financial StatementsItem 18 Financial StatementsItem 19 ExhibitsExhibit 4.5Exhibit 4.10Exhibit 4.11Exhibit 4.12EXHIBIT 8.1EXHIBIT 12.1EXHIBIT 13.1EXHIBIT 15.1
  3




---



##### 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 U.S.
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 In May 2001, we consummated our merger with Silicon Valley Group, Inc. (SVG), now part of ASML
US, Inc. (ASML US). The merger is accounted for under the pooling of interests method.
Therefore, the selected financial data of ASML Holding N.V. (ASML or the Company) for the years
ended December 31, 2001 and 2000, reflect the combination of financial statements for ASMLs
historical operations with those of SVG. Because SVGs year end prior to the merger differed from ASMLs year end, in conformity with
accounting principles generally accepted in the United States (U.S. GAAP), ASMLs selected
financial data for the year ended December 31, 2000 contain the results of ASMLs historical
operations for the twelve months ended December 31, 2000 and the results of SVGs historical
operations for the twelve months ended September 30, 2000. On December 18, 2002, we announced the proposed divestiture of 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, 2004, our selected financial data for each of the five years ended December 31, 2004 and the
financial and operational information presented in this annual report on Form 20-F have been
adjusted to present these businesses as discontinued operations, instead of as a separate segment
as they had been reported prior to the divestiture announcement. Subsequent to the issuance of
the Companys 2003 financial statements, we concluded that the presentation under cash flows from
investing activities of the capitalization and sale of equipment that
is used for demonstration and training systems for a certain period of
time, before they are sold to customers, is inconsistent with the
fact that the actual initial cash outflow relating to the
construction of the equipment, and the ultimate cash inflow relating
to the sale of the equipment have the nature of operating cash flows.
We therefore have reclassified these cash flows from investing
activities to operating activities in our consolidated statements of
cash flows for each of the two years ended December 31, 2003,
our selected financial data for each of the four years ended
December 31, 2003 and the financial and operational information
presented in this annual report. See Note 1 to
the Consolidated Financial Statements. 
 Item 1 Identity of Directors, Senior Management and Advisors Not applicable. 
 Item 2 Offer Statistics and Expected Timetable Not applicable. 
 Item 3 Key Information 4




---



##### Table of Contents



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. 5




---



##### Table of Contents



Year ended December 31
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004(in thousands, except per share data)1
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EURConsolidated statements of operations dataNet sales
    
    
    2,672,630
    
    
    
    1,589,247
    
    
    
    1,958,672
    
    
    
    1,542,737
    
    
    
    2,465,377Cost of sales
    
    
    1,571,816
    
    
    
    1,558,234
    
    
    
    1,491,068
    
    
    
    1,173,955
    
    
    
    1,559,738Gross profit on sales
    
    
    1,100,814
    
    
    
    31,013
    
    
    
    467,604
    
    
    
    368,782
    
    
    
    905,639Research and development costs
    
    
    327,015
    
    
    
    347,333
    
    
    
    324,419
    
    
    
    305,839
    
    
    
    352,920Research and development credits
    
    
    (24,983
    )
    
    
    (16,223
    )
    
    
    (26,015
    )
    
    
    (19,119
    )
    
    
    (21,961
    )Selling, general and
administrative expenses
    
    
    256,513
    
    
    
    245,962
    
    
    
    263,243
    
    
    
    212,609
    
    
    
    201,629Restructuring and merger and
acquisition costs (credits)
    
    
    0
    
    
    
    44,559
    
    
    
    0
    
    
    
    24,485
    
    
    
    (5,862
    )Operating income (loss)
    
    
    542,269
    
    
    
    (590,618
    )
    
    
    (94,043
    )
    
    
    (155,032
    )
    
    
    378,913Minority interest in net result from
subsidiaries
    
    
    (3,205
    )
    
    
    3,606
    
    
    
    0
    
    
    
    0
    
    
    
    0Interest income (expense), net
    
    
    12,593
    
    
    
    (7,207
    )
    
    
    (36,781
    )
    
    
    (29,149
    )
    
    
    (16,073
    )Income (loss) from continuing
operations before income taxes
    
    
    551,657
    
    
    
    (594,219
    )
    
    
    (130,824
    )
    
    
    (184,181
    )
    
    
    362,840(Provision for) benefit from
income taxes
    
    
    (167,923
    )
    
    
    179,017
    
    
    
    42,779
    
    
    
    59,675
    
    
    
    (127,380
    )Cumulative effect of accounting
changes net of tax
    
    
    (2,676
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Net income (loss) from
continuing operations
    
    
    381,058
    
    
    
    (415,202
    )
    
    
    (88,045
    )
    
    
    (124,506
    )
    
    
    235,460Loss from discontinued operations
before income taxes
    
    
    (3,685
    )
    
    
    (103,001
    )
    
    
    (183,624
    )
    
    
    (59,026
    )
    
    
    0Benefit from income taxes
    
    
    674
    
    
    
    39,211
    
    
    
    63,846
    
    
    
    23,316
    
    
    
    0Net loss from discontinued
operations
    
    
    (3,011
    )
    
    
    (63,790
    )
    
    
    (119,778
    )
    
    
    (35,710
    )
    
    
    0Net income (loss)
    
    
    378,047
    
    
    
    (478,992
    )
    
    
    (207,823
    )
    
    
    (160,216
    )
    
    
    235,460Earnings per share data2, 3Basic net income (loss) from continuing
operations per ordinary share
    
    
    0.83
    
    
    
    (0.89
    )
    
    
    (0.18
    )
    
    
    (0.26
    )
    
    
    0.49Basic net loss from discontinued
operations per ordinary share
    
    
    (0.01
    )
    
    
    (0.14
    )
    
    
    (0.26
    )
    
    
    (0.07
    )
    
    
    0.00Basic net income (loss) per ordinary share
    
    
    0.82
    
    
    
    (1.03
    )
    
    
    (0.44
    )
    
    
    (0.33
    )
    
    
    0.49Diluted net income (loss) per ordinary share
    
    
    0.78
    
    
    
    (1.03
    )
    
    
    (0.44
    )
    
    
    (0.33
    )
    
    
    0.49Number of ordinary shares used in
computing per share amounts
(in thousands)Basic
    
    
    461,887
    
    
    
    465,866
    
    
    
    476,866
    
    
    
    482,240
    
    
    
    483,380Diluted
    
    
    483,127
    
    
    
    465,866
    
    
    
    476,866
    
    
    
    482,240
    
    
    
    484,661
   1
 2
 3
 6




---



##### Table of Contents



As of December 31
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EURConsolidated balance sheets dataWorking capital4
    
    
    1,161,178
    
    
    
    912,033
    
    
    
    993,810
    
    
    
    435,502
    
    
    
    640,741Total assets
    
    
    3,432,972
    
    
    
    3,643,840
    
    
    
    3,301,688
    
    
    
    2,868,282
    
    
    
    3,243,766Long-term liabilities
    
    
    871,742
    
    
    
    1,588,846
    
    
    
    1,233,398
    
    
    
    1,040,556
    
    
    
    1,039,023Total shareholders equity
    
    
    1,666,212
    
    
    
    1,226,287
    
    
    
    1,315,516
    
    
    
    1,141,207
    
    
    
    1,391,602Consolidated statements of cash flows data5Purchases of property, plant and equipment
    
    
    (112,167
    )
    
    
    (160,427
    )
    
    
    (89,282
    )
    
    
    (48,567
    )
    
    
    (74,979
    )Depreciation, amortization and impairment
    
    
    111,133
    
    
    
    138,959
    
    
    
    186,686
    
    
    
    156,900
    
    
    
    93,144Net cash provided by (used in)
operating activities
    
    
    188,189
    
    
    
    (328,017
    )
    
    
    (61,127
    )
    
    
    532,659
    
    
    
    257,147Net cash used in investing activities
    
    
    (89,331
    )
    
    
    (197,693
    )
    
    
    (72,876
    )
    
    
    (49,028
    )
    
    
    (60,398
    )Net cash provided by (used in)
financing activities
    
    
    34,198
    
    
    
    664,290
    
    
    
    21,427
    
    
    
    (68,156
    )
    
    
    18,871Net cash provided by (used in)
discontinued operations
    
    
    (45,048
    )
    
    
    (69,815
    )
    
    
    (127,473
    )
    
    
    12,736
    
    
    
    (5,880
    )Net increase (decrease) in cash and
cash equivalents
    
    
    248,812
    
    
    
    (73,522
    )
    
    
    (241,918
    )
    
    
    359,046
    
    
    
    200,324Ratios and other dataIncrease (decrease) in net sales from
continuing operations (in percent)
    
    
    76.1
    
    
    
    (40.5
    )
    
    
    23.2
    
    
    
    (21.2
    )
    
    
    59.8Gross profit from continuing operations

as a percentage of net sales
    
    
    41.2
    
    
    
    2.0
    
    
    
    23.9
    
    
    
    23.9
    
    
    
    36.7Operating income (loss) from continuing
operations as a percentage of net sales
    
    
    20.3
    
    
    
    (37.2
    )
    
    
    (4.8
    )
    
    
    (10.0
    )
    
    
    15.4Net income (loss) from continuing
operations as a percentage of net sales
    
    
    14.3
    
    
    
    (26.1
    )
    
    
    (4.5
    )
    
    
    (8.1
    )
    
    
    9.6Shareholders equity as a percentage
of total assets
    
    
    48.5
    
    
    
    33.7
    
    
    
    39.8
    
    
    
    39.8
    
    
    
    42.9Backlog of new systems (in units) at
year end for continuing operations
    
    
    365
    
    
    
    117
    
    
    
    103
    
    
    
    103
    
    
    
    119Backlog of used systems (in units) at
year end for continuing operations
    
    
    0
    
    
    
    1
    
    
    
    7
    
    
    
    21
    
    
    
    12Backlog of systems (in units) at
year end for continuing operations
    
    
    365
    
    
    
    118
    
    
    
    110
    
    
    
    124
    
    
    
    131Sales of systems (in units) from
continuing operations
    
    
    455
    
    
    
    197
    
    
    
    205
    
    
    
    169
    
    
    
    282Number of employees at year end
for continuing operations
    
    
    6,628
    
    
    
    6,039
    
    
    
    5,971
    
    
    
    5,059
    
    
    
    5,071Number of ordinary shares
outstanding (in thousands)
    
    
    463,395
    
    
    
    466,978
    
    
    
    482,182
    
    
    
    482,514
    
    
    
    483,676Stock price ASML at year end6
    
    
    24.19
    
    
    
    19.52
    
    
    
    7.96
    
    
    
    15.72
    
    
    
    11.81Volatility % ASML shares (260 days)7
    
    
    80.0
    %
    
    
    71.0
    %
    
    
    89.0
    %
    
    
    60.9
    %
    
    
    37.4
    %
   4
 5
 6
 7
 7




---



##### 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 $, dollars, U.S. dollars,
USD or US$ are to United States dollars. Solely for the convenience of the reader, certain euro
amounts presented as of and for the year ended December 31, 2004 have been translated into United
States dollars using an exchange rate in effect on December 31, 2004 of US$ 1.00 = EUR 0.73292.
These translations should not be construed as representations that the euro amounts could be
converted into U.S. dollars at that rate. Historically, a portion of our revenues and expenses 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 euro per U.S. dollar. 2005Calendar period
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    (Jan. 26)Period End
    
    
    1.07
    
    
    
    1.12
    
    
    
    0.95
    
    
    
    0.79
    
    
    
    0.74
    
    
    
    0.76Average 1
    
    
    1.09
    
    
    
    1.12
    
    
    
    1.05
    
    
    
    0.88
    
    
    
    0.80
    
    
    
    0.76High
    
    
    1.21
    
    
    
    1.19
    
    
    
    1.16
    
    
    
    0.97
    
    
    
    0.85
    
    
    
    0.77Low
    
    
    0.97
    
    
    
    1.05
    
    
    
    0.95
    
    
    
    0.79
    
    
    
    0.73
    
    
    
    0.74
   1

    The average of the Noon Buying Rates on the last business day of each month during
the period presented. August
    
    
    September
    
    
    October
    
    
    November
    
    
    December
    
    
    January 26Months of
    
    2004
    
    
    2004
    
    
    2004
    
    
    2004
    
    
    2004
    
    
    2005High
    
    
    0.83
    
    
    
    0.83
    
    
    
    0.81
    
    
    
    0.79
    
    
    
    0.76
    
    
    
    0.77Low
    
    
    0.81
    
    
    
    0.81
    
    
    
    0.78
    
    
    
    0.75
    
    
    
    0.73
    
    
    
    0.74
 
 B. Capitalization and Indebtedness Not applicable. 
 C. Reasons for the Offer and Use of Proceeds Not applicable. 
 D. Risk Factors In conducting our business, we face many risks that may interfere with our business objectives.
Some of these risks relate to our operational processes, while others relate to our business
environment. It is important to understand the nature of these risks and the impact they may have
on our business, financial condition and results of operations. Some of the more relevant risks are
described below. Risks Related to the Semiconductor Industry The Semiconductor Industry is Highly Cyclical and We May be Adversely Affected by Any Future
Downturns As a supplier to the global semiconductor industry, we are subject to the industrys business
cycles, the timing, duration and volatility of which are difficult to predict. The semiconductor
industry has historically been cyclical. Sales of our photolithography systems depend in large part upon the level of capital expenditures by
semiconductor manufacturers. These capital expenditures depend upon a range of competitive and
market factors, including:  
    the current and anticipated market demand for semiconductors and for
products utilizing semiconductors;
    semiconductor prices;
    semiconductor production costs; and
    general economic conditions. Changes in demand for our products as a result of these business cycles have affected the timing
and amounts of customers capital equipment purchases and investments in new technology. Future
reductions or delays in capital equipment purchases by our customers could have a material adverse
effect on our business, financial condition and results of operations. 8




---



##### Table of Contents



In anticipation of periods of increasing demand for semiconductor manufacturing equipment, we must
maintain sufficient manufacturing capacity and inventory, and we must attract, hire, integrate and
retain a sufficient number of qualified employees to meet customer demand. Our ability to predict
the timing and magnitude of industry fluctuations is limited and our products 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 positive 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 costs related
to inventory obsolescence in an industry downturn. In addition, industry downturns generally result
in overcapacity, exercising downward pressure on prices, which has had in the past, and could have
in the future, a material adverse effect on our 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
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 an adverse impact 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 that our customers may not ultimately adopt. If our customers do
not adopt these or other products or enhancements that we develop, we would not recoup any return
on our investments in these technologies, which may result in charges to our statement of
operations. 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 relative to those of our
competitors. 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 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 the dominance of 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, and ASML has sold only a limited number of
systems to Japanese customers. Both Nikon and Canon have substantial financial resources and broad patent portfolios. Each has
stated that it will introduce new products with improved price and performance characteristics that
will compete directly with our products, which 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 lead to intensified price-based competition in those markets that account for the
majority 9




---



##### Table of Contents



of our sales, resulting in lower prices and margins and an adverse impact 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 sole supplier of lenses and
other critical optical components. The inability of Zeiss to maintain and increase production
levels or our inability to maintain our business relationship with Zeiss in the future could result
in our inability to fulfill orders, which could damage relationships with current and prospective
customers and have an 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 sole 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. Although the timeliness, yield and quality of deliveries to date from our remaining subcontractors
generally have been satisfactory, manufacturing certain of these components and subassemblies is an
extremely complex process and delays caused by suppliers may occur in the future. A prolonged
inability to obtain adequate deliveries, 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. The loss of any
significant customer or any reduction in orders by a significant customer may have an adverse
effect on our business, financial condition and results of operations. In 2004, sales to one customer accounted for EUR 434 million, or 18 percent of net
sales, compared to EUR 314 million, or 20 percent of net sales, in 2003. As a result of the limited
number of our customers, credit risk on our receivables is concentrated. Our three largest
customers accounted for 38 percent of accounts receivable at December 31, 2004, compared to 44
percent at December 31, 2003. Business failure of one of our main customers may result in adverse
effects 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 adversely affect 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 (282 units in 2004 and 169 units in 2003), with an average selling price in 2004 of EUR 7.7
million (EUR 9.3 million for new systems and EUR 2.6 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 10




---



##### Table of Contents



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 by customers;
    unexpected manufacturing difficulties; and
    delays in deliveries by suppliers, may cause net sales in a particular reporting period to fall significantly below our expectations,
which would, in turn, adversely affect our operating results for that period. Since the first quarter of 2003, we have published financial results on a quarterly basis. Our
published quarterly earnings have varied significantly from quarter to
quarter and may vary in the future as a result of the above . Our Financial Condition and Results of Operations Reported in Accordance with International Financial Reporting Standards May Differ from our Financial
Condition and Results of Operations Reported in Accordance with U.S. GAAP Beginning in 2005, the European Commission will require companies that are quoted on a European
stock market, such as Euronext Amsterdam N.V. (Euronext Amsterdam), to publish financial
statements in accordance with International Financial Reporting Standards (IFRS). While we intend
to continue publishing U.S. GAAP financial statements, we also will comply with IFRS from January
1, 2005 onwards. Our financial condition and results of operations reported in accordance with IFRS may differ from
our financial condition and results of operations reported in accordance with U.S. GAAP, which
could adversely affect the market price of our ordinary shares. See Item 5.A. Operating Results, Principal Differences Between IFRS and U.S. GAAP. Compliance with Internal Controls Evaluations and Attestation Requirements Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, ASML will be required, as a foreign
private issuer, beginning in fiscal 2005, to perform an evaluation of its internal controls over financial reporting and have its
auditor publicly attest to such evaluation. We have prepared an internal plan of action for
compliance, which includes a timeline and scheduled activities, although as of the date of this
filing we have not yet finalized the evaluation. Compliance with these requirements is expected to
be expensive and time-consuming. If we fail to complete this evaluation in a timely manner, or if
our independent auditor cannot attest to our evaluation in a timely manner, we could be subject to
regulatory scrutiny and a loss of public confidence in our internal controls, with a corresponding
adverse effect on our share price. Failure to Adequately Protect the Intellectual Property Rights upon Which We Depend Could Harm Our
Business We rely on patents, copyrights, trade secrets and other measures to protect our proprietary
technology. However, there is no assurance that such measures will be adequate. We face risks that:  
    competitors may be able to develop similar technology independently;
    our pending patent applications may not be granted as expected;
    the steps we take to prevent misappropriation or infringement of our intellectual property may not be successful; and
    intellectual property laws may not sufficiently protect our proprietary
rights or may adversely change in the future. In addition, 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. Defending Against Intellectual Property Claims by Others Could Harm Our Business We face a continuing risk that we will be subject to claims alleging the infringement of others
patents or intellectual property rights. If successful, these claims could limit or prohibit us
from developing our technology and producing our products, which could have a material adverse
effect on our business, financial condition and results of operations. 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. In addition, our customers may be
subject to claims of infringement from third parties, alleging that our equipment used by such
customers in the manufacture of semiconductor products and/or the
methods relating to the use of our equipment 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 11




---



##### Table of Contents



against them as a result of such infringement. 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. This
may adversely affect our business, financial condition and results of operations. We Are Subject to Risks in our International Operations The majority of our business activity is conducted outside Europe, including in developing and
emerging markets in Asia. There are a number of risks inherent in doing business in those markets,
including the following:  
    potentially adverse tax consequences;
    unfavorable political or economic environment;
    unexpected legal or regulatory changes; and
    inability to effectively protect intellectual property. If we are unable to manage successfully the risks inherent in our international activities, our
business, financial condition and results of operations could be adversely affected. Disruption in Taiwans Political Environment Could Seriously Harm Our Business and the Market Price
of Our Shares Approximately 27% of our 2004 revenues and approximately 12% of our 2003 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. Relations between Taiwan and the Peoples Republic of China, changes in Taiwanese
government policies and other factors affecting Taiwans political, economic or social environment
could affect our business, financial condition and results of operations. We Are Subject to Environmental Laws and Regulations We are subject to Dutch 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. We believe that we have taken adequate measures to comply with
these regulations in the course of our ordinary business operations. Furthermore, we do not believe
that any environmental laws or regulations currently in effect will have an adverse effect on our
business, financial condition and results of operations.


 However, we cannot predict whether any pending or future legislation will be adopted or what the
effect of such legislation would be 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, U.S. 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 alternate production capacity would be available if a major disruption were to occur or
that, if it were available, it could be obtained on favorable terms. Such a disruption could have
an 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 but we nonetheless determine to proceed, we
must temporarily suspend any action while the Works Council determines whether to appeal to the
Netherlands courts. 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. Fluctuations in Foreign Exchange Rates and Interest Rates Could Harm Our Results of Operations We are exposed to currency risks and interest rate risks. We are particularly exposed to
fluctuations in the exchange rate between the U.S. Dollar and the euro, as we incur manufacturing
costs and price our systems predominantly in euro while a portion of our revenue and cost of sales
is denominated in U.S. dollars. In addition, a substantial portion of our assets, liabilities and operating results are
denominated in U.S. dollars, and a minor portion of our assets, liabilities and operating results
are denominated in currencies other than the euro and the U.S. 12




---



##### Table of Contents



dollar. Our consolidated financial
statements are expressed in euros. Accordingly, our results of operations are exposed to
fluctuations in various exchange rates. Furthermore, a strengthening of the euro, particularly against the U.S. Dollar and 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 an adverse impact on our
business, financial condition and results of operations. We are also exposed to fluctuations in interest rates. As of December 31, 2004, ASML had a net cash
position. A decrease of the short-term interest rates could diminish the interest income on our
cash holdings, adversely affecting our financial results. 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. 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 experiences significant
fluctuation, including fluctuation that is unrelated to our performance. We expect that this
fluctuation will 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. In addition, the provisions in our Articles of Association relating to our
Priority Shares have the effect of taking control over certain significant corporate decisions away
from holders of ordinary shares. As a result, holders of ordinary shares may have more difficulty
in protecting their interests in the face of actions by members of the Board of Management or
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, Taiwan, Italy, France,
Germany, the United Kingdom, Ireland, the Republic of Korea, Singapore, Israel, China, Japan and
Malaysia. 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 Our principal capital expenditures within continued operations over the past three years amounted
to EUR 111.3 million for 2004, EUR 74.5 million for 2003 and EUR 138.6 million for 2002. The
related cash outflows amounted to EUR 75.5 million for 2004, EUR
51.7 million for 2003 and EUR 89.3 million for 2002. See Consolidated Statements of Cash Flows in our consolidated financial statements. Our
capital expenditures consist of machinery and equipment (e.g. prototypes, demonstration systems and
training models), information technology investments, leasehold improvements to our facilities and
licenses of patents related to lithography equipment. Our Veldhoven headquarters is financed
through a special purpose vehicle that is a variable interest entity. See 13




---



##### Table of Contents



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 36.2 million for 2004,
EUR 48.8 million for 2003 and EUR 58.7 million for 2002. See Notes 8 and 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 market share. We offer an integrated portfolio of lithography systems mainly for
manufacturing complex integrated circuits (semiconductors or ICs). We supply systems to
integrated circuit 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. Value of Ownership Our business model is based on our Value of Ownership concept that consists of the following:  
    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, 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, 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 imprint
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 leverages the production-proven
elements from our PAS 5500 product family to address the industry shift toward larger (300
millimeter) wafers. The TWINSCAN platform became in 2003 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 millimeter in diameter, comprises
advanced wafer steppers and Step & Scan systems suitable for i-line and deep UV (including 248
nanometer and 193 nanometer wavelength) processing of wafers. We are currently performing further research & development on immersion lithography, which is the
most probable solution to lower the cost per wafer and increase resolution. During the second half
of 2004, we delivered two pre-production immersion systems to research institutes and one to a
commercial customer. We expect volume shipments of immersion lithography systems to commence in 2005. 14




---



##### Table of Contents



We are also currently performing research & development on maskless lithography. Maskless
lithography is one of the possible solutions to manage escalating 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. We are currently performing research & development on Extreme Ultra-Violet Lithography (EUVL).
EUVL, combining a wavelength of 13.5 nanometer and an initial numerical aperture of 0.25, will
provide a large process window compared to todays applications and will be a multi-generation
lithography solution. ASML is currently building prototype systems which are expected to be
delivered to research institutes at the end of 2005 and early 2006. During 2004, we decided to suspend our research and development activities on 157 nanometer
technology as our customers decided, because of the expected benefits from immersion lithography,
not to adopt this technology yet. Products ASML develops 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 PAS 5500 product family comprises advanced wafer steppers and Step & Scan systems suitable for
i-line and deep UV processing of wafers up to 200 millimeter 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 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 millimeter in diameter and capable of extending shrink technology beyond
70 nanometers. Our older PAS 2500 and PAS 5000 families are suitable for g-line and i-line processing of wafers up
to 150 millimeter 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. For processing of 200 millimeter wafers using step-and-scan technology, PAS 5500 series is the
preferred product range. ASML offers PAS 5500 systems based on i-line technology (using light with
a 365 nanometer wavelength), KrF (with 248 nanometer wavelength) and ArF (using 193 nanometer wavelength). For processing of 300 millimeter wafers, ASML is offering TWINSCAN systems based on i-line, KrF and
ArF technology. In 2003, ASML introduced the second generation of TWINSCAN systems based on the XT
body with a reduced footprint and a 50% reduction in specified installation facility requirements. In April 2004, ASML introduced the TWINSCAN XT:1400 for dry and wet lithography. The system is a
0.93 NA, 193 nanometer scanner that images at the 65 nanometer node in volume production
environments. The XT:1400 can also be used for pre-production testing and development at the 45
nanometer node. The first shipments are expected in the first half of 2005. The XT:1400 has a
unique architecture found only in ASML systems. The design provides customers with the option of
transitioning the system from dry to immersion lithography through an immersion conversion kit.
The XT:1400 gives customers the flexibility to include immersion into their technology roadmaps
while protecting their investments in dry 193 nanometer technology. This significantly lowers risks
with wavelength transitions. During the second half of 2004, we shipped ASMLs first lithography systems based on immersion
technology. These shipments mark delivery of the industrys first high productivity immersion
scanners for production applications. We have a unique
competitive advantage in immersion techniques due, in part, to the dual-stage design of the
TWINSCAN system. Wafer measurement  including focus and overlay  is completed on the dry stage
while the imaging process, using immersion fluid applied between the wafer and the lens, is
completed on the other, 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. We also continually develop and sell a range of product options and enhancements designed to
increase productivity and to optimize value of ownership over the entire life of our systems. 15




---



##### Table of Contents



Current ASML Lithography product portfolio of Steppers and Step & Scan Systems Feature Size
    
    Wavelength of LightFeature size =
    
    Wavelength = length of light going through projection lens;Resolution =
    
    The shorter the wavelength, the smaller the line widthSize of line
    
    and the finer the pattern on the ICwidth in Nanometer
 365 nm (i-line)
    
    248 nm (KrF)
    
    193 nm (ArF)700
    
    PAS 5500/22350
    
    PAS 5500/125300
    
    PAS 5500/250280
    
    PAS 5500/400and AT:400150
    
    
    
    PAS 5500/350130
    
    
    
    PAS 5500/750 and AT:750120
    
    
    
    PAS 5500/800110
    
    
    
    PAS 5500/850 and AT:850100
    
    
    
    
    
    PAS 5500/1100 and AT:110090
    
    
    
    
    
    PAS 5500/1150 and AT:115080
    
    
    
    
    
    AT:120070
    
    
    
    
    
    XT:1250 and XT:1250i65
    
    
    
    
    
    XT:1400 and XT:1400i
 Notes:
1000 nanometer = 1 micron (μ) = 0.001mm = one millionth of a meter
PAS 5500/22/125/250/350 = Stepper system with wafer size of 200mm
PAS 5500/400 and up = Step & Scan system with wafer size of 200mm
AT and XT = TWINSCAN systems with wafer sizes of 200 and 300mm
This table does not include the older products sold on the PAS 2500 and PAS 5000 platforms. Sales and Customer Support We market and sell our products principally through our direct sales staff. In Asia, we sell our
products primarily through our own direct sales staff, in certain jurisdictions supported by
independent sales agents. We support our customers with applications, service and technical support. Our field engineers and
applications, service and technical support specialists are based throughout the United States,
Europe and Asia. During 2004, we continued sharpening our customer focus through the work of multiple
cross-functional process improvement teams. These process improvement teams are striving to
streamline and integrate our main business processes such as new product introduction, acquisition
of orders from customers, fulfillment of orders, and post-delivery support and services. Customers and Geographic Markets In 2004, sales to one customer accounted for EUR 434 million, or 18 percent of net sales, compared
to EUR 314 million, or 20 percent of net sales, in 2003. We expect that sales to relatively few
customers will continue to account for a high percentage of our net sales in any particular year
for the foreseeable future. See Note 17 to our consolidated financial statements for a breakdown of our sales by geographic segment. Manufacturing, Logistics and Suppliers Our business model is based on outsourcing a significant part of the components and modules that
comprise our lithography systems, working in partnership with suppliers from all over the world.
Our manufacturing activities comprise the assembly and testing of a finished system from components
and subassemblies that are manufactured to our specifications by third parties and by us and the
testing of those components, subassemblies and finished systems. All of our manufacturing
activities (subassembly, final assembly and system testing) are performed in one clean room
facility located in Veldhoven, the Netherlands, and one clean room facility in Wilton, Connecticut.
We procure stepper and Step & Scan system components and subassemblies from a single supplier or a
limited group of suppliers in order to ensure overall quality and timeliness of delivery. We
jointly operate a formal strategy with suppliers known as Value Sourcing that is based on
competitive performance in quality, logistics, technology and total cost. The essence of Value
Sourcing is to maintain a supply base that is world class, globally competitive and globally
present. Our Value Sourcing strategy is based on the following strategic principles:  
    maintaining long-term relationships with our suppliers;
    sharing risks and rewards with our suppliers;
    each supplier being less than 25% dependent on ASML; 16




---



##### Table of Contents




    dual sourcing of knowledge, globally, together with our suppliers; and
    single, dual or multiple sourcing of products, where possible. Value sourcing aligns the actual supplier performance to our requirements on quality, logistics,
technology and total costs. Zeiss is our sole external supplier of lenses and other critical optical components, which account
for between 20 percent and 50 percent of our cost of goods sold, varying by product type, and which
collectively accounted for approximately 30 percent of our aggregate cost of goods sold in 2004. 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. Zeiss currently is capable of
manufacturing a limited number of lenses and optical components for our wafer steppers and Step &
Scan systems and is highly dependent on Zeiss manufacturing and testing facilities in Oberkochen
and Wetzlar, Germany. During 2004, we were in some cases constrained by the number of lenses that Zeiss could produce. If Zeiss is unable to maintain and increase production levels to respond to
an increase in our customer demand in an industry upturn, we would be unable to fulfill orders for
our systems, which could damage relationships with current and prospective customers and have an
adverse effect on our business, financial condition and results of operations. 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. Our relationship with Zeiss is structured as an exclusive strategic alliance pursuant to several
agreements concluded in 1997, 2000 and 2003 that set forth a framework for cooperation in the areas
of product research, design, planning and manufacturing and pricing, as well as customer support
and warranty service. Pursuant to these agreements, ASML and Zeiss will continue their strategic alliance on an exclusive
basis 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 maintain production over a prolonged period (such as because of a catastrophe
affecting Zeiss Oberkochen or Wetzlar facilities), we would effectively cease to be able to conduct our business. In connection with a settlement of worldwide patent litigation between Nikon, ASML and Zeiss, ASML
entered into a patent cross-license agreement with Nikon on December 10, 2004 (effective November
12, 2004), pursuant to which ASML granted Nikon a non-exclusive license to manufacture and sell
lithography equipment under patents owned or otherwise sublicensable by ASML and Nikon granted ASML
a non-exclusive license to manufacture and sell lithography equipment (other than optical
components) under patents owned or otherwise sublicensable by Nikon. Also in connection with the
settlement, ASML entered into a sublicense with Zeiss on December 10, 2004 (effective November 12,
2004), pursuant to which Zeiss sublicensed to us all of its rights to exploit optical components
from Nikon under the Nikon-Zeiss Patent Cross-License Agreement. See Item 10.C. Material
Contracts for a summary of the ASML-Nikon Patent Cross License Agreement and the ASML/Zeiss
Sublicense Agreement. ASML entered into the cross-license agreement with Nikon and the sublicense
agreement with Zeiss because it believed that, notwithstanding the strength of its claims and
defenses, doing so would be more cost effective than continuing to engage in expensive and
protracted litigation and administrative proceedings with Nikon, the outcome of which was
inherently uncertain. 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 established sophisticated development centers in the Netherlands and the United States and, in
addition, 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 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.
We also apply for subsidy payments in connection with specific development projects under programs
sponsored by the Netherlands government, the European Union and the U.S. government (Defense
Advanced Research Projects Agency, or DARPA). 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 Notes 1 and 15 to our consolidated financial statements. 17




---



##### Table of Contents



We invested EUR 353 million on research and development in continuing operations in 2004 (including
a charge of EUR 49 million with respect to a cross-license agreement entered into between ASML and
Nikon), compared to EUR 306 million in 2003 and EUR 324 million in 2002. 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 2004, our research and development efforts propelled further development of the TWINSCAN
platform along with several leading edge technologies, including 248 nanometer, 193 nanometer,
immersion and EUVL. Our research and development activities in 2004 also led to productivity and
performance enhancements for our other existing product families. Moreover we continued our
research into the feasibility of maskless technology. Intellectual Property We rely on intellectual property rights such as copyrights, patents, and trade secrets to protect
our proprietary technology. We aim to obtain ownership rights on technology developed by 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. Competitors may be able to develop and protect
similar technology independently. Also, our patent applications may not be approved as intended,
and intellectual property laws may not sufficiently support our proprietary rights. 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 or 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, and is obligated to make additional payments to Nikon of US$9 million
(approximately EUR 7 million) each in 2005, 2006 and 2007. Zeiss made an initial payment to Nikon
of US$40 million (approximately EUR 32 million) in 2004, and is required to make additional
payments to Nikon of US$6 million (approximately EUR 4 million) in 2005, 2006 and 2007. See Item
10.C. Material Contracts. Patent litigation with Ultratech Stepper, Inc In May 2000, Ultratech Stepper, Inc. (Ultratech) filed a lawsuit against ASML that is proceeding
in the United States District Court for the Northern District of California. Ultratech alleges that
ASML is infringing Ultratechs rights under a United States patent in connection with its
manufacture and commercialization in the U.S. of advanced photolithography equipment embodying
technology that, in particular, is used in Step & Scan equipment. Ultratechs complaint seeks
injunctive relief prohibiting future sales and damages for past sales of this equipment. Ultratech
may also seek prejudgment interest. Ultratechs complaint also seeks enhanced damages based on
alleged willful infringement. If the jury finds that ASML willfully infringed the patent, the court
has the discretion to award three times the damages.
In August 2002, the Court granted ASMLs motion for summary judgment of non-infringement, following
which Ultratech appealed this judgment to the United
States Court of Appeals for the Federal Circuit. On March 30, 2004, the Federal Circuit reversed
the District Courts grant of summary judgment and remanded the case to the District Court for
determination of infringement under the Federal Circuits new construction of one of the terms of
the asserted patent. As a result of the Federal Circuits new construction, ASML is seeking additional discovery from
Ultratech, with trial scheduled for May 2005. ASML believes it has meritorious defenses to
Ultratechs claims, including that ASML does not infringe Ultratechs patent, and that the patent
is invalid, and will vigorously defend itself against these claims. In the event a final
non-appealable decision were to be rendered that was adverse to ASML, it could result in a damages
award and substantially restrict or prohibit ASMLs sales in the United States, which in turn could
have a material adverse effect on the Companys financial position and results of operations. 18




---



##### Table of Contents



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 relative to those of our competitors. 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 to prevent competitors from using and developing
their technology. 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 regulation 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 or product as well as their commercial success. Moreover,
environmental and other regulations that adversely affect the
pricing of our products could affect our net sales and operating profit. 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. 
 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: (ORGANIZATIONAL CHART) See Exhibit 8.1 for a list of our material subsidiaries. 
 D. Property, Plants and Equipment We own several facilities, including office facilities, in the Netherlands, the United States and
Japan. The book value of the buildings used in our continuing operations and owned by ASML amounted
to EUR 81 million as of December 31, 2004. We lease our headquarters, applications laboratory and
research and development facilities, manufacturing (assembly and testing) premises and some of our
office facilities in Veldhoven, the Netherlands. The operating leases for several of our
facilities are long-term and contain purchase options. See Item 5.E. Off-Balance Sheet Arrangements and Note 12 to our consolidated
financial statements. Some of our office facilities at our
headquarters in Veldhoven are financed through a special purpose vehicle that is a variable
interest entity. We also own and have regional sales and service offices and manufacturing
facilities located worldwide near our customers premises. We expect capital expenditures in 2005 to range between EUR 75 million and EUR 85 million, of which
the majority will be allocated to machinery and tooling equipment and to IT hardware. See Item 4.A.
History and Development of the Company, Capital Expenditures. See also Item 5.B. Liquidity and
Capital Resources and Note 9 to our consolidated financial statements. While we anticipate continuing capital expenditures for the purpose of upgrading and, where
appropriate, incrementally expanding our facilities, we believe that our existing facilities are
sufficient to accommodate the likely range of production volumes that we currently expect in the
market for semiconductor manufacturing equipment for the next 2 years. 19




---



##### Table of Contents



Item 5 Operating and Financial Review and Prospects Executive Summary ASML is the worlds leading provider of lithography systems for the semiconductor industry,
manufacturing complex machines that are critical to the production of integrated circuits or chips.
Headquartered in Veldhoven, the Netherlands, ASML operates globally, with activities in Europe, the
United States and Asia. Semiconductor Equipment Industry Historically, the semiconductor industry has been highly cyclical. The number of lithography
equipment units that we and our competitors shipped for the 5 years ended December 31, 2003 is set
forth in the following table: Year ended December 31
    
    1999
    
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003Total lithography equipment units shipped
    
    
    731
    
    
    
    1,182
    
    
    
    789
    
    
    
    413
    
    
    
    456
    The years 2001, 2002 and 2003 were an unprecedented period of downturn in the global
semiconductor industry and, consequently, the semiconductor equipment industry. During the last
quarter of 2003 and the first three quarters of 2004, however, our systems order intake showed
considerable strength. This recovery resulted in 2004 in a significant improvement in net sales,
gross profit on sales and net income. We have accumulated
a significant backlog for deliveries in the first half of 2005. However, we remain cautious in our
forecast as customer order push-outs are always possible, if overall semiconductor demand were not
to materialize as expected. The order backlog as of December 31, 2004 comprises 131 lithography
systems. ASML plans to ship 60 systems in the first quarter of 2005. The company has limited
visibility for the second half of 2005. Summary of operations Our sales consist of product sales and service sales. Product sales generated approximately 91% of
total net sales in 2004. During 2004, we shipped 282 systems to our customers, compared to 169 in
2003. During 2004, the average selling price of our systems (ASP) was EUR 7.7 million. During
2004, the ASP of our systems amounted in the first, second, third and fourth quarter of the year,
respectively, to EUR 6.7 million, 7.6 million, 7.5 million and EUR 8.8 million. Based upon our
backlog as of December 31, 2004, we estimate the ASP of systems we expect to ship in the first
quarter of 2005 to be EUR 10.7 million. This increase in ASP reflects the industrys shift from 200
millimeter towards 300 millimeter systems, as well as a shift from 365 nanometer towards 248 and 193
nanometer systems. Cost of sales reflects primarily the costs of components and subassemblies that comprise our
lithography systems, labor used in the manufacture of our systems and directly related overhead. We procure system components
and subassemblies from a single supplier or a limited group of suppliers in order to ensure overall
quality and timeliness of delivery. During 2004, we continued our efforts to reduce our cost base
by focusing on cost of goods reduction programs. These programs are effected in close cooperation
with our supply chain in order to reduce the costs of manufacturing the components and modules for
our systems, resulting in lower cost of goods. In addition, ASML made some redesigns to its current
product portfolio. The impact of these programs is reflected in our gross margin. See Item 5.A.
Operating Results  Results of Operations. The semiconductor manufacturing industry is subject to rapid technological change and frequent new
product introductions and enhancements. The cost to develop new systems is increasingly high. Our
level of research and development expenditures reflects our continuing effort to introduce several
leading edge lithography products for 193 nanometer applications and the newest versions of the
TWINSCAN platform, combined with continued investments in 248 nanometer high numerical aperture
(NA) program, immersion and EUV. During 2004, ASML shipped the worlds first immersion tool. Our break-even level is the minimum number of new systems that need to be sold in a year in order
to achieve net profit in that year. We have reduced our break-even level to approximately 130 new
systems as of the end of 2004 from a break-even level of 160 new systems as of the beginning of
2004, depending upon our product mix by:  
    adjusting our labor capacity over the past 2 years;  
    controlling our cost basis by focusing on cost of goods reduction programs;  
    increasing the value of ownership of our systems resulting in higher ASPs for our
systems; and  
    increasing our operating flexibility. 20




---



##### Table of Contents



Japanese Market 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 and ASML has sold only a limited number of systems to Japanese
customers. During 2004, ASML announced plans to increase its service, sales and marketing
operations in Japan to serve its growing regional customer base. In July 2004, ASML received an
order for its TWINSCAN lithography system for 300 millimeter production from a large Japanese
electronics and electrical-equipment manufacturer. We now have four customers in Japan. Settlement of Patent Litigation Pursuant to agreements executed in the fourth quarter of 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, and is obligated to make
additional payments to Nikon of US$ 9 million (approximately EUR 7 million) in each of 2005, 2006 and
2007. An amount of EUR 49 million pertains to past conduct and is expensed as research and
development expenses in ASMLs statement of operations for the year ended December 31, 2004. The
remaining value, in an amount of EUR 21 million, has been capitalized under intangible assets and
will be amortized over a period of 5 years under cost of sales. Restructuring Charges In July 2003, ASML announced further workforce reductions of approximately 550 positions worldwide
due to the continuing downturn in the semiconductor equipment industry. During 2003, ASML 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 previous
workforce reductions announced in December 2002. ASMLs Board of Management and ASMLs Dutch 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, 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. Our payments associated with these workforce reductions were
EUR 2.5 million in 2004. Dutch Corporate Income Tax Rate Reduction A corporate income tax rate reduction in the Netherlands was enacted in the fourth quarter of
2004. As a consequence, we had to re-measure the valuation of our tax assets and liabilities
accordingly. The re-measurement led to a one-time tax charge of approximately EUR 15 million.
Income taxes represented 35.1 percent of income before taxes in 2004 (31.1 percent excluding
one-time tax charge of approximately EUR 15 million), compared to 32.4 percent in 2003. The enactment of the Dutch Corporate income tax rate reduction will lead to a decrease of the
consolidated effective tax rate of approximately 3 percentage points to an expected tax rate of
approximately 28 percent. Key Performance Indicators ASML uses key performance indicators in managing its business. The major key performance indicators
for the three years ended December 31, 2004 are set forth in the following table. Year ended December 31
    
    2002
    
    
    2003
    
    
    2004GrowthTotal Net sales (EUR million)
    
    
    1,959
    
    
    
    1,543
    
    
    
    2,465Backlog of total systems (units)
    
    
    110
    
    
    
    124
    
    
    
    131Value of Backlog of total systems (EUR million)
    
    
    1,089
    
    
    
    993
    
    
    
    1,691ASP new systems (EUR million)
    
    
    8.9
    
    
    
    9.5
    
    
    
    9.3ASP backlog (EUR million)
    
    
    9.9
    
    
    
    8.0
    
    
    
    12.9ProfitabilityGross profit on sales (percentage)
    
    
    23.9
    
    
    
    23.9
    
    
    
    36.7Net income (loss) (EUR million)
    
    
    (208
    )
    
    
    (160
    )
    
    
    235LiquidityNet increase (decrease) in cash and cash equivalents (EUR million)
    
    
    (242
    )
    
    
    359
    
    
    
    200Cash and cash equivalents (EUR million)
    
    
    669
    
    
    
    1,028
    
    
    
    1,228
 21




---



##### Table of Contents



In managing our business, we continuously seek to:  
    increase the value of ownership (see Item 4.B. Business Overview) to our customers
resulting in higher ASPs for our systems;
    control our cost base by focusing on reducing cost of goods sold and controlling
research and development costs and selling, general and administrative expenses, resulting
in improved operating margins; and
    improve our working capital. Our working capital improvement program includes inventory
control, early collection of our receivables and effective management of payments. We measure ourselves against the above-mentioned key performance indicators and our Board of
Management and senior management continuously monitor and discuss these in monthly operational
review meetings and quarterly financial planning meetings.
 
Our key performance indicators showed considerable strength during 2004 compared to 2003
and 2002 mainly due to the recovery of the semiconductor equipment market, after a period of
downturn, the results of our cost of goods reduction programs and our continuous focus on working
capital improvement programs. 
 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, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those
related to revenue recognition, long-term service contracts, warranty and installation obligations,
tangible assets, intangible assets, inventories, bad debt provisions, restructuring provisions,
contingencies and litigation and income taxes. 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
under different assumptions or conditions. To the extent there are material differences between
actual results and these estimates, our future results of operations could be adversely affected.
We believe that the accounting policies 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 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 premises. Our systems are based largely on two product platforms that permit incremental, modular upgrades.
Historically, we have introduced a new product platform on average once
every decade and have done so on one occasion since the beginning of 2000. This introduction results in a complex integration of mechanical and optical
subsystems. Consequently, at the end of 2000, we departed from our standard revenue recognition
policy in connection with the introduction of our TWINSCAN family of lithography systems. Although
each TWINSCAN system successfully completed a Factory Acceptance Test prior to shipment, we
considered the TWINSCAN to constitute new technology for which we did not have sufficient
evidence to conclude that (i) installation at the customer site would occur consistently within a
pre-determined time period comparable to our other systems; and (ii) upon installation, the system
would perform within the specifications for which customer sign-off had been obtained in the
pre-shipment Factory Acceptance Test. Consequently, we initially deferred all revenue with respect
to each TWINSCAN system until installation and acceptance of the system at the customers premises
had been completed. At December 31, 2000, this resulted in the deferral of revenue totaling EUR 9
million in respect of one TWINSCAN system that had been shipped but not completely installed. At
December 31, 2001, this resulted in the deferral of revenue totaling EUR 138 million in respect of
13 TWINSCAN systems that had been shipped but for which installation had not yet been completed.
All of this revenue was recognized during the succeeding year. By the end of 2002, however, we had
successfully shipped and installed a total of 70 TWINSCAN systems, which provided us with
sufficient evidence to conclude that installation of TWINSCAN systems would occur consistently
within a predetermined time period and that the performance of these systems would not reasonably
be different from that exhibited in the pre-shipment Factory Acceptance 22




---



##### Table of Contents



Test. As a result, at the end of 2002, we commenced recognizing revenues from TWINSCAN systems upon
shipment. Therefore, no revenue was deferred pending installation of a TWINSCAN system (or any
other ASML system) during 2003 or 2004. In our annual report on Form 20-F for the year ended December 31, 2003, we disclosed that whether
we would consider immersion as new technology or proven technology would depend on our progress in
immersion lithography technology during 2004. During 2004 the engineering and design obstacles
associated with immersion technology were overcome in rapid fashion through the development of
add-on modules to existing models within ASMLs TWINSCAN family of systems. After the development
of the immersion tool was completed, ASML determined that the addition of immersion features to its
existing TWINSCAN systems did not constitute new technology, since it is a fairly simple
enhancement to existing technology. At December 31, 2004, one immersion lithography system has been
recognized in revenue that was under installation at a customer site. This system was tested and
accepted in a Factory Acceptance Test prior to shipment. ASML anticipates that, in connection with future introductions of new technology, it will initially
defer revenue recognition until completion of installation and acceptance of the new technology at
customer premises. This deferral would continue until ASML could 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. The fair value of installation services provided to our customers is initially deferred and is
recognized when the installation is completed. The unearned revenue balance from installation
services amounted to approximately EUR 9.4 million at December 31, 2004. Sales from service
contracts are recognized when performed. Revenue from prepaid service contracts is recognized over
the term of the contract. As of December 31, 2004, the unearned revenue balance on prepaid service
contracts (including training) amounted to approximately EUR 72.5 million. Warranty We provide standard warranty coverage on our systems for twelve 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 cost is 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 our financial plans, updated with the latest available
semiconductor market projections, our sales expectations and our
costs evaluations. These are consistent with the plans and estimates
that we use to manage our business. It is possible, however, that
actual outcome, may differ from these plans and estimates, and that future
adverse changes in market conditions may require impairment of
certain long-lived assets. During 2004, we recorded impairment
charges in the amount of EUR 2.9 million relating to
machinery and equipment as, the carrying amounts of these assets were not recoverable. See Notes 2, 3 and 9 to our consolidated financial statements. 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 23




---



##### Table of Contents



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 take 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 financial condition and results of operations. See Note 6 to our consolidated
financial statements. Trade Receivables A majority of ASMLs trade receivables are derived from sales to large multinational semiconductor
manufacturers throughout the world. In order to monitor potential credit losses, ASML performs
ongoing credit evaluations of its 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. 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 prevailing economic conditions in the industry and their
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. ASML has not incurred any material accounts receivable credit
losses during the past 3 years. However, we sell a substantial number of systems to a limited
number of customers. ASMLs three largest customers accounted
for 38% of accounts receivable at
December 31, 2004, compared to 44% at December 31, 2003. An unanticipated business failure of one
of ASMLs main customers could result in a substantial credit loss in respect to amounts owed to
the Company by that customer, which could adversely affect ASMLs results of operations and
financial condition. See Note 20 to our consolidated financial statements. 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, we apply SFAS No. 146 (effective since January 1, 2003)
in the case of benefit arrangements that, in substance, do not constitute an ongoing benefit
arrangement. ASML applies SFAS No. 112 when termination benefits 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, ASML announced further workforce
reductions of approximately 550 positions worldwide due to the continuing downturn in the
semiconductor equipment industry. During 2003, ASML 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. ASMLs Board of Management and ASMLs Dutch 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, 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. 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. 24




---



##### Table of Contents



Contingencies and litigation As of December 31, 2004 and 2003, ASML was party to various legal proceedings generally incidental
to its business, as disclosed in Note 14 to the consolidated
financial statements. In connection with these
proceedings and claims, ASMLs 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 its
statement of operations. 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 ASMLs 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, ASML may agree to settle or to terminate a claim or
proceeding in which it believes it would ultimately prevail where it believes 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 ASML determined to enter into a cross-license agreement as an alternative to
continuing its intellectual property dispute with Nikon. See Item 10.C. Material Contracts. Income tax We operate in various tax jurisdictions in the U.S., Europe and Asia and must comply with the tax
laws of each of these jurisdictions. We use the asset and liability method 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. In 2004, we assessed our ability to realize our deferred tax assets resulting from net operating
loss carry-forwards. The total amount of loss carry forwards as of December 31, 2004 is EUR 577
million. Based on this analysis, management believes that it is more likely than not that all losses
will be offset by future taxable income before the Companys ability to utilize those losses
expires. This analysis takes into account the Companys projected future taxable income from
operations, possible tax planning alternatives available to the Company, and a realignment of group
assets that the Company effected during the period 2001 through 2003 and that included the transfer
of certain tangible and intangible assets of ASML US Inc. to ASML Netherlands BV. The value of the
assets transferred results in additional income to ASML US, Inc., which the Companys management
believes 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 ASML requested a bilateral advance pricing
agreement (APA) from the US and Netherlands tax authorities. Since December 2002, ASMLs
management has held numerous meetings with representatives of those authorities. In December 2004,
the U.S. and Netherlands tax authorities formally met to review ASMLs APA submission. Based on
these meetings, and feedback from both these authorities, ASML is confident that ASMLs APA request
will be successful. Although we remain optimistic that the APA will be completed in the course of
calendar year 2005, the specific timing remains in the control of those tax authorities. See Note
16 to our consolidated financial statements. Business strategy Our business strategy is to provide superior value of ownership for our customers while ASML
achieves top financial performance. We implement this strategy through customer focus, technology
leadership and operational excellence. Customer focus We satisfy different types of chipmakers by customizing our products to provide premium value for
all market segments. This includes satisfying demand for high volume systems necessary for
production of memory chips, as well as demand for systems that can perform fast and frequent
changeovers required by foundries or made-to-order chip contractors. We perform to the unique
specifications set by integrated device manufacturers to fit their chipmaking environment. Of the top 20 chipmakers worldwide, in terms of semiconductor capital expenditure, 16 are customers
of ASML. We plan to solidify our position in this segment through 25




---



##### Table of Contents



superior execution. At the same time, we have a significant market share of customers below the top
20, and we plan to grow our share in this segment by expanding our geographic reach. Japan has historically been dominated by our competitors. In 2004, we undertook a long term market
development strategy, and we now have four customers in Japan. We plan to further increase our
sales staff and marketing efforts, add customer support and open new offices. We will continue to offer solutions for related lithography application markets, including Thin
Film Head and micro-electro mechanical systems (MEMs), among others. Technology leadership Technological developments and the level of capital investments increasingly influence the
equipment choices of chipmakers. The Companys product range for steppers and advanced Step & Scan systems spans all the industrys
current wavelengths for both 200- and 300-millimeter wafers. Since 2000, we offer the industrys only dual-stage wafer imaging platform  called TWINSCAN  that
allows exposure of one wafer while simultaneously measuring another wafer. Customers have been
embracing our technology platform, and in 2004, we installed our 200th TWINSCAN system. In 2003, we announced the introduction of our new immersion lithography system, a product that
replaces the air over the wafer with fluid to enhance focus and shrink circuit line width, based on
our TWINSCAN platform. In 2004, we delivered the industrys first immersion lithography systems. In 2004, we reconfirmed TWINSCAN as the semiconductor industrys leader in productivity
performance, while transitioning to the next technology node. We shipped a total of 18 systems of
next generation TWINSCAN AT:1250 and TWINSCAN XT:1250. These systems extend imaging to the
65-namometer line width on both 200- and 300-millimeter wafers using 193-nanometer wavelength. This
marks a fast ramp-up for a product of such complexity. We also form and maintain strategic alliances with other semiconductor equipment suppliers to offer
customers more complete solutions. For example, we have joint development programs with leading
makers of track equipment in the so-called litho cluster, where wafer coating and exposure can be
combined to better meet demands of chipmakers. For the next generation of optical lithography, ASML is committed to EUV technology that will allow
production of integrated circuits down to the 32-nanometer line width and smaller. For a market and technology overview and further information about ASML products, see Item 4.B.
Business Overview. Operational excellence We strive to transform our market and technology success into a sustainable business success
through operational excellence. The Companys human resources strategy embraces our unique culture of both individual and team
commitment within an innovative environment. We will continue to develop a motivated team of
successful people and create opportunities for professional growth. ASMLs strategy includes outsourcing the majority of components and subassemblies that make up our
lithography products. We work in partnership with suppliers, jointly operating a strategy known as
value sourcing, based on quality, logistics, technology and total cost. We strive to attain
flexibility and cost savings. Value sourcing exemplifies mutual commitment, alongside shared risk
and reward. It also allows the necessary flexibility to adapt to sudden swings in market demand. We strive to continuously improve efficiency in fixed and variable costs, and to strengthen our
capability to generate cash. This means continuously reducing cost of goods, increasing
manufacturing efficiency and developing supplier flexibility. Continuous reduction in total cycle time is a strategic benefit of operational excellence. This is
the time it takes from the date of ordering bulk materials to volume production by our lithography
system at customer facilities. For example, we have shortened the Companys total cycle time of
TWINSCAN by more than 50 percent as of the end of 2004, compared with its introduction in 2001. 26




---



##### Table of Contents



Our continuous focus on execution excellence has contributed to lowering our break-even level for
the number of systems that we manufacture. This is critical due to the cyclicality of the world
market for semiconductor lithography systems. Financial criteria for ASML ASMLs objective is to provide to our shareholders an attractive return on invested capital. In
seeking to achieve this objective, we measure ourselves on financial key performance criteria
based on liquidity, profitability and growth (see Executive
Summary, Key Performance Indicators). 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. Our decision in December 2002 to sell our Thermal business and to terminate our Track equipment
business has resulted in separate disclosure for continuing and discontinued operations for the
three years ended December 31, 2004. Set forth below are our consolidated statements of operations from continuing operations data for
the three years ended December 31, 2004, expressed as a percentage of total net sales: Year ended December 31
    
    2002
    
    
    2003
    
    
    2004Total net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    76.1
    1
    
    
    76.1
    1
    
    
    63.3
    2Gross profit on sales
    
    
    23.9
    
    
    
    23.9
    
    
    
    36.7Research and development costs
    
    
    16.6
    
    
    
    19.8
    
    
    
    14.3Research and development credits
    
    
    (1.3
    )
    
    
    (1.2
    )
    
    
    (0.9
    )Selling, general and administrative costs
    
    
    13.4
    
    
    
    13.8
    
    
    
    8.2Restructuring and merger and acquisition related charges
    
    
    N/A
    
    
    
    1.6
    
    
    
    (0.2
    )Operating income (loss) from continuing operations
    
    
    (4.8
    )
    
    
    (10.0
    )
    
    
    15.4Interest expense, net
    
    
    1.9
    
    
    
    1.9
    
    
    
    0.7Income (loss) from continuing operations before income taxes
    
    
    (6.7
    )
    
    
    (11.9
    )
    
    
    14.7(Provision for) Benefit from income taxes
    
    
    (2.2
    )
    
    
    (3.9
    )
    
    
    5.2Net income (loss) from continuing operations
    
    
    (4.5
    )
    
    
    (8.1
    )
    
    
    9.6
   1
 2
 Results of operations from continuing operations 2004 compared with 2003 Consolidated sales and gross profit The following table shows a summary of sales (revenue and units sold), gross profit on sales and
ASP data on an annual and semi-annual basis for the years ended December 31, 2004 and 2003: 2003
    
    
    
    
    
    
    
    
    
    2004First
    
    
    Second
    
    
    Full
    
    
    First
    
    
    Second
    
    
    FullYear ended December 31
    
    half year
    
    
    half year
    
    
    year
    
    
    half year
    
    
    half year
    
    
    yearNet sales (EUR million)
    
    
    647
    
    
    
    896
    
    
    
    1,543
    
    
    
    1,070
    
    
    
    1,395
    
    
    
    2,465Net product sales (EUR million)
    
    
    553
    
    
    
    804
    
    
    
    1,357
    
    
    
    964
    
    
    
    1,287
    
    
    
    2,251Net service sales (EUR million)
    
    
    94
    
    
    
    92
    
    
    
    186
    
    
    
    106
    
    
    
    108
    
    
    
    214Total systems recognized
    
    
    74
    
    
    
    95
    
    
    
    169
    
    
    
    130
    
    
    
    152
    
    
    
    282Total new systems recognized
    
    
    55
    
    
    
    71
    
    
    
    126
    
    
    
    99
    
    
    
    117
    
    
    
    216Total used systems recognized
    
    
    19
    
    
    
    24
    
    
    
    43
    
    
    
    31
    
    
    
    35
    
    
    
    66Gross profit on sales (% of sales)
    
    
    19.4
    
    
    
    27.2
    
    
    
    23.9
    
    
    
    34.2
    
    
    
    38.7
    
    
    
    36.7ASP for new systems (EUR thousands)
    
    
    8,736
    
    
    
    10,034
    
    
    
    9,464
    
    
    
    8,711
    
    
    
    9,764
    
    
    
    9,282ASP for used systems (EUR thousands)
    
    
    1,816
    
    
    
    2,162
    
    
    
    2,018
    
    
    
    2,266
    
    
    
    2,853
    
    
    
    2,577
 Consolidated net sales increased by approximately 59.8 percent from 2003 to 2004 with product sales
(systems and options) increasing by approximately 65.9 percent over that period, primarily due to
an increased number of systems recognized. The
number of new systems recognized in net sales increased from 126 units in 2003 to 216 units in 2004 due to
an increase in equipment demand by the semiconductor industry in 2004 after 3 consecutive years of
downturn in the global semiconductor industry. The year-on-year increase in the number of new
systems recognized mainly relates to an increase in sales of our 193nm ArF and 248nm KrF systems for
300 millimeter wafer processing and 365nm i-line for 200 millimeter wafer processing. 27




---



##### Table of Contents



The
ASP for new systems decreased by approximately 1.9 percent, reflecting an increased share of
i-line lithography systems for 200 millimeter wafer processing with lower ASPs, which was
partially offset by an increased share of KrF lithography systems for 300 millimeter wafer
processing with higher ASPs. Furthermore, we experienced higher second half 2004 and 2003 ASPs as a
consequence of the sales mix during those periods reflecting more sales of our more advanced
systems. At December 31, 2004 ASML had no deferred revenue from new technology. During 2004, no revenue from
new technology was recorded that had been previously deferred. 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 driven by market demand expressed by other customers and not by explicit or implicit
contractual arrangements relating to the initial sale. The number of used systems sold increased
from 43 units in 2003 to 66 in 2004. This increase was driven by high utilization of the
lithography equipment, which drove our customers to seek opportunities to expand production
capacity in their existing production facilities. The experience of customers was also related to a
change in product mix, which was driven by specific demand in application areas that required less
critical resolution capabilities. The ASP for used systems increased by approximately 27.7 percent,
reflecting a further shift from our older PAS 2500 towards our newer PAS 5500 family, including
scanner systems. Service sales showed a 15.1 percent increase from EUR 186 million in 2003 to EUR 214 million in
2004. This increase was mainly due to new contract sales with major customers and relocation of
systems in the United States, partially offset by a decline in the exchange rate of the USD versus
the euro during 2004. Of the top 20 chipmakers worldwide, in terms of semiconductor capital expenditure, 16 are customers
of ASML. In 2004, sales to one customer accounted for EUR 434 million, or 18 percent of net sales.
In 2003, sales to one customer accounted for EUR 314 million, or 20 percent of net sales. Gross profit as a percentage of net sales in 2004 increased to 36.7 percent from 23.9 percent in
2003. The gross profit on new systems increased from 21.7 percent to 36.2 percent mainly due to
lower costs of sales reflecting the results from our cost of goods reduction programs
(approximately 6.0 percent positive impact on our gross profit) and improved ASPs (approximately
0.8 percent positive impact on our gross profit). This increase in gross profit was offset by the
2004 product mix (approximately 1.2 percent negative impact on our gross profit). Furthermore,
improved utilization of our production facilities caused by higher
sales positively impacted our gross margin by 6.5 percent. Finally, lower costs for obsolete inventory (1.2 percent) and
positive currency results (1.2 percent) resulted in higher gross margins. Lithography order backlog We started 2004 with an order backlog of 124 systems (103 new and 21 used), and received orders for
delivery of 318 systems during the year. In 2004, we recorded 282 system sales and 29 order
cancellations or push-outs beyond twelve months, resulting in an order backlog of 131 systems (119
new and 12 used) as of December 31, 2004. The total value of the backlog as of December 31, 2004
amounts to EUR 1.7 billion, compared with a backlog of approximately EUR 993 million as of December
31, 2003. See also Item 5.D. Trend Information. Research and development Research and development costs increased from EUR 306 million in 2003 to EUR 353 million in 2004
primarily due to a charge of EUR 49 million with respect to a
cross-license agreement entered into
between ASML and Nikon (see Executive Summary, Settlement of
Patent Litigation and Note 8 to our
consolidated financial statements). The level of research and development expenditures reflected our continuing effort to introduce
several leading edge lithography products for 193 nanometer applications and the newest versions of
the TWINSCAN platform, combined with continued investments in 248 nanometer high numerical aperture
(NA) program, immersion and EUV. Research and development credits increased from EUR 19 million in 2003 to EUR 22 million in 2004
due to an increased volume of research and development projects that qualified for credits. Selling, general and administrative costs Selling, general and administrative costs decreased by 5.2 percent from EUR 213 million in 2003 to
EUR 202 million in 2004, mainly due to a continuing increased focus on reducing costs and decreased
legal fees associated with patent infringement cases, partially offset by increased IT costs and
consultancy fees with respect to implementing provisions of Section 404 of the U.S. Sarbanes-Oxley
Act of 2002. Selling, general and administrative costs as a percentage of net sales decreased from 28




---



##### Table of Contents



13.8 percent in 2003 to 8.2 percent in 2004, primarily due to an increase in net sales. Restructuring costs In response to the semiconductor industrys continuing downturn and a corresponding decrease in
demand for ASMLs products and services, on December 18, 2002, we announced measures to contain
costs for our lithography business, including customer support, and thereby lower our break-even
point. These measures resulted in the recognition of restructuring charges of EUR 78.5 million,
recorded during 2002 as cost of sales, for slow-moving and obsolete lithography inventory and
impairments of tangible fixed assets. We also announced workforce reductions of approximately 700
positions worldwide. The related lay-off costs were largely recorded in 2003 since the final
details of the plan had not been finally determined by December 31, 2002. With respect to these
reductions, we recorded in 2003 restructuring charges totaling EUR 6.9 million, of which EUR 4.1
million was reflected in cost of sales and EUR 2.8 million was reflected in restructuring costs. By
adjusting labor capacity, we expected to achieve annual cost savings of EUR 49 million. As of
December 31, 2003, this plan had been fully effectuated and cash payments equivalent to the full
EUR 6.9 million in accrued expenses had been made. 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 were planned for the Netherlands. 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
previous workforce reductions announced in December 2002. The estimated initial annual cost savings
were EUR 47 million. ASMLs Board of Management and ASMLs Dutch 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, we decreased the reductions to approximately 300 positions worldwide, of
which 150 were contract employees with limited rights upon termination. As a result, 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. Our payments associated
with these workforce reductions were EUR 2.5 million in 2004 and our initially anticipated cost
savings were reduced to approximately EUR 24 million. Also during 2003, we recorded restructuring costs of approximately EUR 7 million relating to the
consolidation of our office and warehouse facilities at our headquarters in Veldhoven as we ceased
using certain of our 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 were insufficient cash flows to support the carrying cost. During
2004, we 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 1.1 million of which was recorded in cost of sales and
EUR 2.5 million of which was recorded under restructuring expenses. Net interest expense Net interest expense decreased from EUR 29 million in 2003 to EUR 16 million in 2004 due to an
increase in interest income and a decrease in interest expense. Our interest income related
primarily to interest earned on our cash and cash equivalents. Interest income increased compared
with 2003, primarily due to higher cash and cash equivalent balances throughout the year as a
result of an increase in cash flows from operations. Our interest expense relates primarily to our
convertible notes. Our interest expense decreased in 2004 compared with 2003, primarily due to
repurchases and the redemption of our US$ 520 million 4.25 percent Convertible Subordinated Notes
during the second half of 2003, partially offset by the issuance in May 2003 of EUR 380 million
5.50% Convertible Subordinated Notes due 2010. Income taxes A corporate income tax rate reduction in the Netherlands was enacted in the fourth quarter of 2004.
As a consequence, ASML had to re-measure the valuation of its tax assets and liabilities
accordingly. This re-measurement led to a one-time tax charge of approximately EUR 15 million.
Income taxes represented 35.1 percent of income before taxes in 2004, compared to 32.4 percent in
2003. We believe that this tax rate reduction will lead to a decrease of our consolidated effective
tax rate of approximately 3 percentage points for future years to an expected tax rate of
approximately 28 percent. See Note 16 to our consolidated financial statements. 29




---



##### Table of Contents



Discontinued operations Results from discontinued operations comprised the results of our Thermal business, which we
substantially divested in October 2003, and our Track equipment business which we terminated in
December 2002. Year ended December 31
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EURRevenuesTrack
    
    
    2,514
    
    
    
    0Thermal
    
    
    38,198
    
    
    
    0Total
    
    
    40,712
    
    
    
    0Loss from discontinued operations, net of taxesTrack loss from operations
    
    
    (1,456
    )
    
    
    0Track exit costs
    
    
    (1,944
    )
    
    
    0Thermal loss from operations
    
    
    (21,906
    )
    
    
    0Thermal exit costs
    
    
    (10,404
    )
    
    
    0Total
    
    
    (35,710
    )
    
    
    0
 In October 2003, we completed the sale of our Thermal business to a privately held company formed
by VantagePoint Venture Partners. In June 2003, ASML sold certain of its fixed assets and
inventories related to its Track business to Rite Track. The exit costs of EUR 2 million, net of
tax, were recorded in 2003 for impairment charges on a building previously used in our Track
operations. As of December 31, 2004, we continue to hold this building for sale with a book value of approximately
EUR 3 million and liabilities for loss contingencies amounting to approximately EUR 5 million
related to our former Thermal and Track business. Results of operations from continuing operations 2003 compared with 2002 During the year 2003 we faced a significant downturn in the semiconductor industry, which started
in 2001. Consolidated sales and gross profit The following table shows a summary of sales (revenue and units sold), gross profit on sales and
average sales price data on an annual and semi-annual basis for the years ended December 31, 2003
and 2002: 2002
    
    
    
    
    
    
    2003First
    
    
    Second
    
    
    Full
    
    
    First
    
    
    Second
    
    
    FullYear ended December 31
    
    half year
    
    
    half year
    
    
    year
    
    
    half year
    
    
    half year
    
    
    yearNet sales (EUR million)
    
    
    788
    
    
    
    1,171
    
    
    
    1,959
    
    
    
    647
    
    
    
    896

    
    
    
    1,543Net product sales (EUR million)
    
    
    674
    
    
    
    1,067
    
    
    
    1,741
    
    
    
    553
    
    
    
    804
    
    
    
    1,357Net service sales (EUR million)
    
    
    114
    
    
    
    104
    
    
    
    218
    
    
    
    94
    
    
    
    92
    
    
    
    186Total systems recognized
    
    
    78
    
    
    
    127
    
    
    
    205
    
    
    
    74
    
    
    
    95
    
    
    
    169Total new systems recognized
    
    
    73
    
    
    
    110
    
    
    
    183
    
    
    
    55
    
    
    
    71
    
    
    
    126Total used systems recognized
    
    
    5
    
    
    
    17
    
    
    
    22
    
    
    
    19
    
    
    
    24
    
    
    
    43Gross profit on sales (% of sales)
    
    
    29.6
    
    
    
    20.0
    
    
    
    23.9
    
    
    
    19.4
    
    
    
    27.2
    
    
    
    23.9ASP for new systems (EUR thousands)
    
    
    8,581
    
    
    
    9,141
    
    
    
    8,917
    
    
    
    8,736
    
    
    
    10,034
    
    
    
    9,464ASP for used systems (EUR thousands)
    
    
    1,162
    
    
    
    763
    
    
    
    854
    
    
    
    1,816
    
    
    
    2,162
    
    
    
    2,018
 Consolidated net sales decreased from 2002 to 2003 by approximately 21 percent. Product sales
(systems and options) declined by approximately 22 percent from 2002 to 2003, primarily due to a
decreasing number of new systems recognized, partially offset by an increase in ASP. The ASP for
new systems increased by approximately 6% reflecting a shift in our product portfolio towards an
increased share of our latest technology equipment (TWINSCAN systems), which accounted for 38
percent of total shipment volume of new systems in 2003 compared to approximately 33 percent in
2002. The number of new systems recognized decreased from 183 units in 2002 to 126 units in 2003 due to:  
    a further decline in equipment demand by semiconductor manufacturers
in 2003 after a modest recovery shown in the first half of 2002 for
delivery in the second half of 2002; and
    the effect of the accounting treatment for new technology systems
 (see Critical Accounting Policies Using Significant Estimates)
resulting in recognition of an additional EUR 138 million of revenues
for 13 systems in 2002 that were initially deferred in 2001. At December 31, 2003 ASML had no deferred revenue from new technology. During 2003, no revenue was
recorded that had been previously deferred as the Company had no new technology during 2003 nor, at
December 31, 2002, did it have deferred revenue associated with new technology that became proven
technology during 2003. 30




---



##### Table of Contents



The number of used systems sold increased from 22 units in 2002 to 43 in 2003. This increase
reflected the uncertain market conditions in which our customers sought opportunities to quickly
expand production capacity in their existing production facilities without significant capital
expenditures to secure long-term growth. These systems are used in less critical resolution
capabilities. The ASP for used systems increased by approximately 136 percent reflecting a shift
from our older PAS 2500 towards our newer PAS 5500 family, including scanner systems. Service sales showed a 15 percent decrease from EUR 218 million in 2002 to EUR 186 million in 2003.
This decrease was mainly due to:  
    the decline in exchange rate of the US dollar versus the euro during
2003 which resulted in lower revenues from US dollar denominated
service contracts, which accounted for approximately 50 percent of our
service revenues;
    the decline in service sales on our former activities in the Track
 business as a result of the expiration of our service obligations. In
December 2002, we decided to terminate our manufacturing activities in
the Track business; however, we continued to service our existing
customers for whom we had warranty or other service obligations.
Consequently, customer support related to the Track business is
included in continuing operations; and
    an increase in the number of customers that opted for in-house
servicing instead of external servicing. In 2003, sales to one customer accounted for EUR 314 million, or 20 percent of net sales. In 2002,
sales to one customer accounted for EUR 377 million, or 19 percent of net sales. Gross profit as a percentage of net sales in 2003 was the same as in 2002 (23.9 percent). The gross
profit on new systems decreased from 24.3 percent to 21.7 percent due to severe price competition
(2.2 percent negative impact on our gross profit), relatively more sales of newer technology
systems having lower gross profit (4.4 percent negative impact on our gross profit) and
under-utilization of our production facilities due to a decrease in sales (2.5 percent negative
impact on our gross profit). This decrease in gross profit was offset by lower repayments of
technical development credits as this program was fully repaid during 2003 (1.5 percent positive
impact on our gross profit), lower costs of sales due to the replacement of independent sales
agents with our own employees for the purpose of servicing our Asian customers (1.0 percent
positive impact on our gross profit) and a decrease in charges to provisions for obsolete inventory
(4.0 percent positive impact on our gross profit). The gross profit on service sales increased to 21.7 percent in 2003 from 7.3 percent in 2002. This
increase was primarily due to provisions in 2002 for obsolete service parts of EUR 10 million and
training system write-downs of EUR 18 million, due to the unprecedented global semiconductor
industry downturn and by a shift in customer demand away from ASMLs older product lines to which
those service parts and training systems related. The impairment charges on training equipment
arose because there were insufficient cash flows to support the carrying cost of these systems as a
consequence of their reduced marketability. The charges were determined on the basis of the
difference between the assets estimated fair value and their carrying value. The inventory
write-down arose because the Company had service parts inventory in excess of its forecasted needs,
also as a consequence of the continuing industry downturn. In addition, ASML experienced a shift in
customer demand away from Step & Repeat lithography systems and towards newer Step & Scan
lithography systems. This resulted in excess inventory for Step & Repeat service parts. This
inventory was substantially all scrapped in the course of 2003, which was reflected in the
utilization of the allowance for obsolete inventory for that year. We received no proceeds or only
nominal proceeds from the disposals of this scrap, and therefore these disposals had no effect on
our gross margin. Lithography order backlog We started 2003 with an order backlog of 110 systems (103 new and 7 used), and received orders for
delivery of 239 systems during the year. In 2003, we recorded 169 system sales and 56 order
cancellations or push-outs beyond twelve months, resulting in an order backlog of 124 systems (103
new and 21 used) as of December 31, 2003. The total value of the backlog as of December 31, 2003
amounted to EUR 993 million, compared with a total backlog value of approximately EUR 1,089 million
as of December 31, 2002. Research and development Research and development costs decreased from EUR 324 million in 2002 to EUR 306 million in 2003 as
a result of increased cost-efficiency in our research and development programs and workforce
reductions. The level of research and development expenditures reflected our continuing effort to
introduce several leading edge lithography products for 193 nanometer applications and the newest
versions of the TWINSCAN platform, combined with continued investments in 248 nanometer high
numerical 31




---



##### Table of Contents



aperture (NA) program, immersion, next generation 157 nanometer lithography solutions and EUV. Research and development credits decreased from EUR 26 million in 2002 to EUR 19 million in 2003
due to a decreased volume for research and development expenditures that qualified for credits.
Included in 2002 credits is a postponed credit (EUR 3.5 million) on 2001 expenditures that was
subject to certain criteria that were only achieved in 2002. Selling, general and administrative costs Selling, general and administrative costs decreased by 19.0 percent from EUR 263 million in 2002 to
EUR 213 million in 2003, mainly as a result of workforce reductions and decreased legal fees
associated with patent infringement cases. Selling, general and administrative costs as a
percentage of net sales increased from 13.4 percent in 2002 to 13.8 percent in 2003, as a result of
the decline in net sales. Restructuring costs See Results of Operations from continuing operations 2004 compared with 2003, Restructuring
Costs. Net interest expense Net interest expense decreased from EUR 37 million in 2002 to EUR 29 million in 2003 due to an
increase in interest income, which was partially offset by an increase in interest expense. Our
interest income related primarily to interest earned on our cash and cash equivalents. Interest
income increased compared with 2002, primarily due to higher cash and cash equivalent balances
throughout the year as a result of our improved working capital and issuance in May 2003 of EUR 380
million 5.50% Convertible Subordinated Notes due 2010. This was partially offset by a decrease in
short-term market interest rates. Our interest expense relates primarily to our convertible notes.
Our interest expense increased in 2003 compared with 2002, primarily due to the issuance of the
above-mentioned convertible notes, partially offset by the repurchases and redemption of our US$
520 million 4.25 percent Convertible Subordinated Notes during the second half of 2003. Income taxes Income taxes represented 32.7 and 32.4 percent of income before taxes in 2002 and 2003,
respectively. This decrease resulted from a change in distribution of pre-tax losses between
geographical areas. See Note 16 to our consolidated financial statements. Discontinued operations Results from discontinued operations comprised the results of our Thermal business, which we
substantially divested in October 2003, and our Track business which we terminated in December
2002. Year ended December 31
    
    2002
    
    
    2003(in thousands)
    
    EUR
    
    
    EURRevenuesTrack
    
    
    7,236
    
    
    
    2,514Thermal
    
    
    105,929
    
    
    
    38,198Total
    
    
    113,165
    
    
    
    40,712Loss from discontinued operations, net of taxesTrack loss from operations
    
    
    (27,991
    )
    
    
    (1,456
    )Track exit costs
    
    
    (30,626
    )
    
    
    (1,944
    )Thermal loss from operations
    
    
    (61,161
    )
    
    
    (21,906
    )Thermal exit costs
    
    
    0
    
    
    
    (10,404
    )Total
    
    
    (119,778
    )
    
    
    (35,710
    )
 In 2003, we reviewed the long-lived assets used in the Thermal business for impairment as we
entered into negotiations with several potential buyers and, as a result, recorded impairment
charges of EUR 16 million. In October 2003, we completed the sale of our Thermal business to a
privately held company formed by VantagePoint Venture Partners. No further gain or loss was
realized on the sale. Our Thermal business incurred a net loss of EUR 32 million in 2003 compared
to a net loss of EUR 61 million in 2002. The termination of the Track business resulted in an exit plan that included workforce reduction,
fixed asset impairments and inventory write-offs due to discontinued
product lines.

The exit plan included the disposal of remaining assets related to the Track business. In 2002,
ASML decided to continue to service existing customers of its Track business for whom ASML had
warranty or other service obligations. Consequently, customer 32




---



##### Table of Contents



support related to the Track business was not included in discontinued operations for 2002. In June
2003, ASML sold certain of its fixed assets and inventories related to its Track business to Rite
Track. No gain or loss was realized on the sale. Our Track business incurred a net loss of EUR 3
million in 2003 compared to a net loss of EUR 59 million for 2002. The net loss for 2002 included
total pre-tax estimated exit costs of EUR 47 million. These exit costs included asset impairments,
inventory write downs, purchase and other commitment settlements and employee termination costs.
The net loss in 2003 relates mainly to impairment charges recorded on a building in the United
States, previously used by our Track business. Estimated exit costs related to our Track business comprised the following for the two years ended
December 31, 2003 (EUR millions): Year ended December 31
    
    2002
    
    
    2003(in millions)
    
    EUR
    
    
    EURInventory write downs
    
    
    18
    
    
    
    -Fixed asset impairments
    
    
    11
    
    
    
    3Severance payments
    
    
    7
    
    
    
    -Operational lease buildings
    
    
    4
    
    
    
    -Other commitments
    
    
    7
    
    
    
    -Gross estimated exit costs
    
    
    47
    
    
    
    3Tax benefit
    
    
    (16
    )
    
    
    (1
    )Estimated exit costs, net of tax
    
    
    31
    
    
    
    2
 Our exit from the Track business was substantially completed by the end of 2003 with limited
changes from prior year exit cost estimates. Foreign Exchange Management We use the euro as our reporting currency in our consolidated financial statements. However, we are
involved in transactions and have net investments in foreign entities in currencies that differ
from our reporting currency. As a result, we have foreign currency transaction and translation
exposures. We actively manage our exposure to foreign exchange risks. Further details on our
foreign exchange management are disclosed in Note 4 to our consolidated financial statements. See
also Item 3.D. Risk Factors, Fluctuations in Foreign Exchange Rates and Interest Rates Could Harm
our Results of Operations and Item 11 Quantitative and Qualitative Disclosures About Market
Risk. Principal Differences between IFRS and U.S. GAAP Beginning in 2005, the European Commission will require companies that are quoted on a European
stock exchange market to publish their financial statements in accordance with IFRS. While we
intend to continue publishing U.S. GAAP financial statements, we also will comply with IFRS from
January 1, 2005 onwards. We have investigated the impact of differences identified between IFRS and U.S. GAAP. The current
differences identified that affect our net profit or loss, as well as our shareholders equity,
relate to the treatment of development costs, stock option plans and cash settlement features in
our convertible notes.  
    Treatment of development costs: IFRS requires capitalization of development costs
provided if, and only if, an entity can demonstrate all of the
following:

(a) the technical feasibility of completing the intangible asset so that it will be
available for use or sale;

(b) its intention to complete the intangible asset and use or
sell it;

(c) its ability to use or sell the intangible asset;

(d) how the intangible asset will generate probable future economic benefits. Among other
things, the entity can demonstrate the existence of a market for the output of the
intangible asset or the intangible asset itself or, if it is to be used internally, the
usefulness of the intangible asset;

(e) the availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset; and

(f) its ability to measure reliably the expenditure attributable to the intangible asset during its
development.ASMLs IFRS opening balance sheet as of January 1, 2004 and balance sheet as of December
31, 2004 do not include any capitalization of development costs due to the fact that
ASMLs administrative system was not implemented in such a manner that the above-mentioned
criteria could be met. During the second half of 2004, ASML made changes to its
administrative systems in order to comply with IFRS, and will include capitalization of
development costs that meet the criteria described above from January 1, 2005 onwards.
    Stock option plans: IFRS requires expensing of stock option plans. ASML applies IFRS 2
Share-Based Payments with respect to stock options it has granted after November 7,
2002. ASMLs IFRS opening balance sheet as of January 1, 2004 33




---



##### Table of Contents



includes a reclassification within shareholders equity between net result carried forward
and additional-paid-in capital of EUR 4.2 million before income taxes. ASMLs statement of
operations was negatively affected by EUR 8.8 million before income taxes for the year
ended December 31, 2004.
    Cash settlement features in our convertible notes: ASML has decided to adopt
International Accounting Standard (IAS) 32, Financial Instruments: Disclosure and
Presentation and IAS 39, Financial Instruments:
Recognition and Measurement, as of
January 1, 2005. The cash settlement features in our convertible
notes are considered to be embedded derivatives
under IAS 32 and therefore are measured at initial recognition at fair value
determined in accordance with IAS 39. Subsequent measurement of the embedded derivative
asset continue to be at fair value, with changes in fair value reported in the
statement of operations. The remainder of the fair value of the note instrument after
deducting the fair value of the cash settlement features is measured at amortized cost in
accordance with IAS 39. New U.S. GAAP Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued a revision of FASB
statement No. 123, Accounting for Stock-Based Compensation (SFAS No. 123(R)). This statement
supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance. SFAS No. 123(R) addresses the accounting for
share-based payment transactions in which a company receives employee services in exchange for
either equity instruments of the company or liabilities that are based on the fair value of the
companys equity instruments or that may be settled by the issuance of such equity instruments.
SFAS No. 123(R) eliminates the ability to account for share-based compensation transactions using
the intrinsic method that we currently use and generally requires that such transactions be
accounted for using a fair-value-based method and recognized as expense in our consolidated
statement of operations. SFAS No. 123(R) is effective as of the beginning of the first interim or
annual reporting period that begins after June 15, 2005. SFAS No. 123(R) will have a significant
impact on our consolidated statement of operations for 2005 and future years as we will be required
to expense the fair value of our stock option grants under ASMLs stock option plans. See also
Notes 1 and 13 to our consolidated financial statements. In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on recognition and
measurement guidance previously discussed under EITF Issue No. 03-01, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-01). The
consensus clarifies the meaning of other-than-temporary impairment and its application to
investments in debt and equity securities, in particular investments within the scope of FASB
Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, and
investments accounted for under the cost method. We do not believe that this consensus will have a
material impact on our consolidated results of operations. In
November 2004, the EITF reached a consensus on EITF Issue No. O3-13 Applying the conditions in
paragraph 42 of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in
determining whether to report discontinued operations. The consensus clarifies the approach for
evaluating whether the criteria in paragraph 42 of SFAS No. 144 have been met for purposes of
classifying the results of operations of a component of an entity that either has been disposed of
or is classified as held for sale as discontinued operations. The task force also reached a
consensus that the guidance would be applied to a component of an enterprise that is either
disposed of or classified as held for sale in fiscal periods beginning after December 15, 2004. We
do not believe that this consensus will have a material impact on our consolidated results of
operations. 
 B. Liquidity and Capital Resources The following discussion and analysis of financial condition should also be viewed in the context
of the risks affecting our business strategy, described in Item 3.D. Risk Factors. Subsequent to the issuance of
the Companys 2003 financial statements, the Companys
management concluded that the presentation under cash flows from
investing activities of the capitalization and sale of equipment that
is used for demonstration and training purposes for a certain period
of time, before it is sold to customers, is inconsistent with the
actual initial cash outflow relating to the construction of the
equipment, and the ultimate cash inflow relating to the sale of the
equipment. The Companys management believes that these cash
flows should be considered cash flows from operating activities,
since the sale of this equipment is not substantially different from
the sale of the Companys other products. As a result, the statement of
cash flows for the years ended December 31, 2002 and 2003 have
been restated to classify these cash flows, for all periods presented
as cash flows from operating activities. These reclassifications have
no impact on the total of ASMLs cash flows from operating
and investing activities, or on net income (loss) or shareholders equity as
of and for the years ended December 31, 2002 and 2003. 34




---



##### Table of Contents



ASMLs balance of cash and cash equivalents amounted to EUR 1,028 million and EUR 1,228 million as
of December 31, 2003 and 2004, respectively. Net cash flows provided by operating activities were
EUR 533 million and EUR 257 million in 2003 and 2004, respectively. Cash provided by operating
activities in 2004 was primarily derived from ASMLs net income for the year partially offset by an
increase in accounts receivable and inventories. As ASML has deferred tax assets resulting from net
operating losses carried forward, the tax charge of EUR 127 million as included in the profit of
the year only resulted in a cash outflow of EUR 7 million for corporate income taxes, leaving a
cash inflow from the profit of the year of approximately EUR 355 million. Net cash flows provided
by operating activities includes EUR 93 million of depreciation and amortization charges and impairment charges and EUR 34
million for addition to ASMLs obsolescence allowance, which do not impact the cash flow. Net
accounts receivable increased from EUR 314 million to EUR 503 million due to the high volume of
shipments at the end of 2004 compared to 2003. ASML used EUR 149 million of cash to increase
inventories in 2004, primarily due to higher anticipated sales in the first quarter of 2005
compared to anticipated sales in the first quarter of 2004 at the end of 2003, which is mainly
financed by an increase in accounts payable of EUR 122 million. Net cash used in investing activities was EUR 49 million in 2003 and EUR 60 million in 2004. The
2004 and 2003 figures mainly related to expenditures in information technology investments and
machinery and equipment. The increase in 2004 compared to 2003 results mainly from investments in
information technology hardware and software. Net
cash provided by financing activities was EUR 19 million in 2004 compared to EUR 68 million
used in financing activities in 2003. In 2004, proceeds from financing activities mainly reflect
EUR 20 million in proceeds from the exercise of stock options and EUR 1 million repayment of long
term debts. The 2003 amount primarily reflected the redemption and
repurchase of all of US$ 520
million of 4.25 percent Convertible Subordinated Notes due 2004, partially offset by the issuance
of EUR 380 million of 5.5 percent Convertible Subordinated Notes due 2010. Our principal sources of liquidity consist of EUR 1,228 million of cash and cash equivalents, and
EUR 400 million of available credit facilities as of December 31, 2004, and cash flows from
operations. For further details regarding 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 of
which relate to the uncertainties of global economies and the semiconductor and the semiconductor
equipment 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, will be sufficient to satisfy our liquidity requirements for
the next twelve months. We expect capital expenditures in 2005 to range between EUR 75 million and
EUR 85 million. In addition, for the next twelve months we have operating lease commitments of
approximately EUR 37 million and certain open inventory purchase commitments of approximately EUR
602 million with our suppliers to ensure a smooth and continuous supply chain for key components.
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 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 is obligated to make additional payments to Nikon of US $9 million (approximately EUR 7
million) each in 2005, 2006 and 2007. Pursuant to a license agreement between Micronic and ASML, ASML will pay to Micronic in the first
quarter of 2005 an amount of EUR 20 million. In 2006, we have repayment obligations, amounting to US$ 575 million, on our 5.75 percent
Convertible Subordinated Notes due 2006 issued in October 2001, assuming no conversions occur.
These notes are convertible into 30,814,576 ordinary shares at a conversion price of US$ 18.66 (EUR
13.68) per share, subject to adjustment, at any time prior to maturity. At any time on or after
October 22, 2004, the Notes are redeemable at the option of ASML, in whole or in part, at 100
percent of their principal amount, together with accrued interest, provided that our shares close
above 130 percent of the conversion price for twenty trading days out of a thirty-day period. None
of the notes were converted into ordinary shares during 2004. We have additional 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, subject to
adjustment, at any time prior to maturity. We currently intend to fund our future repayment
obligations with primarily cash on hand and cash generated through operations. A description of our
long-term debt, lines of credit and borrowing arrangements is provided in Note 11 to our
consolidated financial statements. See also Item 3.D. Risk Factors. 35




---



##### Table of Contents



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. A discussion of our funding, treasury policies and currencies in which cash and cash equivalents
are held and long-term debt and borrowing arrangements are incorporated by reference to herein
Notes 4 and 11 to our consolidated financial statements. 
 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 The year 2004 showed significant growth in sales compared to 2003, due to a recovery in the
semiconductor industry. We have accumulated a significant backlog for deliveries in the first half of 2005: our unit
backlog is larger than that of December 2003, and the ASP is
significantly higher, as a result of a
richer 300 millimeter product mix. However, we remain cautious in our forecast as customer order
push-outs are always possible, if overall semiconductor demand were not to materialize as expected.
The order backlog as of December 31, 2004 comprises 131
lithography systems with an ASP of EUR 12.9 million. ASML plans to ship 60 systems in the first quarter of 2005 with an
expected ASP of approximately EUR 10.7 million.
The company has limited visibility for the second half of 2005. The following table sets forth our backlog of systems as of December 31, 2003 and 2004. As of December 31
    
    2003
    
    
    2004Backlog sales of new systems (units)
    
    
    103
    
    
    
    119Backlog sales of used systems (units)
    
    
    21
    
    
    
    12Backlog sales of total systems (units)
    
    
    124
    
    
    
    131Value of backlog new systems (EUR million)
    
    
    946
    
    
    
    1,664Value of backlog used systems (EUR million)
    
    
    47
    
    
    
    27Value of backlog of total systems (EUR million)
    
    
    993
    
    
    
    1,691ASP for new systems (EUR million)
    
    
    9.2
    
    
    
    14.0ASP for used systems (EUR million)
    
    
    2.2
    
    
    
    2.2
 Our backlog includes only system orders for which written authorizations have been accepted and
shipment dates within 12 months have been assigned. Historically, orders have been subject to
cancellation or delay by the customer. Due to possible customer changes in delivery schedules and
to cancellation of orders, our backlog at any particular date is not necessarily indicative of
actual sales for any succeeding period. Based upon our backlog as of December 31, 2004, we expect our gross margin in the first half of
2005 will remain in the 38-40 percent range. For 2005, we anticipate research and development costs to range between EUR 70-75 million for the
first quarter of 2005 as the company prepares to launch, within one year, its third and fourth
generation immersion tools, including systems with hyper-numerical aperture lenses. A
corporate income tax rate reduction in the Netherlands was enacted in the fourth quarter of
2004. This enactment will lead to a decrease of the consolidated effective tax rate to an expected
tax rate of approximately 28 percent. 
 E. Off-Balance Sheet Arrangements We have various contractual obligations, some of which are required to be recorded as liabilities
in our consolidated financial statements, including long- and short-term debt. Other contractual
arrangements, namely operating lease commitments and purchase obligations, are not generally
required to be recognized as liabilities on our balance sheet but are required to be disclosed. Variable Interest Entities In December 2003, the FASB issued FIN 46R, Consolidation of Variable Interest Entities. Under FIN
46R an enterprise must consolidate a variable interest entity if 36




---



##### Table of Contents



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 shareholders 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 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 would result from purchase commitments that are expected to be forfeited
are provided for in our financial statements. As of December 31, 2004, we had purchase commitments
for a total amount of approximately EUR 639 million, reflecting our backlog level at the end of
2004. 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. In addition to operating lease commitments and purchase
obligations, these off-balance sheet arrangements consist of product warranties and guarantees of
our subsidiaries debt to third parties. We provide guarantees to third parties in connection with transactions entered into by our
subsidiaries in the ordinary course of business. These include bank loans reflected in Note 11 of
our consolidated financial statements. Pursuant to a license agreement between Micronic and ASML,
ASML will pay to Micronic in the first quarter of 2005 an amount of EUR 20 million. In connection with this payment, a letter of credit for the corresponding amount
has been issued. 
 F.
Tabular Disclosure of Contractual
Obligations Our contractual obligations as of December 31, 2004 can be summarized as follows: Less than
    
    
    1-2
    
    
    3-5
    
    
    After 5Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    years(in thousands)
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EURLong Term Debt, including interest expense1
    
    
    992,004
    
    
    
    46,758
    
    
    
    500,865
    
    
    
    42,871
    
    
    
    401,510Operating Lease Obligations
    
    
    234,042
    
    
    
    36,596
    
    
    
    49,841
    
    
    
    39,766
    
    
    
    107,839Purchase Obligations
    
    
    638,947
    
    
    
    602,204
    
    
    
    36,743
    
    
    
    0
    
    
    
    0Other deferred Liabilities2
    
    
    19,790
    
    
    
    6,596
    
    
    
    13,194
    
    
    
    0
    
    
    
    0Total Contractual obligations
    
    
    1,884,783
    
    
    
    692,154
    
    
    
    600,643
    
    
    
    82,637
    
    
    
    509,349
 37


---

1


2




---



##### Table of Contents



Several operating leases for our buildings contain purchase options, exercisable at the
option of the Company at the end of the lease, and in some cases, during the term of the lease. The
amounts to be paid if ASML should exercise these purchase options at the end of the lease can be
summarized as of December 31, 2004 as follows: Less than
    
    
    1-2
    
    
    3-5
    
    
    After 5Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    years(in thousands)
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EURPurchase options
    
    
    69,077
    
    
    
    7,714
    
    
    
    0
    
    
    
    5,627
    
    
    
    55,736
 
 G. Safe Harbor See Special Note regarding Forward-Looking Statements. 
 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
    
    Date of Birth
    
    Term ExpiresHenk Bodt1,2,3
    
    Chairman of the Supervisory Board
    
    April 30, 1938
    
    2007Jan A. Dekker1,3
    
    Member of the Supervisory Board
    
    May 10, 1939
    
    2006Peter H. Grassmann
    
    Member of the Supervisory Board
    
    November 21, 1939
    
    2006Jos W.B. Westerburgen2, 3
    
    Member of the Supervisory Board
    
    June 24, 1942
    
    2005Michael J. Attardo2
    
    Member of the Supervisory Board
    
    April 12, 1941
    
    2005Fritz W. Fröhlich1
    
    Member of the Supervisory Board
    
    March 19, 1942
    
    2008Arthur P.M. van der Poel
    
    Member of the Supervisory Board
    
    November 1, 1948
    
    2008Eric Meurice
    
    President and Chief Executive Officer and
Chairman of the Board of Management
    
    July 30, 1956
    
    2008Stuart K. McIntosh
    
    Executive Vice President Operations
and Member of the Board of Management
    
    August 31, 1944
    
    N/A4Peter T.F.M. Wennink
    
    Executive Vice President, Chief Financial
Officer and Member of the Board of
Management
    
    May 30, 1957
    
    N/A4Martin A. van den Brink
    
    Executive Vice President Marketing
& Technology and Member of the Board
of Management
    
    May 21, 1957
    
    N/A4David P. Chavoustie
    
    Executive Vice President Sales and
Member of the Board of Management
    
    May 7, 1943
    
    N/A4
  1
 2
 3
 4
 Effective March 18, 2004, Mr. Bergsma resigned from the Supervisory Board. On that same date,
Mr. Fröhlich and Mr. van der Poel were appointed as new members of our Supervisory Board. Effective
October 1, 2004, Mr. Dunn retired as President, Chief Executive Officer and Chairman of our Board
of Management and has been succeeded by Mr. Meurice. Mr. Attardo and Mr. Westerburgen will be retiring by rotation on March 24, 2005. Mr. Westerburgen
has informed the Supervisory Board that he is available for reappointment on March 24,
2005. Mr. Attardo has informed the Supervisory Board that he is not available for reappointment. Mr. Dekker shall resign as member of the Selection and Nomination Committee effective March 2005;
Mr. Dekker will be succeeded in this position by Mr. van der Poel. Mr. McIntosh
retired from his position on the Board of Management effective
January 3, 2005. See Item 10.C.  Material Contracts. 38




---



##### Table of Contents



Director and Officer Biographies Henk Bodt Mr. Bodt was appointed as Chairman of our Supervisory Board in 1995. Mr. Bodt is a former Executive
Vice President of Royal Philips Electronics. In addition to other positions, including Chairman and
Chief Executive Officer of the Consumer Electronics Division, he also served on the Board of
Management of Philips and on the Group Management Committee of Philips. He currently serves on the
Supervisory Boards of DSM N.V., Delft Instruments N.V. and Neo-Post SA. Jan A. Dekker Mr. Dekker has served on our Supervisory Board since 1997. Mr. Dekker is a former Chief Executive
Officer of TNO from which he retired in November 2003. He currently serves on the Supervisory
Boards of Gamma Holding N.V. and Koninklijke BAM N.V. and he is also President of the Royal
Institute of Engineers (KIVI NIRIA) and President of EARTO. Peter H. Grassmann Mr. Grassmann has served on our Supervisory Board since 1996. Mr. Grassmann is a former President
and Chief Executive Officer of Zeiss from which positions he retired in 2000. He currently serves
on the Supervisory Boards of Gambro B.V., Aradex AG, Febit AG, IONITY AG, and on the Senate of the
Max-Planck-Society. He is a member of the Advisory Board of EQT private equity funds GmbH. Jos W.B. Westerburgen Mr. Westerburgen was appointed to our Supervisory Board in March 2002. Mr. Westerburgen has
extensive experience in the field of corporate law and tax. Mr. Westerburgen is former Company
Secretary and Head of Tax of Unilever, and a former member of the Peters Committee on Corporate
Governance in the Netherlands. Mr. Westerburgen currently serves as a member of the Supervisory
Board of Unilever Nederland B.V., and is also Vice-Chairman of the Board of the Association Aegon.
Furthermore he has been an advisor to Rodamco Europe N.V. and serves on the Supervisory Board of
Rodamco effective January 1, 2005. Michael J. Attardo Mr. Attardo was appointed to our Supervisory Board during 2001. He is the former President and CEO
of IBM Microelectronics, from which position he retired in 1999, and a former non-executive
director of Silicon Valley Group, Inc. 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
Board of Randstad Holding N.V. and serves as a member of the Supervisory Board of the following
companies: Allianz Nederland N.V.; Draka Holding N.V.; Equant N.V.; Gamma Holding N.V. and Kempen
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 Axalto Holding N.V. and serves as a member of the Supervisory Boards of PSV N.V.
and DHV Holding B.V. Eric Meurice Mr. Meurice was appointed as our President, Chief Executive Officer and Chairman of the Board of
Management effective October 1, 2004. He is the former Executive Vice President in charge of
Thomson TV Division (between 2001 and 2004) and between 1995 and 2001 Mr. Meurice held various
management positions at Dell Computer Corporation. Between 1989 and 1995 Mr. Meurice was the
Marketing and Sales Director of ITT Semiconductors and from 1984 until 1989 he worked at Intel
Corporation as World Wide Automotive Marketing Manager. Stuart K. McIntosh Mr. McIntosh was appointed as Executive Vice President Operations and President Lithography
Division during 2000 and was appointed as a member of our Board of Management effective April 1,
2001. Prior to that he served as the Executive Vice President and Chief Operating Officer of
Philips Semiconductors. He also serves on the Advisory Board of SEMI North America. 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 39




---



##### Table of Contents



Accountants. Mr. Wennink is currently on 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
then, 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. David P. Chavoustie Mr. Chavoustie has served as Executive Vice President Sales since 1998. He was appointed as a
member of our Board of Management in April 2000. Before then, he served as Vice President Worldwide
Sales of Vantis Corporation and as Vice President/General Manager of the Embedded Processes
Division of Advanced Micro Devices. Mr. Chavoustie currently also serves on the Board of Directors
of Three-Five Systems, Inc. and Brillian Corporation. 
 B. Compensation For details on compensation paid to or accrued for members of the Board of Management and members
of the Supervisory Board, see Note 18 to our consolidated financial statements. For details on options granted to, and pension benefits of, the members of the Board of Management,
see Note 18 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, ASMLs employees and the 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 the Companys objectives, (ii)
corporate strategy and management of risks inherent to the business activities, (iii) the structure
and operation of the internal risk management and control systems, (iv) the financial reporting
process and (v) compliance with the 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. New legislation Effective October 1, 2004, new legislation came into force with regard to the Large Company Regime
(also known as the new structuurregime, hereinafter referred to as: the New Act). This new
legislation provides for broader powers to the shareholders and provides a statutory basis for the
Netherlands Corporate Governance Code. 40




---



##### Table of Contents



Board of
Management
The Board of Management consists of at least two members or any larger number of members as
determined by the meeting of holders of priority shares in consultation with the Supervisory Board.
Members of the Board of Management are appointed by the Supervisory Board. The Supervisory Board
must inform 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 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. The remuneration policy is posted on ASMLs website. Supervisory Board
The Supervisory Board consists of at least three members or any 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 our website. Prior to effectiveness of the New Act, appointments to the Supervisory Board were made by the
Supervisory Board itself, subject to certain rights of recommendation of the General Meeting of
Shareholders, the Works Council and the Board of Management, and certain rights of objection
retained by the General Meeting of Shareholders and the Works Council. Pursuant to the New Act, 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 a strengthened right to make recommendations for 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 when the recommended person will be appointed as 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 not
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. 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 reasons of lack of confidence. 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 Board of Management decisions
Pursuant to the New Act, 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:  (i)
    a transfer of all or substantially all of the business of ASML to a third party;(ii)
    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(iii)
    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). 41




---



##### Table of Contents



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 three 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 agreed to indemnify 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 those
that have been developed in the United States both by the NASDAQ National Market (Nasdaq) and by
the SEC pursuant to the Sarbanes-Oxley Act of 2002, some of which already are applicable and some
of which will be applicable to ASML during 2005. On March 10, 2003, the Netherlands government commissioned a committee known as the Tabaksblat
Committee to conduct a review of corporate governance in the Netherlands.
The Tabaksblat Committee issued its final report The Netherlands Corporate Governance Code (the
Code) on December 9, 2003, which came into effect on January 1, 2004. A full report on compliance
with the Code is required to be included in the statutory annual report for the financial year
2004. Netherlands listed companies are required to either comply with the best practice provisions
of the Code, or to explain on which points and why they deviate from these best practice
provisions.
Pursuant to the Codes recommendations, ASML has included a separate chapter on corporate
governance in its annual report for 2004. The Code contains recommendations with regard to
corporate governance, including the following topics:  
    strengthening the role of the Supervisory Board and its committees and to increase 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 the Supervisory
Board;
    facilitating and stimulating 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. The Company is currently implementing applicable provisions of the Code and the Sarbanes-Oxley Act
of 2002, and subsequent SEC and Nasdaq rules that have been issued pursuant thereto. Committees of ASMLs Supervisory Board The Supervisory Board has an Audit Committee, a Remuneration Committee and a Selection and
Nomination 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. Our external auditor,
our Chief Executive Officer, our Chief Financial Officer and our Corporate Controller 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. During the year 2004, the Audit Committee met to review our quarterly earnings announcements and
our audited annual consolidated financial statements, to discuss the system of internal controls
over financial reporting and related audit findings, to approve the external audit plan and related
audit fees and to pre-approve any audit and non-audit services to be rendered by our external
auditor. The current members of our Audit Committee are Fritz Fröhlich (chairman), Henk Bodt and
Jan Dekker. The members of the Audit Committee are all independent, non-executive members 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 and the
rules promulgated thereunder. 42




---



##### Table of Contents



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 Michael
Attardo. The Remuneration Committee has prepared a remuneration policy for the Board of Management,
which has been presented to and adopted by the 2004 General Meeting of Shareholders. 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, including the Chief Executive Officer. 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 ASMLs short
and long-term performance and its current compensation and benefits structures and levels
benchmarked against those of relevant peers. External compensation survey data and, where necessary,
external consultants, are used to benchmark ASMLs remuneration levels and structures. Selection and Nomination Committee ASMLs Selection and Nomination Committee is composed of at least three members of the Supervisory
Board. 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 was established in March 2004 and has had one meeting since
its inception. In addition, during 2004, the members of the Selection and Nomination Committee
consulted together several times on an ad hoc basis to review recruitment of the new Chief
Executive Officer. The current members of our Selection and Nomination Committee are Jos
Westerburgen (chairman), Henk Bodt and Jan Dekker. Mr. Dekker shall resign as member of the
Selection and Nomination Committee as of March 2005; Mr. Dekker will be succeeded in this position
by Arthur van der Poel. Disclosure Committee ASML has a Disclosure Committee to ensure compliance with applicable disclosure requirements
arising under United States and Netherlands law. 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. Furthermore,
members of the Disclosure Committee are in close contact with our external legal counsel and our
external auditor. During the year 2004, the Disclosure Committee met to review our quarterly earnings announcements,
our audited annual consolidated financial statements and other public announcements containing
financial information. In addition, specific meetings were held to assess 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 three members of the Disclosure Committee. Exemptions from Certain Nasdaq Corporate Governance Rules Nasdaq rules provide that Nasdaq may provide exemptions from the Nasdaq corporate governance
standards to a foreign private issuer when those standards are contrary to 43




---



##### Table of Contents



a law, rule or
regulation of any public authority exercising jurisdiction over such issuer or contrary to
generally accepted business practices in the issuers country of domicile, except to the extent
that such exemptions would be contrary to US federal securities laws. ASML has received from Nasdaq
exemptions from certain Nasdaq corporate governance standards that are contrary to the laws, rules,
regulations or generally accepted business practices of The Netherlands. These exemptions and the
practices followed by ASML in lieu of Nasdaq rules, are described below:  
    ASML is exempt from 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 is exempt from Nasdaqs requirements regarding the solicitation of proxies and provision
of proxy statements for General Meetings of Shareholders. ASML does not solicit proxies or
prepare 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 is exempt from Nasdaqs requirements that the establishment of, or material amendments to,
stock option or purchase plans and other equity compensation arrangements pursuant to which options
or stock may be acquired by directors, officers or employees be approved by shareholders. ASMLs
Articles of Association provide that the Companys Board of Management may issue shares, including
share options, only if it has been granted the general authority to do so by the General Meeting of
Shareholders. Once this grant of authority has been obtained, each issuance of shares must then be
approved by ASMLs Supervisory Board and by the Meeting of the Priority Shareholders. 
 D. Employees As of December 31, 2004, we had 5,071 employees in our continuing operations employed primarily in manufacturing and product development
activities at our headquarters in Veldhoven. As of December 31, 2002, and December 31, 2003, the
total number of employees in continued operations was 5,971 and 5,059, respectively. For a more
detailed description of employee information, see Notes 13 and 19 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 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, such as those affecting employee compensation, or
pension or profit sharing plans, 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. On July 16, 2003, ASML announced workforce reductions of approximately 550 positions worldwide,
with the majority in the Netherlands. ASMLs Board of Management and ASMLs Dutch 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, we decreased the reductions to approximately 300 positions
worldwide, of which 150 were contract employees with limited rights upon termination. See Note 19 to our consolidated financial statements for a breakdown of our employees by segment
and function. 
 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 18 to
our consolidated financial statements, which are incorporated herein by reference. Information with
respect to the grant of shares and
share options to employees is included in Note 13 to our consolidated financial Statements which is
incorporated herein by reference. 44




---



##### Table of Contents



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, 2004: Identity of Person or Group
    
    Amount Owned
    
    
    Percent of ClassCapital Group International, Inc 1
    
    
    37,722,430
    
    
    
    7.8
    %FMR Corp.2
    
    
    46,189,190
    
    
    
    9.6
    %Capital Research and Management Company 3
    
    
    50,571,680
    
    
    
    10.5
    %Members of ASMLs Supervisory Board and

Board of Management, as a group (8 persons) 4
    
    
    1,979,630
    
    
    
    
    *
    1
 2
 3
 4
 According to SEC filings, (i) Capital Group International, Inc. increased its shareholding
(including as a holder of convertible notes) from 28,455,070 shares as of November 2003 to
37,722,430 shares as of September 2004, (ii) Capital Research and Management Company increased its
shareholding (including as a holder of convertible notes) from 26,807,920 shares as of February
2004 to 50,571,680 as of December 2004 and (iii) FMR Corp. reduced its shareholding (including as a
holder of convertible notes) from 58,304,695 shares as of February 2003 to 46,189,190 shares as of
February 2004. Our major shareholders do not
have voting rights different from other shareholders. We do not issue share certificates, except for registered New York Shares. For more information see
Item 10.B. Memorandum and Articles of Association. As of January 18, 2005, our ordinary shares were held by 632 registered holders with a registered
address in the United States. Since certain of our ordinary shares were held by brokers and
nominees, the number of record holders in the United States may not be representative of the number
of beneficial holders or of where the beneficial holders are resident. Obligations of Shareholders to Disclose Holdings under Netherlands Law Holders of our shares may be subject to reporting obligations under the Netherlands 1996 Act on
Disclosure of Holdings in Listed Companies (the Major Holdings Act) and the Netherlands 1995 Act
on the Supervision of the Securities Trade (the Securities Trade Act). The Major Holdings Act applies to any person or entity that, directly or indirectly, acquires or
disposes of an interest in the voting rights and/or the capital of a public limited company
incorporated under the laws of the Netherlands that is officially listed on a stock exchange within
the European Union (the EU). Disclosure is required when, as a result of an acquisition or
disposal, the percentage of voting rights or capital interest acquired or disposed of by a person
or an entity reaches, exceeds or falls below 5, 10, 25, 50 or 66-2/3 percent. With respect to ASML,
the Major Holdings Act would require any person or entity whose interest in the voting rights
and/or capital of ASML reached, exceeded or fell below those percentage interests to notify in
writing both ASML and the Netherlands Authority for the Financial Markets (Autoriteit Financiële
Markten, the AFM) immediately after the acquisition or disposal of the triggering interest in
ASMLs share capital. On July 3, 2003, a draft bill to amend the Major Holding Act was submitted to the Second Chamber of
the Netherlands Parliament. According to the Explanatory Notes to
the proposed bill, it is anticipated that the existing percentages will be replaced by the
following percentage ranges which require disclosure if as a result of acquisition or disposal the
percentage of voting rights and capital interest reaches, exceeds or falls below 5, 10, 15, 20 and
25 percent or more. Under the proposed bill, above 25 45




---



##### Table of Contents



percent, all direct or indirect transactions
in our share capital or voting rights must be reported. In addition, the Major Holding Act might be subject to changes following from EU legislation on
transparency. For the purpose of calculating the percentage of capital interest or voting rights, the following
interests must be taken into account: shares (i) directly held (or acquired or disposed of) by any
person, (ii) held (or acquired or disposed of) by such persons subsidiaries or by a third party
for such persons account or by a third party with whom such person has concluded an oral or
written voting agreement, and (iii) which such person, or any subsidiary or third party referred to
above, may acquire pursuant to any option or other right held by such person (including, but not
limited to, upon conversion of convertible bonds). Special rules apply to the attribution of shares
which are part of the property of a partnership or other community of property. 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. If a pledgee or usufructarian acquires such
(conditional) voting rights, this may trigger reporting obligations for the holder of the shares. In addition, pursuant to the Securities Trade Act and a decree based thereon, a shareholder who
directly or indirectly holds a capital interest of more than 25 percent in our capital must, by
means of a standard form, within ten days after the month in which the transaction occurs, notify
the AFM of such transaction in our ordinary shares or securities the value of which is dependent on
the value of our ordinary shares (including, without limitation, an acquisition or disposal of our
shares or convertible bonds). If that shareholder is a legal entity and not an individual, the
obligations under the Securities Trade Act also apply to members of its management and supervisory
boards. In addition, these obligations apply to the following persons related to such 25 percent
shareholder (if the 25 percent shareholder is a natural person): (i) spouses, (ii) relations by
blood or affinity to the first degree and other persons who share a household with these persons,
and (iii) relations by blood or affinity to the first degree who do not share a household with
these persons, in each case who hold at least 5 percent of our shares in our capital or will obtain
this percentage through the transaction. The AFM keeps a public registry of and publishes all notifications made pursuant to the Major
Holdings Act and the Securities Trade Act. Non-compliance with the reporting obligations under the Major Holdings Act or the Securities Trade
Act could lead to criminal fines, administrative fines, imprisonment or other sanctions. In
addition, non-compliance with the reporting obligations under the Major Holdings 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
Major Holdings Act or Securities Trade 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 share 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. Legal Proceedings See Item 4.B. Business Overview and Note 14 to our consolidated financial statements, which is
incorporated herein by reference. 46




---



##### Table of Contents



Dividend Policy ASML has no current intention to pay dividends on its ordinary shares. 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. 
 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 Official Segment of the stock market of Euronext
Amsterdam. The principal trading market of our ordinary shares is Euronext Amsterdam. For more
information see Item 10.B Memorandum and Articles of Association. Historical information relating to the ordinary shares has been adjusted to give retroactive effect
to the three-for-one stock split in April 2000. 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 Euronext Amsterdam. Nasdaq
    
    
    Euronext AmsterdamUS$
    
    
    EURHigh
    
    
    Low
    
    
    High
    
    
    LowAnnual Information2000
    
    
    50.25
    
    
    
    17.63
    
    
    
    52.00
    
    
    
    22.202001
    
    
    30.62
    
    
    
    9.51
    
    
    
    32.32
    
    
    
    9.702002
    
    
    25.80
    
    
    
    4.95
    
    
    
    29.79
    
    
    
    5.132003
    
    
    20.39
    
    
    
    6.11
    
    
    
    17.04
    
    
    
    5.392004
    
    
    22.32
    
    
    
    12.41
    
    
    
    17.50
    
    
    
    10.26Quarterly Information1st quarter 2003
    
    
    9.75
    
    
    
    6.11
    
    
    
    9.38
    
    
    
    5.392nd quarter 2003
    
    
    11.06
    
    
    
    6.57
    
    
    
    9.52
    
    
    
    5.983rd quarter 2003
    
    
    16.93
    
    
    
    9.55
    
    
    
    15.29
    
    
    
    8.204th quarter 2003
    
    
    20.39
    
    
    
    13.18
    
    
    
    17.04
    
    
    
    11.091st quarter 2004
    
    
    22.32
    
    
    
    16.48
    
    
    
    17.50
    
    
    
    13.382nd quarter 2004
    
    
    19.37
    
    
    
    15.16
    
    
    
    15.93
    
    
    
    12.683th quarter 2004
    
    
    16.85
    
    
    
    12.41
    
    
    
    13.90
    
    
    
    10.364th quarter 2004
    
    
    16.61
    
    
    
    12.82
    
    
    
    12.49
    
    
    
    10.26Monthly InformationJuly 2004
    
    
    16.85
    
    
    
    13.66
    
    
    
    13.90
    
    
    
    11.16August 2004
    
    
    13.74
    
    
    
    12.53
    
    
    
    11.66
    
    
    
    10.36September 2004
    
    
    14.37
    
    
    
    12.41
    
    
    
    11.67
    
    
    
    10.36October 2004
    
    
    14.25
    
    
    
    12.82
    
    
    
    11.26
    
    
    
    10.26November 2004
    
    
    16.07
    
    
    
    14.02
    
    
    
    12.34
    
    
    
    11.13December 2004
    
    
    16.61
    
    
    
    15.32
    
    
    
    12.49
    
    
    
    11.54January (through January 26), 2005
    
    
    15.73
    
    
    
    14.48
    
    
    
    11.86
    
    
    
    11.19
    
 B. Plan of Distribution Not applicable. 
 C. Markets See Item 9.A. Listing Details. 
 D. Selling Shareholder Not applicable. 
 E. Dilution Not applicable. 47




---



##### Table of Contents



F. Expenses of the Issue Not applicable. 
 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 Current Report on
Form 6-K, filed with the Commission on June 10, 2004. 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 and the Meeting of Priority Shareholders must approve any issuance of ordinary
shares or preference shares. The Board of Management (subject to the approval of the Supervisory Board and the Meeting of the
Priority Shareholders) is currently authorized to issue ordinary shares and/or rights thereto
through September 18, 2005, up to a maximum of 10 percent of our issued share capital as of the
date of authorization (March 18, 2004), plus an additional 10 percent of our issued share capital
as of the date of authorization (March 18, 2004) in connection with mergers and acquisitions. At
our annual General Meeting of Shareholders to be held on March 24, 2005, our shareholders will be
asked to extend this authority through September 24, 2006. 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 limited or eliminated. 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 and
the Meeting of Priority Shareholders, to limit or eliminate the preemptive rights of holders of
ordinary shares. The Board of Management is currently authorized, subject to these approvals, to
limit or eliminate preemptive rights of holders of ordinary shares through September 18, 2005. A
further designation may be effective for up to five years and may be renewed. At our annual General
Meeting of Shareholders to be held on March 24, 2005, our shareholders will be asked to extend this
authority through September 24, 2006. We may repurchase 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 18, 2005 up to a maximum of 10 percent of our issued share capital as of the date of
authorization (March 18, 2004) 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 24, 2005, our shareholders will
be asked to extend this authority through September 24, 2006. Shareholder Approval for Share and Share Option Arrangements for Board of Management In 2004, 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 in the
future to establish 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. Notwithstanding
this exception, ASML nevertheless submitted stock option plans available to employees to the
General Meeting of Shareholders in the annual
meeting of March 18, 2004. In the event that material changes to
the stock option plans occur, we
shall also do so in 2005. 48




---



##### Table of Contents



C. Material Contracts
Nikon-ASML Cross License Agreement Scope of License In connection with a settlement of worldwide patent litigation between Nikon, ASML and Zeiss, on
December 10, 2004, ASML entered into a patent cross-license agreement with Nikon, effective
November 12, 2004, pursuant to which (i) ASML granted Nikon a non-exclusive license to manufacture
and sell lithography equipment under patents owned or otherwise sublicensable by ASML and (ii)
Nikon granted ASML a non-exclusive license to manufacture and sell lithography equipment (other
than optical components) under patents owned or otherwise sublicensable by Nikon. These license
grants cover existing patents, as well as additional patents that issue worldwide before the end of
2009, and are retroactive to the effective application date of each licensed patent. The license
grants exclude patent claims for electron beam or other charged particle beam lithography,
lithography to manufacture flat panel displays or expose large-area substrates other than wafers,
maskless lithography, glass products and special mask technology. Certain Nikon patents related to
immersion lithography designated as excluded Nikon patents are also excluded from the
cross-license, but if Nikon sues ASML, Zeiss or any of their subsidiaries or customers in respect
of such patents, ASML has the right to terminate the license that it has granted to Nikon under the
cross-license agreement. In addition, Nikon and ASML agree not to sue each other based on
exploitation of lithography products under co-owned patents that are not licensable without the
consent of the co-owner. Term of License The licenses under the agreement are perpetual for patents having an effective application date
before 2003 (Class A Patents) and for all other patents (Class B Patents) will terminate at the
end of 2009. At any time until June 30, 2015, either party has a limited right to designate up to 5
Class B patents (or patents related to lithography issued from 2010 to 2015) of the other party as
Class A patents. Any patents acquired after the date of the agreement are deemed Class B Patents. Immunity Under the terms of the settlement, ASML and Nikon have granted each other immunity from patent
suits by the other party from the end of 2009 until December 31, 2014 under patents issuing before
2015. After 2015, either party may sue the other party for activities from 2010 to 2015 under
patents not subject to a license, provided that damages for that period are limited to a reasonable
royalty for that period. Each party also grants to the other partys resellers and customers
immunity from patent suits for use of lithography equipment purchased prior to 2015, provided that
the reseller or customer does not sue or threaten to sue the other party for lithography related
patent infringement. Each party also grants to the other party and its resellers and customers
limited immunity from patent suits for use of special masks and glass products sold before 2015.
Either party may bring suit after 2015 for special mask products sold from 2010 to 2015, provided
that damages are limited to reasonable royalties for that period. Payments Pursuant to the cross license agreement, ASML made an initial payment of US$ 60 million
(approximately EUR 49 million) to Nikon in November 2004 and is further obligated to pay three
annual payments of US$ 9 million (approximately EUR 7 million), commencing November 12, 2005. Termination; Assignment Nikon may terminate the cross-license agreement if either ASML or Zeiss default on their payment
obligations to Nikon, provided that ASML and Zeiss may cure each others payment default. Either
party may assign its rights under the cross-license agreement in connection with a sale of all or
substantially all of the assets of the business of manufacturing the products covered by the
cross-license agreement. ASML/Zeiss Sublicense Agreement Also in connection with a settlement of worldwide patent litigation between Nikon, ASML and Zeiss,
on December 10, 2004, ASML entered into a sublicense agreement with Zeiss SMT AG, effective
November 12, 2004, pursuant to which Zeiss granted ASML a non-exclusive license of all of the
rights it received from Nikon to exploit optical components under the Nikon-Zeiss Patent
Cross-License Agreement. Pursuant to the Nikon-Zeiss Patent Cross-License Agreement, Nikon granted
Zeiss a non-exclusive license to manufacture and sell optical components under patents owned or
otherwise sublicensable by Nikon. No royalties are payable by ASML for the license prior to the
termination of the 1997 Agreement between Carl Zeiss AG and ASML Netherlands B.V. The 1997
Agreement is terminable by either party (i) as of the end of a calender year,
upon 3 years notice, or (ii) for cause (breach of the agreement by the other party). Upon that
termination, ASML is obligated to begin to pay Zeiss a royalty on sales of certain lithography
systems including optical components, unless that agreement has 49




---



##### Table of Contents



been unilaterally terminated by
Zeiss without cause. If Nikon sells optical components to ASML but does not pay Zeiss a royalty as
provided in the Nikon-Zeiss Patent Cross-License Agreement, ASML will lose its right to sell
stand-alone optical components under the sublicense agreement. The sublicense agreement terminates upon termination of the Nikon-Zeiss Patent Cross-License
Agreement or if ASML does not pay royalties owing to Zeiss under the sublicense agreement. ASML may
assign its rights under the sublicense agreement in connection with a sale of all or substantially
all of the assets of its lithography business and Zeiss may transfer its rights under the
sublicense agreement in connection with a sale of all or substantially all of the assets of its
optical components business. Employment Agreement with Eric Meurice On August 2, 2004, the Companys chief executive officer Eric Meurice entered into an employment
agreement with the Company, terminable by the Company on not less than six months notice and by
Mr. Meurice 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. Meurice is entitled to receive a
payment equal to one years base salary in the event he is terminated by the Company. The
employment agreement contains confidentiality and non-competition
provisions to which Mr. Meurice
is subject. The agreement entitles Mr. Meurice to a base salary of EUR 600,000 per year, plus an annual bonus
of up to 50% of base salary if certain performance targets are met.
Pursuant to the agreement, Mr. Meurice received 125,000 share options upon execution of the agreement and is entitled to receive
annually, if certain performance targets are met, (i) share options with a value equal to up to 25%
of base salary and (ii) shares with a value equal to up to 25%
of base salary. Mr. Meurice is also
entitled to pension benefits under a defined contribution plan. For
additional information on Mr. Meurices remuneration, see Note 18 to our consolidated financial statements. Retirement of Stuart McIntosh On October 12, 2004, the Company entered into an agreement with
Stuart McIntosh in connection with his
retirement from the Board of Management. Pursuant to the agreement,
as amended, Mr. McIntosh
retired from the Board of Management effective January 3, 2005, and from employment by ASML
effective April 30, 2005. In accordance with the terms of the
agreement, Mr. McIntosh is entitled
to payments totalling EUR 589,845, which is equal to the amount he would have received
during the remaining term of his employment agreement. Agreement between Zeiss and ASML Holding N.V. On October 24, 2003, ASML Holding N.V. entered into an agreement with Carl Zeiss SMT AG. The
agreement builds upon the existing strategic alliance between the parties and modifies the pricing
and margin determinations detailed in their 1997 agreement. Furthermore, the agreement alters the
existing contractual framework between the parties by providing new warranty terms, intellectual
property rights, and exclusivity rights to current optical system products. The agreement also
includes pricing terms for future optical systems. 
 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 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 U.S. 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. For
more information see Item 10.B. Memorandum and Articles of Association. 
 E. Taxation Netherlands Taxation The statements below represent a summary of current Netherlands tax laws. 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. 50




---



##### Table of Contents



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% or more of our share capital, or holds options to
purchase 5% or more of our share capital, is considered to have a substantial interest in our
shares or our options, as applicable. A deemed substantial interest is present if (part of) a
substantial interest has been disposed of, or is deemed to be disposed of, in a transaction where
no tax is recognized. Special attribution rules exist in determining the presence of a substantial
interest. Income Tax Consequences for 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 substantial interest in our share capital or, in the event
the Non-resident Holder holds or has held a substantial interest in our share capital, such
interest is or was a business asset in the hands of the holder;
    does not share and has not shared directly (either through the beneficial ownership of ordinary
shares or similar securities) in the profits of an enterprise managed and controlled in the
Netherlands which owned or was deemed to have owned ASMLs 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 ASMLs 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 ASMLs ordinary shares is or was connected; and
    is not an individual that has opted to be taxed as a resident of the Netherlands. Corporate income tax 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;
    the holder has a substantial interest in ASML, 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%
of the nominal paid-in capital of ASML and meet some other requirements. Under most Netherlands tax treaties the right to tax capital gains realized by a Non-resident
Holder from the sale, exchange or other disposition of ordinary shares is allocated to the holders
country of residence and not the Netherlands. 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 a statutory rate of 25%.
Dividends include:  
    dividends in cash or in kind;
    deemed and constructive dividends;
    consideration for the repurchase of ordinary shares (including a repurchase by a direct or
indirect subsidiary) in excess of the recognized average paid-in capital unless such
repurchase is for temporary investment or exempt;
    proceeds from the redemption of ordinary shares in excess of recognized paid-in capital;
    stock dividends equal to their nominal value (unless distributed out of recognized paid-in share
premium);
    repayment of paid-in capital not recognized as capital for Netherlands dividend withholding tax
purposes; and 51




---



##### Table of Contents




    liquidation proceeds in excess of average paid-in capital recognized as 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;  
    the rate is reduced by treaty; or  
    surtax was due on the dividend distribution and the recipient is a resident of the
Netherlands Antilles or Aruba, a Member State of the EU or a country with which the
Netherlands has concluded a treaty for the avoidance of double taxation. 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, all European Union
member states, and other countries.


Under the Treaty between the United States of America and the Kingdom of 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% Netherlands withholding tax to
15% or, in the case of certain U.S. corporate shareholders owning at least 10% of our voting power,
to 5%, provided that the shareholder 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% 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 and (ii) 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 on March 8, 2004 the United States and the Netherlands agreed on a
new protocol to the tax treaty concluded between parties. The new protocol introduces (among
others) a 0% dividend withholding tax rate on dividends, provided certain requirements are met. In
addition, above mentioned article 26 (limitation on benefits) is adjusted. Some requirements to the
various tests mentioned in article 26 will become more severe and others will be moderated. The
protocol enters into effect as of two months after ratification and official publication as far as
it concerns withholding taxes. For other taxes the protocol enters into effect on January 1, 2005. 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 ASML is
not considered the beneficial owner of such dividends. Surtax As a result of Netherlands tax reform effective from January 1, 2001, ASML will be subject to a 20%
corporate income tax, or Surtax, on excessive (evaluated based on certain criteria, including
previous dividend distributions) dividends ASML distributes during the period from January 1, 2001
through December 31, 2005. It is proposed in the Netherlands parliament to terminate the surtax
regime as per December 31, 2004. 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 52




---



##### Table of Contents



thereof at any time during the
ten years preceeding 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 preceeding the time of the gift. Value Added Tax No Netherlands value added tax is imposed on dividends in respect of ASMLs shares or on the
transfer of ASMLs ordinary 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 ASMLs ordinary shares or of the execution, performance, delivery
and/or enforcement of rights in respect of ASMLs ordinary shares. United States Taxation The following is a discussion of the material U.S. federal income tax consequences relating to the
acquisition, ownership and disposition of ordinary shares by a U.S. 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% 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 U.S. 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 U.S. federal income tax
consequences of acquiring or holding shares. Prospective purchasers of ordinary shares are advised
to consult their tax advisers with respect to their particular circumstances and with respect to
the effects of U.S. federal, state, local or non-U.S. tax laws to which they may be subject. As used herein, the term U.S. Holder means a beneficial owner of ordinary shares that for U.S.
federal income tax purposes is:  
    an individual citizen or resident of the United States,
    a corporation or other entity treated as a corporation for U.S. 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 U.S. 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 U.S. persons who have the authority to control
all of its substantial decisions. If an entity treated as a partnership for U.S. federal income tax purposes owns ordinary shares,
the U.S. 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 U.S.
federal income tax consequences of holding and disposing of the ordinary shares. Taxation of Dividends U.S. 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 U.S. 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 U.S. 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. Generally, any gain or loss resulting from currency exchange
fluctuations during the period from the date the dividend payment is 53




---



##### Table of Contents



includible in income to the
date such payment is converted into U.S. dollars will be treated as ordinary income or loss. Such
gain or loss will generally be income from sources within the United States for U.S. foreign tax
credit purposes. 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 U.S. 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 U.S. Internal Revenue Code, a U.S. Holder may generally
deduct from its United States federal taxable income, or credit against its United States federal
income tax liability, the amount of any Netherlands withholding taxes. However, Netherlands
withholding tax may be deducted only if the U.S. Holder does not claim a credit for any Netherlands
or other non-U.S. taxes paid or accrued in that year. In addition, Netherlands dividend withholding
taxes will likely not be creditable against the U.S. 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% 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 U.S. tax legislation (the 2003 Tax Act) reduces to 15% 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 period beginning 60
days before the ex-dividend date. Dividends received from qualified foreign corporations
generally qualify for the reduced rate. A non-U.S. 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-U.S. corporation
are readily tradable on an established securities market in the United States or (ii) the non-U.S.
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 U.S. 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 U.S. Holder will generally recognize capital
gain or loss for U.S. 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 U.S. 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 U.S. 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 U.S. federal income tax purposes. Gain or loss from the sale or other disposition
of ordinary shares generally will be treated as U.S. source income or loss for U.S. 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 U.S. 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 will be refunded (or credited against the
beneficial owners U.S. federal income tax liability, if any) 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, 54




---



##### Table of Contents



ownership and disposition of shares
including the tax consequences under state, local and other tax laws and the possible effects of
changes in U.S. 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 U.S. 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 U.S. companies 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 risk (i.e. the risk of a change in the value of a financial instrument,
derivative or non derivative) caused by fluctuations in currency exchange rates and interest rates.
Our treasury department manages market risk in accordance with established policies through
transactions in financial instruments. None of these transactions are entered into for trading
purposes. These instruments are generally available from numerous sources and we do not consider
them to be specialized or high risk. The terms of the financial instruments utilized are consistent
with the related underlying hedged exposure. Established controls including policies, guidelines
and a system of authorization and reporting, are in place covering all financial instruments. We
regularly evaluate the use of financial instruments, including swaps, options and forward
contracts, and believe that the risk of incurring losses as a result of default is remote. We are exposed to credit risk in connection with these financial instruments. All contracts have
been entered into with major creditworthy financial institutions, and the risk associated with
these transactions is the cost of replacing these agreements at the current market rates in the event of default by the counterparts. We do not have
significant concentration of risk with any single party in any of our financial instruments. Foreign exchange 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 we expect this will continue to be so for the
foreseeable future. According to our foreign exchange policy guidelines, we hedge material foreign
exchange transaction risk exposure, such as sales transactions, forecasted purchase cash flows,
accounts receivable 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. 55




---



##### Table of Contents



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, 2004,
we anticipate EUR 26.7 million of other comprehensive income to represent the total anticipated
gain to be released to sales and EUR 2.8 million to represent the total anticipated loss to be
charged to cost of sales over the next 12 months as the forecasted sale and purchase transactions
occur. Since we have subsidiaries outside the euro-zone, the eurodenominated value of our shareholders
equity is also exposed to fluctuations in exchange rates. Equity changes caused by movements in
foreign exchange rates are shown as a translation difference in our consolidated financial
statements. We use, from time to time, foreign currency-denominated loans to hedge material
translation exposure arising from foreign net investments. 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. See Notes 1, 4 and 11 to our consolidated financial statements, which are
incorporated herein by reference. Credit risk 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. Sensitivity analysis derivative financial instruments The Company uses foreign exchange derivatives to manage its currency risk and interest rate swaps
to manage its interest rate risk. The following table summarizes the Companys derivative financial instruments, their market values
and their sensitivity to an instantaneous 10% decrease of the euro against other currencies and an
instantaneous 1% non-favorable increase in interest rates from their levels of December 31, 2003
and 2004 respectively, with all other variables held constant. Fair Value change1% non-
    
    
    10% weakening offavorable increase
    
    
    euro against otherNotional Amount2
    
    
    Fair Value
    
    
    in interest rate
    
    
    currency(in thousands)
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EURAs of December 31, 2003Forward contracts 1
    
    
    54,173
    
    
    
    444
    
    
    
    N/A
    
    
    
    (4,398
    )Currency options
    
    
    8,314
    
    
    
    (217
    )
    
    
    N/A
    
    
    
    (173
    )Interest rate swaps
    
    
    981,285
    
    
    
    6,102
    
    
    
    (21,801
    )
    
    
    N/AAs of December 31, 2004Forward contracts 1
    
    
    82,722
    
    
    
    11,547
    
    
    
    N/A
    
    
    
    (9,441
    )Currency options
    
    
    78,882
    
    
    
    8,803
    
    
    
    N/A
    
    
    
    (7,696
    )Interest rate swaps
    
    
    847,431
    
    
    
    1,978
    
    
    
    (10,407
    )
    
    
    N/A
    1 Includes forward contracts on U.S. dollars, Hong Kong dollars, British
Pounds, Israeli Shekel, Japanese Yen, Singapore dollars and Swiss Francs. 2 The fair value of forward contracts (used for hedging purposes) is the estimated amount that
a bank would receive or pay to terminate the forward contracts at the
reporting date, taking into account current interest rates, current
exchange rates and the current
creditworthiness of the counterparties.
 56




---



##### Table of Contents



The fair value of currency options (used for hedging purposes) is the estimated amount that a bank
would receive or pay to terminate the option agreements at the reporting date, taking into account
current interest rates, current exchange rates, volatility and the current creditworthiness of the
counterparties. The fair value of interest rate swaps (used for hedging purposes) is the estimated amount that a
bank would receive or pay to terminate the swap agreements at the reporting date, taking into
account current interest rates and the current creditworthiness of the counterparties. 
 Item 12 
 Description of Securities Other Than Equity Securities Not applicable. 57




---



##### 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 Evaluation of Disclosure controls and Procedures Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) as of December 31, 2004 (the Evaluation Date). Based on such evaluation, those
officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are
effective in alerting them on a timely basis to material information relating to ASML (including
its consolidated subsidiaries) required to be included in our periodic filings under the Exchange
Act. Changes in Internal Controls over Financial Reporting During the year ended December 31, 2004 there have not been any changes in our internal controls
over financial reporting that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting. 
 Item 16 
 A. Audit Committee Financial Expert Our Supervisory Board has determined that effective March 18, 2004, Mr. Fritz Fröhlich qualified as
the Audit Committee Financial Expert (replacing Mr. Syb Bergsma, who was previously determined to
be the Audit Committee Financial Expert). 
 B. Code of Ethics ASMLs Code on Ethical Business Conduct In 2001, ASML adopted its Principles of Ethical Business Conduct, which contain ASMLs ethical
principles in relation to various subjects. These Principles have been worked out into day-to-day
guidelines (called Internal Guidelines on Ethical Business Conduct) that were adopted in March
2003. The Internal Guidelines on Ethical Business Conduct apply to ASML employees worldwide,
including ASMLs Chief Executive Officer and Chief Financial Officer. No amendments were made to,
and no waivers were granted in respect of, ASMLs Principles of Ethical Business Conduct or
Internal Guidelines on Ethical Business Conduct in 2004. In January 2005, ASML adopted an amended version of its Principles of Ethical Business Conduct and
Internal Guidelines on Ethical Business Conduct. In connection with these amendments, ASML also
amended the Complaint Procedure with regard to violations of the Internal Guidelines on Ethical
Business Conduct and adopted a Whistleblowers Procedure for the receipt, retention and treatment
of complaints regarding accounting, internal controls and auditing matters and the confidential,
anonymous submission of complaints by employees regarding questionable accounting and auditing
matters. The main reasons for these amendments and adoption of the Whistleblowers Procedure were
the coming into force of the Code and developments in Nasdaq and SEC
rules. Our Internal Guidelines on Ethical Business Conduct are posted on our website. 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;  58




---



##### Table of Contents



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 has served as our independent public accountants for each of the years ended
in the three-year period ended December 31, 2004. The following table sets forth the aggregate fees
for professional audit services and other services rendered by Deloitte Accountants in 2004 and
2003. Year ended December 31
    
    20031
    
    
    20041(in thousands)
    
    EUR
    
    
    EURAudit Fees
    
    
    1,041
    
    
    
    1,014Audit-related Fees
    
    
    104
    
    
    
    125Tax Fees
    
    
    1,472
    
    
    
    738All Other Fees
    
    
    89
    
    
    
    0Total
    
    
    2,706
    
    
    
    1,877
   1
 Audit fees Audit fees primarily relate to the audit of our annual financial statements set forth in our Annual
Report on Form 20-F, agreed upon procedures work on our quarterly financial results, services
related to statutory and regulatory filings of our subsidiaries and services in connection with
accounting consultations on both U.S. GAAP and IFRS. Audit-related fees Audit-related fees mainly comprise services in connection with consultations on implementing the
requirements of Section 404 of the Sarbanes-Oxley Act. Tax fees Tax Fees can be detailed as follows: Year ended December 31
    
    20031
    
    
    20041(in thousands)
    
    EUR
    
    
    EURCorporate Income Tax compliance services
    
    
    576
    
    
    
    287Tax assistance for expatriate employees
    
    
    476
    
    
    
    253Other tax advisory and compliance
    
    
    420
    
    
    
    198Total
    
    
    1,472
    
    
    
    738
   1
 Other fees Other fees reflect for the year 2003 expenditures for training and local compliance services
(non-tax-related). The Audit Committee has approved the external audit plan and related audit fees for the year 2004.
The Audit Committee has adopted a policy regarding audit and non-audit services, in consultation
with Deloitte Accountants. This policy ensures the independence of our auditors by expressly
setting forth all services that the auditors may not perform and reinforcing the principle of
independence regardless of the type of work performed. Certain non-audit services such as
tax-related services and acquisition advisory are permitted. The Audit Committee pre-approves all
audit and non-audit services not specifically prohibited under this policy and reviews the annual
external audit plan and any subsequent engagements. 
 D. Exemptions from the Listing Standards for Audit Committees Not applicable. 
 E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers Not applicable. 59




---



##### 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-35 hereto. 
 Item 19 Exhibits Exhibit No.
    
    Description1
    
    Articles of Association of ASML Holding N.V. (English translation)
(Incorporated by reference to Amendment No. 7 to the Registrants Registration
Statement on Form 8-A/A, filed with the Commission on June 10, 2004 (File No.
0-25566))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 5.75 percent
Convertible Subordinated Notes due 2006 (Incorporated by reference to the Registrants Annual Report on Form 20-F for the year ended December 31, 2001)2.2
    
    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 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 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
    
    Employee Agreement between ASML Holding N.V. and Eric Meurice*4.6
    
    Employee Agreement between ASML Holding N.V. and Stuart K. McIntosh
(Incorporated by reference to the Registrants Annual Report on Form 20-F for the
year ended December 31, 2003)4.7
    
    Employee Agreement between ASML Holding N.V. and David P. Chavoustie
(Incorporated by reference to the Registrants Annual Report on Form 20-F for the
year ended December 31, 2003)4.8
    
    Form of Employee Agreement for
members of the Board of Management (Incorporated by reference to the Registrants Annual Report
on Form 20-F for the year ended December 31, 2003)4.9
    
    ASML New Hires and Incentive Stock Option Plan For Management (Version
2003) (Incorporated by reference to the Registrants Registration Statement on
Form S-8, filed with the Commission on September 2, 2003 (File No. 333-109154))4.10
    
    Nikon-ASML Patent Cross License Agreement, dated December 10, 2004, between ASML Holding N.V. and
Nikon Corporation*#4.11
    
    ASML/Zeiss Sublicense Agreement, dated December 10, 2004, between Carl Zeiss SMT AG and ASML
Holding N.V.*#4.12
    
    Agreement, dated October 12, 2004, between ASML Holding N.V. and Stuart
K. McIntosh*4.13
    
    ASML Incentive and New Hire Option Plan for Board of Management (Incorporated by reference to the Registrants Registration Statement on
Form S-8, filed with the Commission on June 9, 2004 (File No. 333-116337))8.1
    
    List of 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.*
 60




---



##### Table of Contents



# Certain information omitted pursuant to a request for confidential treatment filed separately
with the Securities and Exchange Commission 61




---



##### 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 28, 2005 /s/ Peter T.F.M. Wennink
Principal Accounting and Chief Financial Officer
Dated: January 28, 2005 62




---



Index to Financial Statements Financial Statements  
 F-2
    
    Consolidated statements of operations for the years ended December
31, 2002, 2003 and 2004F-3
    
    Consolidated statements of comprehensive income (loss) for the years
ended December 31, 2002, 2003 and 2004F-3
    
    Consolidated balance
sheets as of December 31, 2003 and 2004F-4
    
    Consolidated Statements of shareholders equity for the years ended
December 31, 2002, 2003 and 2004F-5
    
    Consolidated statements of cash flows for the years ended December
31, 2002, 2003 and 2004F-6
    
    Notes to the
consolidated financial statementsF-35
    
    Report of
Independent Registered Accounting Firm
 F-1




---



##### Table of Contents



Consolidated Statements of Operations1 Year ended December 31
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    20042Notes
    
    (in thousands, except per share data)
    
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    US$Net product sales
    
    
    1,740,633
    
    
    
    1,356,905
    
    
    
    2,250,925
    
    
    
    3,071,174Net service sales
    
    
    218,039
    
    
    
    185,832
    
    
    
    214,452
    
    
    
    292,599Total net sales
    
    
    1,958,672
    
    
    
    1,542,737
    
    
    
    2,465,377
    
    
    
    3,363,773Cost of product sales
    
    
    1,289,030
    
    
    
    1,028,362
    
    
    
    1,389,556
    
    
    
    1,895,918Cost of service sales
    
    
    202,038
    
    
    
    145,593
    
    
    
    170,182
    
    
    
    232,1973
    
    Total cost of sales
    
    
    1,491,068
    
    
    
    1,173,955
    
    
    
    1,559,738
    
    
    
    2,128,115Gross profit on sales
    
    
    467,604
    
    
    
    368,782
    
    
    
    905,639
    
    
    
    1,235,658Research and development costs
    
    
    324,419
    
    
    
    305,839
    
    
    
    352,920
    
    
    
    481,52615
    
    Research and development credits
    
    
    (26,015
    )
    
    
    (19,119
    )
    
    
    (21,961
    )
    
    
    (29,964
    )Selling, general and administrative costs
    
    
    263,243
    
    
    
    212,609
    
    
    
    201,629
    
    
    
    275,1043
    
    Restructuring charges (credits)
    
    
    0
    
    
    
    24,485
    
    
    
    (5,862
    )
    
    
    (7,998
    )Operating income (loss)
    
    
    (94,043
    )
    
    
    (155,032
    )
    
    
    378,913
    
    
    
    516,990Interest income 3
    
    
    23,700
    
    
    
    25,413
    
    
    
    27,998
    
    
    
    38,201Interest expense 3
    
    
    (60,481
    )
    
    
    (54,562
    )
    
    
    (44,071
    )
    
    
    (60,131
    )Income (loss) from
continuing operations before income taxes
    
    
    (130,824
    )
    
    
    (184,181
    )
    
    
    362,840
    
    
    
    495,06016
    
    (Provision for) benefit from income taxes
    
    
    42,779
    
    
    
    59,675
    
    
    
    (127,380
    )
    
    
    (173,798
    )Net income (loss) from continuing operations
    
    
    (88,045
    )
    
    
    (124,506
    )
    
    
    235,460
    
    
    
    321,2622
    
    Loss from
discontinued operations before income taxes
    
    
    (183,624
    )
    
    
    (59,026
    )
    
    
    0
    
    
    
    016
    
    Benefit from income taxes
    
    
    63,846
    
    
    
    23,316
    
    
    
    0
    
    
    
    0Net loss from discontinued operations
    
    
    (119,778
    )
    
    
    (35,710
    )
    
    
    0
    
    
    
    0Net income (loss)
    
    
    (207,823
    )
    
    
    (160,216
    )
    
    
    235,460
    
    
    
    321,262Basic net income
(loss) from continuing operationsper ordinary share
    
    
    (0.18
    )
    
    
    (0.26
    )
    
    
    0.49
    
    
    
    0.66Basic net income
(loss) from discontinued operationsper ordinary share
    
    
    (0.26
    )
    
    
    (0.07
    )
    
    
    0.00
    
    
    
    0.00Basic net income (loss) per ordinary share
    
    
    (0.44
    )
    
    
    (0.33
    )
    
    
    0.49
    
    
    
    0.66Diluted net income
(loss) from continuing operationsper ordinary share
    
    
    (0.18
    )
    
    
    (0.26
    )
    
    
    0.49
    
    
    
    0.66Diluted net income
(loss) from discontinued operationsper ordinary share
    
    
    (0.26
    )
    
    
    (0.07
    )
    
    
    0.00
    
    
    
    0.00Diluted net income (loss) per ordinary share
    
    
    (0.44
    )
    
    
    (0.33
    )
    
    
    0.49
    
    
    
    0.66Number of ordinary shares used in computingper share amounts (in thousands)Basic
    
    
    476,866
    
    
    
    482,240
    
    
    
    483,380
    
    
    
    483,380Diluted
    
    
    476,866
    
    
    
    482,240
    
    
    
    484,661
    
    
    
    484,661
   1
 2
 3
 
 Consolidated Statements of Comprehensive Income Year ended December 31
    
    2002
    
    
    2003
    
    
    2004
    
    
    2004(in thousands)
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    US$Net income (loss)
    
    
    (207,823
    )
    
    
    (160,216
    )
    
    
    235,460
    
    
    
    321,263Foreign currency translation, net of taxes
    
    
    (9,269
    )
    
    
    (12,318
    )
    
    
    (21,832
    )
    
    
    (29,788
    )Gain (loss) on derivative instruments
    
    
    15,128
    
    
    
    (7,158
    )
    
    
    16,736
    
    
    
    22,835Comprehensive income (loss)
    
    
    (201,964
    )
    
    
    (179,692
    )
    
    
    230,364
    
    
    
    314,310
 F-2




---



##### Table of Contents



Consolidated Balance Sheets As of December 31
    
    
    2003
    
    
    2004
    
    
    2004Notes
    
    (in thousands, except share and per share data)
    
    
    EUR
    
    
    EUR
    
    
    US$AssetsCash and cash equivalents
    
    
    1,027,806
    
    
    
    1,228,130
    
    
    
    1,675,6675
    
    Accounts receivable, net
    
    
    314,495
    
    
    
    503,153
    
    
    
    686,5056
    
    Inventories, net
    
    
    595,017
    
    
    
    717,688
    
    
    
    979,21716
    
    Deferred tax assets short term
    
    
    49,590
    
    
    
    54,554
    
    
    
    74,4347
    
    Other current assets
    
    
    157,912
    
    
    
    175,792
    
    
    
    239,8522
    
    Assets from discontinued operations
    
    
    5,007
    
    
    
    2,695
    
    
    
    3,677Total current assets
    
    
    2,149,827
    
    
    
    2,682,012
    
    
    
    3,659,35216
    
    Deferred tax assets
    
    
    325,271
    
    
    
    201,100
    
    
    
    274,3827
    
    Other assets
    
    
    30,711
    
    
    
    25,145
    
    
    
    34,3088
    
    Intangible assets, net
    
    
    14,590
    
    
    
    31,818
    
    
    
    43,4139
    
    Property, plant and equipment, net
    
    
    347,883
    
    
    
    303,691
    
    
    
    414,357Total assets
    
    
    2,868,282
    
    
    
    3,243,766
    
    
    
    4,425,812Liabilities and Shareholders EquityAccounts payable
    
    
    220,153
    
    
    
    343,228
    
    
    
    468,3023,10
    
    Accrued liabilities and other
    
    
    442,383
    
    
    
    453,831
    
    
    
    619,21016
    
    Deferred tax liabilities short term
    
    
    2,285
    
    
    
    1,332
    
    
    
    1,81716
    
    Current tax liabilities
    
    
    8,247
    
    
    
    10,037
    
    
    
    13,6952
    
    Liabilities from discontinued operations
    
    
    13,451
    
    
    
    4,713
    
    
    
    6,430Total current liabilities
    
    
    686,519
    
    
    
    813,141
    
    
    
    1,109,45416
    
    Deferred tax liabilities
    
    
    169,641
    
    
    
    200,717
    
    
    
    273,85912,13
    
    Other deferred liabilities
    
    
    10,850
    
    
    
    20,973
    
    
    
    28,61611
    
    Convertible subordinated debt
    
    
    842,543
    
    
    
    802,810
    
    
    
    1,095,35911
    
    Other long term debt
    
    
    17,522
    
    
    
    14,523
    
    
    
    19,815Total liabilities
    
    
    1,727,075
    
    
    
    1,852,164
    
    
    
    2,527,10312,14
    
    Commitments and contingenciesCumulative Preference Shares, EUR 0.02 nominalvalue; 900,000,000 shares authorized;none outstanding as of December 31, 2003 and 2004
    
    
    0
    
    
    
    0
    
    
    
    0Priority Shares, EUR 0.02 nominal value;23,100 shares authorized, issued and outstandingas of December 31, 2003 and 2004
    
    
    1
    
    
    
    1
    
    
    
    1Ordinary Shares, EUR 0.02 nominal value;900,000,000 shares authorized 482,513,502 sharesissued and outstanding as of December 31, 2003and 483,676,483 as of December 31, 2004
    
    
    9,650
    
    
    
    9,674
    
    
    
    13,199Share premium
    
    
    875,829
    
    
    
    895,836
    
    
    
    1,222,284Retained earnings
    
    
    116,110
    
    
    
    351,570
    
    
    
    479,684Accumulated other comprehensive income
    
    
    139,617
    
    
    
    134,521
    
    
    
    183,54121
    
    Total shareholders equity
    
    
    1,141,207
    
    
    
    1,391,602
    
    
    
    1,898,709Total liabilities and shareholders equity
    
    
    2,868,282
    
    
    
    3,243,766
    
    
    
    4,425,812
 F-3




---



##### Table of Contents



Consolidated Statements of Shareholders Equity AccumulatedOtherShares
    
    
    Share
    
    
    Retained
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Premium
    
    
    Earnings
    
    
    Income
    
    
    Total(in thousands)
    
    Number
    
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EURBalance at December 31, 2001
    
    
    466,978
    
    
    
    9,340
    
    
    
    579,564
    
    
    
    484,149
    
    
    
    153,234
    
    
    
    1,226,287Components of comprehensive income:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (207,823
    )
    
    
    
    
    
    
    (207,823
    )Foreign Currency Translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,269
    )
    
    
    (9,269
    )Gain (loss) on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,128
    
    
    
    15,128Issuance of Ordinary Shares
    
    
    15,204
    
    
    
    304
    
    
    
    290,889
    
    
    
    
    
    
    
    
    
    
    
    291,193Balance at December 31, 2002
    
    
    482,182
    
    
    
    9,644
    
    
    
    870,453
    
    
    
    276,326
    
    
    
    159,093
    
    
    
    1,315,516Components of comprehensive income:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (160,216
    )
    
    
    
    
    
    
    (160,216
    )Foreign Currency Translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,318
    )
    
    
    (12,318
    )Gain (loss) on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,158
    )
    
    
    (7,158
    )Issuance of Ordinary Shares
    
    
    332
    
    
    
    7
    
    
    
    5,376
    
    
    
    
    
    
    
    
    
    
    
    5,383Balance at December 31, 2003
    
    
    482,514
    
    
    
    9,651
    
    
    
    875,829
    
    
    
    116,110
    
    
    
    139,617
    
    
    
    1,141,207Components of comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    235,460
    
    
    
    
    
    
    
    235,460Foreign Currency Translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,832
    )
    
    
    (21,832
    )Gain (loss) on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,736
    
    
    
    16,736Issuance of Ordinary Shares
    
    
    1,162
    
    
    
    24
    
    
    
    20,007
    
    
    
    
    
    
    
    
    
    
    
    20,031Balance at December 31, 2004
    
    
    483,676
    
    
    
    9,675
    
    
    
    895,836
    
    
    
    351,570
    
    
    
    134,521
    
    
    
    1,391,602
 
 F-4




---



##### Table of Contents



Consolidated Statements of Cash Flows Year ended December 31
    
    2002
    
    
    2003
    
    
    2004
    
    
    2004(in thousands)
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    US$(as restatedsee Note 1)
    
    
    
    (as restatedsee Note 1)Cash Flows from Operating ActivitiesNet income (loss) from continued operations
    
    
    (88,045
    )
    
    
    (124,506
    )
    
    
    235,460
    
    
    
    321,263Adjustments to reconcile net income to net cash
flows from operating activities:Depreciation and amortization
    
    
    166,035
    
    
    
    144,800
    
    
    
    90,215
    
    
    
    123,090Impairment charges
    
    
    20,651
    
    
    
    12,100
    
    
    
    2,929
    
    
    
    3,996Allowance for doubtful debts
    
    
    0
    
    
    
    9,113
    
    
    
    3,085
    
    
    
    4,209Allowance for obsolete inventory
    
    
    112,164
    
    
    
    32,431
    
    
    
    34,336
    
    
    
    46,848Deferred income taxes
    
    
    (22,361
    )
    
    
    (79,577
    )
    
    
    114,701
    
    
    
    156,499Changes in assets and liabilities that provided (used) cash:Accounts receivable
    
    
    (57,183
    )
    
    
    211,627
    
    
    
    (192,819
    )
    
    
    (263,083
    )Inventories
    
    
    (84,384
    )
    
    
    118,617
    
    
    
    (149,215
    )
    
    
    (203,590
    )Other assets
    
    
    31,365
    
    
    
    44,945
    
    
    
    1,127
    
    
    
    1,538Accrued liabilities
    
    
    (41,683
    )
    
    
    (8,948
    )
    
    
    (5,507
    )
    
    
    (7,514
    )Accounts payable
    
    
    (71,927
    )
    
    
    7,231
    
    
    
    121,998
    
    
    
    166,455Income taxes payable
    
    
    (25,759
    )
    
    
    164,826
    
    
    
    837
    
    
    
    1,142Net cash provided by (used in) operating
activities from continuing operations
    
    
    (61,127
    )
    
    
    532,659
    
    
    
    257,147
    
    
    
    350,853Cash Flows from Investing ActivitiesPurchases of property, plant and equipment
    
    
    (89,282
    )
    
    
    (48,567
    )
    
    
    (74,979
    )
    
    
    (102,302
    )Proceeds from sale of property, plant and equipment
    
    
    16,406
    
    
    
    2,638
    
    
    
    15,137
    
    
    
    20,653Purchase of intangible assets
    
    
    0
    
    
    
    (3,099
    )
    
    
    (556
    )
    
    
    (759
    )Net cash used in investing activities
from continuing operations
    
    
    (72,876
    )
    
    
    (49,028
    )
    
    
    (60,398
    )
    
    
    (82,408
    )Cash Flows from Financing ActivitiesProceeds from issuance of convertible subordinated Notes
    
    
    0
    
    
    
    380,000
    
    
    
    0
    
    
    
    0Payment of underwriting commission
    
    
    0
    
    
    
    (8,550
    )
    
    
    0
    
    
    
    0Net proceeds from issuance of shares and
stock options
    
    
    26,630
    
    
    
    6,360
    
    
    
    20,031
    
    
    
    27,329Redemption and/or repayment of debt
    
    
    (5,203
    )
    
    
    (445,966
    )
    
    
    (1,160
    )
    
    
    (1,581
    )Net cash provided by financing activities
from continuing operations
    
    
    21,427
    
    
    
    (68,156
    )
    
    
    18,871
    
    
    
    25,748Net cash flows
    
    
    (112,576
    )
    
    
    415,475
    
    
    
    215,620
    
    
    
    294,193Effect of changes in exchange rates on cash
    
    
    (1,869
    )
    
    
    (69,165
    )
    
    
    (9,416
    )
    
    
    (12,847
    )Net cash flow (used) provided by discontinued
operations
    
    
    (127,473
    )
    
    
    12,736
    
    
    
    (5,880
    )
    
    
    (8,023
    )Net increase (decrease) in cash and cash equivalents
    
    
    (241,918
    )
    
    
    359,046
    
    
    
    200,324
    
    
    
    273,323Cash and cash equivalents at beginning of the year
    
    
    910,678
    
    
    
    668,760
    
    
    
    1,027,806
    
    
    
    1,402,344Cash and cash equivalents at end of the year
    
    
    668,760
    
    
    
    1,027,806
    
    
    
    1,228,130
    
    
    
    1,675,667Supplemental Disclosures of Cash Flow Information:Cash paid for:Interest
    
    
    66,614
    
    
    
    48,980
    
    
    
    45,866
    
    
    
    62,580Taxes
    
    
    3,642
    
    
    
    11,974
    
    
    
    7,430
    
    
    
    10,138Supplemental non-cash investing and financing activities:Conversion of Bonds into 13,634,782, 536 and
0 ordinary shares respectively in 2002, 2003 and 2004
    
    
    265,411
    
    
    
    16
    
    
    
    0
    
    
    
    0
 F-5




---



##### Table of Contents



Notes to the Consolidated Financial Statements 1. Summary of significant accounting policies 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 is a worldwide operating 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 and
Asia. 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 indicated otherwise except that, solely for the
convenience of the reader, certain euro amounts presented as of and for the year ended December 31,
2004 have been translated into United States dollars (US$) using the exchange rate in effect on
December 31, 2004 of US$ 1.00 = EUR 0.73292. These translations should not be construed as
representations that the euro
amounts could be converted into U.S. dollars at that rate. On December 18, 2002 ASML announced the proposed divestiture of its Thermal business, including
related customer support activities, and the termination of its manufacturing activities in the
Track business. As a result of this decision, the presentation of the Companys financial
statements and the Notes thereto have been retroactively adjusted to reflect the effects of the
decision to discontinue these operations. See Note 2. Restatement relating to
reclassification of 2002 and 2003 Consolidated Statements of Cash Flows. Subsequent to the issuance of
the Companys 2003 financial statements, the Companys
management concluded that the presentation under cash flows from
investing activities of the capitalization and sale of equipment that
is used for demonstration and training purposes for a certain period
of time, before it is sold to customers, is inconsistent with the
actual initial cash outflow relating to the construction of the
equipment, and the ultimate cash inflow relating to the sale of the
equipment. The Companys management believes that these cash
flows should be considered cash flows from operating activities,
since the sale of this equipment is not substantially different from
the sale of the Companys other products. As a result, the statement of
cash flows for the years ended December 31, 2002 and 2003 have
been restated to classify these cash flows, for all periods presented
as cash flows from operating activities. These reclassifications have
no impact on the total of ASMLs cash flows from operating
and investing activities, or on net income (loss) or shareholders equity as
of and for the years ended December 31, 2002 and 2003. A summary of the effect of
the restatement on the cash flows from operating and investing
activities for the years ended December 31, 2002 and 2003 is as
follows: Year ended December 31, 2002

    
    Year ended
December 31, 2003As
previouslyreported

    
    As restated

    
    As
previouslyreported

    
    As restatedCash
flows from operating activities
    
    
    (54,151
    )
    
    
    (61,127
    )
    
    
    509,333
    
    
    
    532,659Cash
flows from investing activities
    
    
    (79,852
    )
    
    
    (72,876
    )
    
    
    (25,702
    )
    
    
    (49,028
    )Total
    
    
    (134,003
    )
    
    
    (134,003
    )
    
    
    483,631
    
    
    
    483,631
 Principles of consolidation The consolidated financial statements include the accounts of ASML Holding N.V. and all of its
majority-owned subsidiaries. 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 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. Applying Statement of Financial Accounting Standards (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 F-6




---



##### Table of Contents



that are highly effective in offsetting the identified hedged risks as required by the SFAS No. 133
effectiveness criteria. Cash Flow Hedges Forwards and options used to hedge the impact of the fluctuations in exchange rates on cash flows
from purchase activities and sales transactions in non-functional currencies are treated as cash
flow hedges. Until the moment of recognition in the statement of operations sales and purchase
transactions are not recorded in the accounts of the Company. Therefore the hedges related to these
transactions are recorded as cash flow hedges. The changes in fair value of the derivatives are
intended to offset changes in the expected cash flows from the underlying transactions. The change
in the fair value of cash flow hedges are deferred in other comprehensive income until the
underlying exposure is recognized in the statement of operations. The critical terms of the hedging
instruments are the same as those for the underlying transactions, and thus these hedging
relationships are perfectly effective. When the underlying hedged transaction is recognized, the related gain or loss on the cash flow
hedge accumulated in other comprehensive income is released to the statement of operations. Gains
and losses on hedges on sales transactions are recognized in revenue, while gains and losses on
hedges on forecasted purchase transactions are recognized in cost of sales. In the event that the
underlying hedged transaction does not occur, or it 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. 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. Fair Value Hedges Forwards used to hedge accounts receivable, accounts payable and other monetary assets and
liabilities denominated in non-functional currencies are designated as fair value hedges. Both the
changes in the fair value of these hedges and their underlying exposure are recognized in the
statement of operations. 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. Effectiveness 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 0.8 million in 2004, 2003 and 2002, 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 and
2003. 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 3 to 10 years. Property, plant and equipment Property, plant and equipment are stated at cost, less accumulated depreciation. 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 F-7




---



##### Table of Contents



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 lifeBuildings and constructions
    
    5  
    40 yearsMachinery and equipment
    
    2  
    5 yearsFurniture, fixtures and other equipment
    
    3  
    5 yearsLeasehold improvements
    
    5  
    10 years
 Certain internal and external costs associated with the purchase and/or development of internally
used software are capitalized when both the preliminary project stage is completed and management
has authorized further funding for the project, which it has deemed probable to be completed and to
be usable for the intended function. These costs are amortized on a straight-line basis over the
period of related benefit, which ranges primarily from two to five years. Evaluation of long-lived assets for impairment The Company evaluates its long-lived assets, which include property, plant and equipment and
intangible assets, for impairment whenever events or changes in circumstances indicate that the
carrying amount of those assets may not be recoverable. Recoverability of these assets is measured
by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected
to be generated by the asset. If those assets are considered to be impaired, the impairment to be
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; the sellers price to
the 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 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 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
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. Commencing at the end of 2000, ASML departed from its standard revenue
recognition policy in connection with the introduction of its TWINSCAN family of lithography
systems. Although each TWINSCAN system successfully completed a Factory Acceptance Test prior to
shipment, management considered the TWINSCAN to constitute new technology for which it did not
have sufficient evidence to conclude that (i) installation at the customer site would occur
consistently within a pre-determined time period comparable to ASMLs other systems; and (ii) upon
installation, the system would perform within the specifications for which customer sign-off had
been obtained in the pre-shipment Factory Acceptance Test. Consequently, ASML initially deferred
all revenue with respect to each TWINSCAN system until installation and acceptance of the system at
the customers premises had been completed. By the end of 2002, however, ASML had successfully
shipped and installed a total of 70 TWINSCAN systems, which provided management with sufficient
evidence to conclude that installation of TWINSCAN systems would occur consistently within a
predetermined time period and that the performance of these systems would not reasonably be
different from that exhibited in the pre-shipment Factory Acceptance Test. As a result, at the end
of 2002, ASML commenced recognizing revenues from TWINSCAN systems upon shipment. Therefore, no
revenue was deferred pending installation of a
TWINSCAN system (or any other ASML system) during 2003 or 2004. As ASMLs 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 December 1999. ASML anticipates that, in connection with future introductions of new technology, it will initially
defer revenue recognition until completion of installation and acceptance of the new technology at
customer premises. This deferral would continue until ASML could conclude that installation of the
technology in question would occur consistently within a predetermined time period and that the
performance of the new F-8




---



##### Table of Contents



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. ASML has no repurchase commitments in its sales terms and conditions. From time to time, however,
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. The fair value of installation services provided to customers is initially deferred and is
recognized when the installation is completed. The fair value is determined by vendor specific
objective evidence (VSOE) and/or third party evidence. VSOE is determined based upon the prices
that ASML charges 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. Prices that
ASML charges on a stand-alone basis are also in line with prices charged by other vendors, although
the number of third party installers is decreasing. Sales from service contracts are recognized when performed. Revenue from
prepaid service contracts is recognized over the life of the contract. ASML offers 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, ASML offers volume discounts to a limited number of customers. These discounts depend on the
number of systems shipped per calendar year. 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. 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. Cost of sales Costs of product sales comprise direct product costs such as materials, labor, cost of warranty,
depreciation, shipping and handling costs and related overhead costs. Repayments of certain
technical development credits, which are calculated as a percentage of sales, are also charged to
cost of product sales (see Research and development costs and credits, below). 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 (effective since January 1, 2003) 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 F-9




---



##### Table of Contents



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 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 that cover research and development costs relating to
approved projects are recorded as research and development credits in the period when such costs
occur. Technical development credits received from the Dutch government to offset the cost of
certain research and development projects are contingently repayable to the extent sales of the
equipment developed in such projects occur. Such repayments are calculated as a percentage of sales
and are charged to cost of sales. No such repayments are required if such sales do not occur. As
disclosed in note 14, ASML did not have any remaining repayment
obligations to the Dutch Ministry of Economic Affairs at December 31, 2004, as ASML had fully
repaid the outstanding amount. 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 As of December 31, 2004 and 2003, ASML was party to various legal proceedings generally incidental
to its business, as disclosed in Note 14 to the consolidated statements. In connection with these
proceedings and claims, ASMLs 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 its
statement of operations. 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
ASMLs 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, ASML may agree to settle or to terminate a claim or
proceeding in which it believes it would ultimately prevail where it believes 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. Stock options ASML applies Accounting Principles Board Opinion (APB) 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option plans. SFAS No. 123,
Accounting for Stock-Based Compensation, amended by SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure allows companies to elect to recognize the fair value of
the stock options granted to
employees as an expense, or to account for stock option plans using the intrinsic value method
under APB 25 and provide pro forma disclosure of the impact of the fair value method on net income
and earnings per share. Under the provisions of APB 25, no significant compensation expense was recorded for ASMLs
stock-based compensation plans for the years ended December 31, 2004, 2003 and 2002. Had
compensation cost been determined based upon the fair value at the grant date for awards under the
plan consistent with the methodology prescribed under SFAS No. 148, ASMLs net income (loss) and
calculation for net income (loss) per ordinary share would have been as follows (net of related tax
effects): F-10




---



##### Table of Contents



Year ended December 31
    
    2002
    
    
    2003
    
    
    2004(in thousands, except per share data)
    
    EUR
    
    
    EUR
    
    
    EURNet income (loss)As reported
    
    
    (207,823
    )
    
    
    (160,216
    )
    
    
    235,460Compensation expenses
    
    
    (76,177
    )
    
    
    (17,696
    )
    
    
    (12,437
    )Pro forma
    
    
    (284,000
    )1
    
    
    (177,912
    )
    
    
    223,023Basic net income (loss) per ordinary shareAs reported
    
    
    (0.44
    )
    
    
    (0.33
    )
    
    
    0.49Pro forma
    
    
    (0.60
    )
    
    
    (0.37
    )
    
    
    0.46Diluted net income (loss) per ordinary shareAs reported
    
    
    (0.44
    )
    
    
    (0.33
    )
    
    
    0.49Pro forma
    
    
    (0.60
    )
    
    
    (0.37
    )
    
    
    0.46
   1
 The estimated weighted
average fair value of options granted during 2002, 2003 and 2004, was
EUR 11.55, EUR 6.66 and EUR 7.35, respectively, on the date of grant using the Black-Scholes
option-pricing model, with the following assumptions in 2002, 2003 and 2004, respectively: no
dividend yield, volatility of 87.4 percent, 85.2
percent and 68.3 percent, respectively, risk-free interest rate of 3.18, 3.60
and 3.65 percent, respectively, no assumed
forfeiture rate and an expected life of two years after the vesting period. Net income (loss) per ordinary share Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average
ordinary shares outstanding for that period. Diluted net income (loss) 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 notes would have an anti-dilutive effect. The dilutive effect is calculated
using the if-converted method. Following this method, our convertible bonds are considered
anti-dilutive in 2004. As a result of the losses incurred by the Company in 2002 and 2003, there is
no difference between basic and diluted earnings in 2002 and 2003 because the assumed conversion of
ASMLs convertible notes and exercise of stock options would have been anti-dilutive. A summary of the basic and diluted weighted average number of shares is as follows: Year ended December 31(in thousands)
    
    2002
    
    
    2003
    
    
    2004Basic weighted average shares outstanding
    
    
    476,866
    
    
    
    482,240
    
    
    
    483,380Diluted weighted average shares outstanding
    
    
    476,866
    
    
    
    482,240
    
    
    
    484,661
 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 21. Comprehensive income Comprehensive income consists of net income (loss) and other comprehensive income (loss). Other
comprehensive income (loss) refers to revenues, expenses, gains and losses that are not included in
net income, but recorded directly in shareholders equity. For the years ended December 31, 2004,
2003 and 2002, comprehensive income consists of net income (loss), unrealized gains and losses on
derivative financial instruments and foreign currency translation adjustments. Segment disclosure Prior to 2002, ASML reported in two business segments, Lithography and Track & Thermal. As ASML
decided in 2002 to terminate the manufacturing activities of its Track business and to divest its
Thermal business, they are presented as discontinued operations and no longer disclosed as a
separate segment. ASML operates in three general geographic areas. See Note 17. Newly adopted accounting pronouncements In December 2004, the FASB issued a revision of FASB statement No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123(R)). This statement supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No.
123(R) addresses the accounting for share-based payment transactions in which a company receives
employee services in exchange for either equity instruments of the company or liabilities that are
based on the fair value of the companys equity instruments or that may be settled by the issuance
of such equity instruments. SFAS No. 123(R) eliminates the ability to account for share-based
compensation transactions using the intrinsic method that we currently use and F-11




---



##### Table of Contents



generally requires
that such transactions be accounted for using a fair-value-based method and recognized as expense
in our consolidated statement of operations. SFAS No. 123(R) is effective as of the beginning of
the first interim or annual reporting period that begins after June 15, 2005. SFAS N. 123(R) will
have a significant impact
on our consolidated statement of operations as we will be required to expense the fair value of
our stock option grants under ASMLs stock option plans. See also Note 13 and the paragraph on
stock options as described above. In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on recognition and
measurement guidance previously discussed under EITF Issue No.

03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments
(EITF 03-01). The consensus clarifies the meaning of other-than-temporary impairment and its
application to investments in debt and equity securities, in particular investments within the
scope of FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and investments accounted for under the cost method. ASML does not believe that this
consensus will have a material impact on its consolidated results of operations. In November 2004, the
EITF reached a consensus on EITF Issue No. O3-13 Applying the conditions in
paragraph 42 of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in
determining whether to report discontinued operations. The consensus clarifies the approach for
evaluating whether the criteria in paragraph 42 of SFAS No. 144 have been met for purposes of
classifying the results of operations of a component of an entity that either has been disposed of
or is classified as held for sale as discontinued operations. The task force also reached a
consensus that the guidance would be applied to a component of an enterprise that is either
disposed of or classified as held for sale in fiscal periods beginning after December 15, 2004.
ASML does not believe that this
consensus will have a material impact on its consolidated results of operations. 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. Both discontinued businesses met the
criteria of SFAS No. 144 and have been classified accordingly. In December 2002 the Company reviewed its long-lived assets used in the Thermal business for
potential impairment and recorded no impairment charges. During 2003, ASMLs management again
reviewed its long-lived assets for impairment as the Company entered into negotiations with several
potential buyers and accordingly recorded pre-tax impairment charges of EUR 16.0 million. In
October 2003, the Company completed the sale of its Thermal business to a privately held company
formed by VantagePoint Venture Partners. At the time of the sale, no further gain or loss was
realized. The net loss of the Thermal business amounted to EUR 32.3 million in 2003 compared to EUR
61.2 million in 2002. The termination of the Track business resulted in an exit plan that included workforce reductions,
fixed asset impairments and inventory write-offs due to discontinued product lines. The exit plan
included the disposal of remaining assets related to the Track business. In 2002, ASML decided to
continue to service
its existing customers for whom ASML has warranty or other service obligations. Consequently,
customer support related to the Track business was not included in discontinued operations for
2002. In June 2003, ASML sold certain of its fixed assets and inventories related to its Track
business to Rite Track. No gain or loss was realized on the sale. The net loss of the Track
business amounted to EUR 3.4 million in 2003 compared to EUR 58.6 million for 2002. The net loss
from operations for 2002 included total pre-tax estimated exit costs of EUR 47.0 million. These
exit costs included asset impairments, inventory write downs, purchase and other commitment
settlements and employee termination costs. The net loss in 2003 relates mainly to impairment
charges recorded on a building in the United States, previously used by the Companys Track
business. This impairment was determined on the difference between the buildings estimated fair
value and its carrying value. The tax effects arising from asset impairment costs, employee termination costs, inventory
write-off and losses from discontinued operations mostly reside and will remain with ASML U.S.
group companies. These losses can be offset against future profits from continuing operations of
these U.S. group companies. As of December 31, 2004, ASML has substantially completed the
discontinuation of the Track business and the divesture of the Thermal business. ASML continues to
hold a related building for sale with a book value of approximately EUR 3 million and liabilities for loss
contingencies amounting to approximately EUR 5 million. F-12




---



##### Table of Contents



Summarized results of operations for discontinued operations are as follows: Year ended December 31
    
    2002
    
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EUR
    
    
    EURRevenuesTrack
    
    
    7,236
    
    
    
    2,514
    
    
    
    0Thermal
    
    
    105,929
    
    
    
    38,198
    
    
    
    0Total
    
    
    113,165
    
    
    
    40,712
    
    
    
    0Loss from discontinued operations,
net of taxesTrack loss from operations
    
    
    (27,991
    )
    
    
    (1,456
    )
    
    
    0Track exit costs
    
    
    (30,626
    )
    
    
    (1,944
    )
    
    
    0Thermal loss from operations
    
    
    (61,161
    )
    
    
    (21,906
    )
    
    
    0Thermal exit costs
    
    
    0
    
    
    
    (10,404
    )
    
    
    0Total
    
    
    (119,778
    )
    
    
    (35,710
    )
    
    
    0
 Estimated exit costs related to our Track business comprised the following for the 2 years ended
December 31, 2003 (EUR millions): Year ended December 31
    
    2002
    
    
    2003(in millions)
    
    EUR
    
    
    EURInventory write downs
    
    
    18
    
    
    
    -Fixed asset impairments
    
    
    11
    
    
    
    3Severance payments
    
    
    7
    
    
    
    -Operational lease buildings
    
    
    4
    
    
    
    -Other commitments
    
    
    7
    
    
    
    -Gross estimated exit costs
    
    
    47
    
    
    
    3Tax benefit
    
    
    (16
    )
    
    
    (1
    )Estimated exit costs, net of tax
    
    
    31
    
    
    
    2
 Our exit from the Track business was substantially completed by the end of 2003 with limited
changes from prior year estimates. Summarized assets and liabilities from discontinued operations are as follows: As of December 31
    
    2002
    
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EUR
    
    
    EURAssetsIntangible assets
    
    
    4,410
    
    
    
    0
    
    
    
    0Tangible fixed assets
    
    
    32,994
    
    
    
    3,167
    
    
    
    2,695Inventories
    
    
    34,693
    
    
    
    0
    
    
    
    0Receivables
    
    
    33,064
    
    
    
    1,840
    
    
    
    0Other
    
    
    933
    
    
    
    0
    
    
    
    0Total Assets
    
    
    106,094
    
    
    
    5,007
    
    
    
    2,695LiabilitiesAccounts payable
    
    
    10,463
    
    
    
    0
    
    
    
    0Accrued liabilities
    
    
    41,741
    
    
    
    13,451
    
    
    
    4,713Installation and warranty
    
    
    13,887
    
    
    
    0
    
    
    
    0Total Liabilities
    
    
    66,091
    
    
    
    13,451
    
    
    
    4,713
 ASML organizes its financing activity at the corporate level and does not allocate funding to
individual net assets identified as assets from discontinued operations. The following table
represents cash flows directly attributable to ASMLs discontinued operations. Year ended December 31
    
    2002
    
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EUR
    
    
    EURNet cash provided by (used in)
operating activities of discontinued operations
    
    
    (121,039
    )
    
    
    12,736
    
    
    
    (5,880
    )Net cash used in investing activities of
discontinued operations
    
    
    (6,434
    )
    
    
    0
    
    
    
    0Net cash provided by (used in) discontinued
operations
    
    
    (127,473
    )
    
    
    12,736
    
    
    
    (5,880
    )
 F-13




---



##### Table of Contents



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 a result of this restructuring plan, the Company
recorded restructuring charges in 2001 for an amount of EUR 402.7 million mainly relating to
inventory write-offs, purchase
commitments, fixed asset write-offs and severance payments. This restructuring provision was mainly
used in 2001, 2002 and 2003. Adjustments to the Restructuring plan 2001, amounting to EUR 5.9
million and EUR 1.4 million, have been recognized in 2002 and 2003, respectively, and are
classified as cost of sales (the same line as where the initial charges were recorded). These
adjustments relate mainly to more favorable settlement agreements with vendors of purchase
commitments than the Company had estimated. Restructuring Plan 2002 In response to the semiconductor industrys continuing downturn and a corresponding decrease in
demand for ASMLs products and services, on December 18, 2002, ASML announced measures to contain
costs for our lithography business, including customer support, and thereby lower our break-even
point (Restructuring plan 2002). The Restructuring plan 2002 did not impact any processes or
products. These measures resulted in the recognition of restructuring charges of EUR 78.5 million, recorded
during 2002 as cost of sales, for slow-moving and obsolete lithography inventory and impairments of
tangible fixed assets. The impaired fixed assets related to lithography systems held for use. Fixed asset impairments were recorded as a consequence of insufficient cash
flows to support the carrying cost of these assets as a consequence of their reduced
marketability, due to the global semiconductor industry downturn. The impairment charges were
determined on the basis of the difference between the assets estimated fair value and their
carrying value. The fair value was determined based upon data gained in the Companys ongoing
resale of used systems. The Company also announced workforce reductions of approximately 700 positions worldwide. The
related lay-off costs were recorded in 2003 since the final details on the plan had not been
finally determined by December 31, 2002. With respect to these reductions, ASML recorded in 2003
restructuring charges totaling EUR 6.9 million, of which EUR 4.1 million was reflected in cost of
sales and EUR 2.8 million was reflected in restructuring charges. By adjusting labor capacity, the
Company expected to achieve annual cost savings of EUR 49 million. As of December 31, 2003, 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 Dutch 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 workforce reductions were 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 1.1 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. F-14




---



##### Table of Contents



Tabular Disclosures of Restructuring The restructuring charges and adjustments recorded during 2002, 2003 and 2004, totaling EUR 73
million, EUR 29 million and EUR (9) million, respectively, consist of the amounts set forth in
detail in the following table: Year ended December 31
    
    2002
    
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EUR
    
    
    EURInventory and other asset write-offs
    
    
    34,000
    
    
    
    1,810
    
    
    
    0Fixed Asset impairments
    
    
    44,500
    
    
    
    0
    
    
    
    0Subtotal1
    
    
    78,500
    
    
    
    1,810
    
    
    
    0Building Closure cost
    
    
    0
    
    
    
    6,833
    
    
    
    0Severance Payments
    
    
    0
    
    
    
    22,182
    
    
    
    0Subtotal2
    
    
    0
    
    
    
    29,015
    
    
    
    0Adjustments to prior year plans2
    
    
    (5,907
    )
    
    
    (1,673
    )
    
    
    (8,556
    )Total restructuring charges
    
    
    72,593
    
    
    
    29,152
    
    
    
    (8,556
    )
   1
 2
 All of the foregoing restructuring charges are recorded in ASMLs statements of operations either
in cost of sales or in restructuring charges, as summarized in the following table for the years
ended December 31, 2002, 2003 and 2004: Year ended December 31
    
    2002
    
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EUR
    
    
    EURCost of sales
    
    
    72,593
    
    
    
    4,667
    
    
    
    (2,694
    )Restructuring Charges
    
    
    0
    
    
    
    24,485
    
    
    
    (5,862
    )Total
    
    
    72,593
    
    
    
    29,152
    
    
    
    (8,556
    )
 The following table summarizes, per restructuring plan, the movement in the restructuring provision
for the three years ended December 31, 2004: Restructuring plan announced in
    
    2001
    
    
    2002
    
    
    2003
    
    
    Total(in thousands)
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EURBalance as of December 31, 2001
    
    
    63,000
    
    
    
    
    
    
    
    
    
    
    
    63,000Utilization
for the year
    
    
    (35,750
    )
    
    
    
    
    
    
    
    
    
    
    (35,750
    )Adjustments
    
    
    (5,907
    )
    
    
    
    
    
    
    
    
    
    
    (5,907
    )Effect of foreign currency translation
    
    
    (9,517
    )
    
    
    
    
    
    
    
    
    
    
    (9,517
    )Balance as of December 31, 2002
    
    
    11,826
    
    
    
    
    
    
    
    
    
    
    
    11,826Additions
    
    
    0
    
    
    
    6,911
    
    
    
    22,104
    
    
    
    29,015Utilization
for the year
    
    
    (6,086
    )
    
    
    (6,906
    )
    
    
    (2,100
    )
    
    
    (15,092
    )Adjustments
    
    
    (1,440
    )
    
    
    
    
    
    
    (233
    )
    
    
    (1,673
    )Effect of foreign currency translation
    
    
    (1,506
    )
    
    
    (5
    )
    
    
    
    
    
    
    (1,511
    )Balance as of December 31, 2003
    
    
    2,794
    
    
    
    0
    
    
    
    19,771
    
    
    
    22,565Utilization
for the year
    
    
    (2,323
    )
    
    
    
    
    
    
    (7,774
    )
    
    
    (10,097
    )Adjustments
    
    
    0
    
    
    
    
    
    
    
    (8,556
    )
    
    
    (8,556
    )Effect of foreign currency translation
    
    
    114
    
    
    
    
    
    
    
    0
    
    
    
    114Balance
as of December 31, 2004
    
    
    585
    
    
    
    0
    
    
    
    3,441
    
    
    
    4,026
 The following table summarizes, per category, the movement in the restructuring provision for the
three years ended December 31, 2004: Purchase
    
    
    Building
    
    
    SeveranceCategory
    
    commitments
    
    
    closure costs
    
    
    payments
    
    
    Total(in thousands)
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EURBalance as of December 31, 2001
    
    
    51,761
    
    
    
    2,058
    
    
    
    9,181
    
    
    
    63,000Utilization
for the year
    
    
    (27,126
    )
    
    
    (2,044
    )
    
    
    (6,580
    )
    
    
    (35,750
    )Adjustments
    
    
    (6,337
    )
    
    
    2,116
    
    
    
    (1,686
    )
    
    
    (5,907
    )Effect of foreign currency translation
    
    
    (8,272
    )
    
    
    (330
    )
    
    
    (915
    )
    
    
    (9,517
    )Balance as of December 31, 2002
    
    
    10,026
    
    
    
    1,800
    
    
    
    0
    
    
    
    11,826Additions
    
    
    0
    
    
    
    6,833
    
    
    
    22,182
    
    
    
    29,015Utilization
for the year
    
    
    (4,711
    )
    
    
    (3,475
    )
    
    
    (6,906
    )
    
    
    (15,092
    )Adjustments
    
    
    (3,326
    )
    
    
    1,653
    
    
    
    0
    
    
    
    (1,673
    )Effect of foreign currency translation
    
    
    (1,111
    )
    
    
    (395
    )
    
    
    (5
    )
    
    
    (1,511
    )Balance as of December 31, 2003
    
    
    878
    
    
    
    6,416
    
    
    
    15,271
    
    
    
    22,565
 F-15




---



##### Table of Contents



Purchase
    
    
    Building
    
    
    SeveranceCategory
    
    commitments
    
    
    closure costs
    
    
    payments
    
    
    Total(in thousands)
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EURUtilization
for 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
    
    
    
    114Balance as of December 31, 2004
    
    
    0
    
    
    
    3,335
    
    
    
    691
    
    
    
    4,026
 ASMLs net cash outflows in 2002, 2003 and 2004 for exit plans were EUR 35.8 million, EUR 15.1
million and EUR 10.1 million, respectively. At the end of 2003, we anticipated that the entire
restructuring provision, amounting to EUR 22.6 million, would be expanded in cash. The amount of
cost savings expected in periods following implementation of the above-mentioned restructuring
plans relate primarily to reduction in workforce and was estimated in the aggregate at EUR 156
million on an annual basis in continuing operations. Substantially all restructuring plans have been executed at year end 2004. 4. Market risk and derivatives Market risk represents the risk of a change in the value of a financial instrument, derivative or
non derivative, caused by fluctuations in currency exchange rates and interest rates. The Company
addresses market risk in accordance with established policies and thereby enters into various
derivative transactions. No such transactions are entered into for trading purposes. Foreign currency management The Company uses the euro as its invoicing currency in order to limit the exposure to foreign
currency movements. Exceptions may occur on a customer by customer basis. To the extent that
invoicing is done in a currency other than the euro, the Company is exposed to foreign currency
risk. It is the Companys policy to hedge material transaction exposures, such as sales transactions,
forecasted cash flows from purchases and accounts receivable/accounts payable. The Company hedges
these exposures through the use of foreign exchange options and forward contracts. The use of a mix
of foreign exchange options and forwards is aimed at reflecting the likelihood of the transactions
occurring. The effectiveness of all outstanding hedge contracts is monitored closely throughout the
life of the hedges. During the twelve months ended December 31, 2004, a EUR 0.3 million gain was recognized in cost of
sales relating to hedges of forecasted transactions that did not occur. As of December 31, 2004,
EUR 26.7 million of other comprehensive income represents the total anticipated gain to be released
to sales, and EUR 2.8 million is the total anticipated loss to be charged to cost of sales over the
next twelve months as the forecasted revenue and purchase transactions occur. It is the Companys policy to hedge material remeasurement exposures. These net exposures from
certain monetary assets and liabilities in non-functional currencies are hedged with forward
contracts. It is the Companys policy to manage material translation exposures resulting predominantly from
ASMLs U.S. dollar net investments. Throughout 2004 a proportion
of ASMLs US$ 575 million 5.75
percent Convertible Subordinated Notes due 2006 was assigned to certain of the Companys U.S.
dollar net investments. As a result, fluctuations in the Companys balance sheet ratios resulting
from changes in exchange rates are reduced. Interest rate management The Company has both assets and liabilities that bear interest, which expose the Company to
fluctuations in the prevailing market rate of interest. The Company uses interest rate swaps to
align the interest typical terms of interest bearing assets with 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. Financial instruments as of December 31, 2004 The Company uses foreign exchange derivatives to manage its currency risk and interest rate swaps
to manage its interest rate risk. The following table summarizes the estimated fair values of the
Companys financial instruments: F-16




---



##### Table of Contents



2003
    
    
    
    
    
    
    2004Notional
    
    
    
    
    
    
    NotionalAs of December 31
    
    Amount2
    
    
    Fair Value
    
    
    Amount2
    
    
    Fair Value(in thousands)
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EURForward contracts1
    
    
    54,173
    
    
    
    444
    
    
    
    82,722
    
    
    
    11,547Currency options
    
    
    8,314
    
    
    
    (217
    )
    
    
    78,882
    
    
    
    8,803Interest rate swaps
    
    
    981,285
    
    
    
    6,102
    
    
    
    847,431
    
    
    
    1,978
    1 Includes forward contracts on U.S. dollars, Hong Kong dollars, British
Pounds, Israeli Shekel, Japanese Yen, Singapore dollars and Swiss Francs. 2
 The fair value of forward contracts (used for hedging purposes) is the estimated amount that
a bank would receive or pay to terminate the forward contracts at the reporting date, taking into
account current interest rates, current exchange rates and the current creditworthiness of the
counterparties. The fair value of currency options (used for hedging purposes) is the estimated amount that a bank
would receive or pay to terminate the option agreements at the reporting date, taking into account
current interest rates, current exchange rates, volatility and the current creditworthiness of the
counterparties. The fair value of interest rate swaps (used for hedging purposes) is the estimated amount that a
bank would receive or pay to terminate the swap agreements at the reporting date, taking into
account current interest rates and the current creditworthiness of the counterparties. Credit risk 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 ASMLs counterparties to a sufficient number of major financial institutions and
issuers of commercial paper. ASML does not expect the counterparties to default given their high
credit quality. 5. Accounts receivable Accounts receivable consist of the following: As of December 31
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EURGross accounts receivable
    
    
    320,691
    
    
    
    507,970Allowance for doubtful debts
    
    
    (6,196
    )
    
    
    (4,817
    )Net accounts receivable
    
    
    314,495
    
    
    
    503,153
 A summary of activity in the allowance for doubtful debt: Year ended December 31
    
    2002
    
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EUR
    
    
    EURBalance at beginning of year
    
    
    (2,754
    )
    
    
    (324
    )
    
    
    (6,196
    )Utilization of the provision
    
    
    2,430
    
    
    
    3,241
    
    
    
    4,464Addition
for the year 1
    
    
    0
    
    
    
    (9,113
    )
    
    
    (3,085
    )Balance
at end of year
    
    
    (324
    )
    
    
    (6,196
    )
    
    
    (4,817
    )
   1
 6. Inventories Inventories consist of the following: As of December 31
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EURRaw materials
    
    
    229,740
    
    
    
    180,936Work-in-process
    
    
    319,209
    
    
    
    416,480Finished products
    
    
    259,690
    
    
    
    283,338Total inventories, gross
    
    
    808,639
    
    
    
    880,754Allowance for obsolescence and/or
lower market value
    
    
    (213,622
    )
    
    
    (163,066
    )Total
inventories, net
    
    
    595,017
    
    
    
    717,688
 F-17




---



##### Table of Contents



A summary of activity in the allowance for obsolescence is as follows: Year ended December 31
    
    2002
    
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EUR
    
    
    EURBalance at beginning of year
    
    
    (500,491
    )
    
    
    (285,264
    )
    
    
    (213,622
    )Addition of the year
    
    
    (112,164
    )1
    
    
    (32,431
    )
    
    
    (34,336
    )Effect of exchange rates
    
    
    36,673
    
    
    
    22,976
    
    
    
    5,280Utilization of the provision
    
    
    290,718
    
    
    
    81,097
    
    
    
    79,612Balance at end of year
    
    
    (285,264
    )
    
    
    (213,622
    )
    
    
    (163,066
    )
   1
 The years 2001-2003 saw an unprecedented downturn in the global semiconductor industry. This
in turn led to a reduced demand for a number of ASMLs products and services, and imposed a
corresponding requirement to impair the value of the Companys inventories. The additions to the
provision set forth in the foregoing table include inventory write-offs with respect to the
Companys restructuring plan announced in December 2002 and July 2003 of EUR 34.0
million and EUR 1.8 million, respectively. ASMLs addition to its obsolescence allowance excluding
these restructuring charges amounted to EUR 78 million, EUR 30 million and EUR 34 million,
respectively, for the three years ended December 31, 2004. The decrease in the addition to the
allowance from 2002 to 2003, excluding the above-mentioned restructuring charges,
reflects ASMLs program of improved supply chain and inventory control management, initiated in
2002. 7. Other assets Other non-current assets consist of the following: As of December 31
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EURCompensation plan assets1
    
    
    8,720
    
    
    
    7,672Prepaid expenses
    
    
    16,130
    
    
    
    12,028Subordinated loan granted to lessor
in respect of Veldhoven headquarters2
    
    
    5,445
    
    
    
    5,445Other
    
    
    416
    
    
    
    0Total other long-term assets
    
    
    30,711
    
    
    
    25,145
   1
 2
 Other current assets consist of the following: As of December 31
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EURAdvance payments to Zeiss
    
    
    71,268
    
    
    
    72,375VAT
    
    
    16,528
    
    
    
    38,464Loan to Micronic AB
    
    
    35,242
    
    
    
    0Prepaid expenses
    
    
    31,813
    
    
    
    22,703Other
    
    
    3,061
    
    
    
    42,250Total other current assets
    
    
    157,912
    
    
    
    175,792
 Zeiss is the Companys sole supplier of lenses and, from time to time, receives non-interest
advance payments from the Company that assist in financing Zeiss work in progress and thereby
secure lens deliveries to the Company. Amounts owed under these advance payments are repaid through
lens deliveries. The Company does not maintain a loss allowance against these advances, but
periodically monitors Zeiss financial condition to confirm that no provision is necessary. Micronic is a Swedish company specialized in software solutions for the Lithography
industry. In June 2001, ASML granted Micronic a convertible loan in the principal amount of 320
million Swedish kronor or approximately EUR 35 million to support Micronics research in the field
of maskless technology. The loan was repayable on July 31, 2004 or could be converted into 1
million shares of Micronic upon the request of ASML. In July 2004, Micronic fully repaid the
outstanding loan. 8. Intangible assets In 1999, ASML obtained, through its purchase of the business of MaskTools, the intellectual
property rights relating to Optical Proximity Correction technology. This technology enhances
leading edge lithography systems to accurately and reliably print line widths below 0.2 micron.
These rights have been valued at cost and are amortized on a straight-line basis over their
estimated useful life of 10 years. F-18




---



##### Table of Contents



In 2003, ASML acquired a patent portfolio, relating to dual stage technology. This patent
portfolio has been valued at cost and is amortized on a straight-line basis over its estimated
useful life of 3 years. 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 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 and
is obligated to make additional payments to Nikon of US$9 million (approximately EUR 7 million)
each in 2005, 2006 and 2007. An amount of EUR 49 million was reflected as a research and development expense in ASMLs statement of operations for the year ended December 31,
2004. The remaining value, in an amount of
EUR 21 million, has been capitalized under intangible
assets and will be amortized over a period of 5 years under cost of sales. As of December 31
    
    
    
    
    
    2003
    
    
    2004(in thousands)
    
    
    
    
    
    EUR
    
    
    EURCostBalance, January 1
    
    
    
    
    
    
    20,475
    
    
    
    23,574Additions
    
    
    
    
    
    
    3,099
    
    
    
    22,143Balance, December 31
    
    
    
    
    
    
    23,574
    
    
    
    45,717Accumulated amortizationBalance, January 1
    
    
    
    
    
    
    6,406
    
    
    
    8,984Amortization
    

    
    
    
    
    
    2,578
    
    
    
    4,915Balance, December 31
    
    
    
    
    
    
    8,984
    
    
    
    13,899Net book value, December 31
    
    
    
    
    
    
    14,590
    
    
    
    31,818
 Estimated amortization expenses relating to intangible assets for the next five years are as
follows: 2005:
    
    
    8,1842006:
    
    
    6,7082007:
    
    
    6,4832008:
    
    
    6,2602009:
    
    
    4,183Thereafter:
    
    
    0
 9. Property, plant and equipment Property, plant and equipment consist of the following: Buildings
    
    
    Machinery
    
    
    
    
    
    
    Furniture,and
    
    
    and
    
    
    Leasehold
    
    
    fixtures and otherconstructions
    
    
    equipment
    
    
    improvements
    
    
    equipment
    
    
    Total(in thousands)
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EURCostBalance, January 1
    
    
    150,112
    
    
    
    477,714
    
    
    
    98,537
    
    
    
    168,587
    
    
    
    894,950Additions
    
    
    4,297
    
    
    
    39,405
    
    
    
    10,875
    
    
    
    34,629
    
    
    
    89,206Disposals
    
    
    (8,472
    )
    
    
    (59,619
    )
    
    
    (2,434
    )
    
    
    (19,561
    )
    
    
    (90,086
    )Effect of exchange rates
    
    
    (5,627
    )
    
    
    (10,801
    )
    
    
    (328
    )
    
    
    (1,284
    )
    
    
    (18,040
    )Balance,
December 31, 2004
    
    
    140,310
    
    
    
    446,699
    
    
    
    106,650
    
    
    
    182,371
    
    
    
    876,030Accumulated depreciationBalance, January 1
    
    
    57,579
    
    
    
    311,201
    
    
    
    47,279
    
    
    
    131,008
    
    
    
    547,067Depreciation1
    
    
    4,338
    
    
    
    54,935
    
    
    
    14,565
    
    
    
    16,995
    
    
    
    90,833Disposals
    
    
    (111
    )
    
    
    (35,564
    )
    
    
    (826
    )
    
    
    (17,381
    )
    
    
    (53,882
    )Effect of exchange rates
    
    
    (2,784
    )
    
    
    (7,493
    )
    
    
    (204
    )
    
    
    (1,198
    )
    
    
    (11,679
    )Balance,
December 31, 2004
    
    
    59,022
    
    
    
    323,079
    
    
    
    60,814
    
    
    
    129,424
    
    
    
    572,339Net Book Value2December 31, 2003
    
    
    92,533
    
    
    
    166,513
    
    
    
    51,258
    
    
    
    37,579
    
    
    
    347,883December 31, 2004
    
    
    81,288
    
    
    
    123,620
    
    
    
    45,836
    
    
    
    52,947
    
    
    
    303,691
 F-19




---



##### Table of Contents



1
 2
 The majority of the Companys disposals relate to machinery and equipment, primarily
consisting of demonstration systems and training systems. These systems are similar to the ones
ASML sells in its ordinary course of business. These are capitalized
under fixed assets because they
are held and, at the time they are placed in service, expected to be used for a period longer than
one year. These systems are recorded at cost and depreciated over their useful life. From the
moment these assets are no longer held for use but intended for sale,
they are reclassified from
fixed assets to inventory at the lower of their carrying value or fair market value. The cost of
sales for these systems includes this value and the additional costs of refurbishing (materials and
labor). When sold, the proceeds and cost of these systems are recorded as revenue and cost of
sales, respectively, identical to the treatment of other sales transactions. During 2004 and 2003, the
Company recorded impairment charges of EUR 2.9 million and EUR 12.1
million, respectively, in cost of sales on machinery and equipment, for which there are
insufficient cash flows to support the carrying cost. The impairment charges were determined based
on the difference between the assets estimated fair value and their carrying value. 10. Accrued liabilities and other Accrued liabilities and other consist of the following: As of December 31
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EURDeferred revenue
    
    
    59,966
    
    
    
    87,107Warranty
    
    
    15,496
    
    
    
    19,660Materials and costs to be paid
    
    
    65,554
    
    
    
    86,820Advances from customers
    
    
    187,677
    
    
    
    141,516Personnel related items
    
    
    53,229
    
    
    
    83,296Investment credits
    
    
    12,282
    
    
    
    1,450Restructuring
    
    
    22,565
    
    
    
    4,026Other
    
    
    25,614
    
    
    
    29,956Total accrued liabilities and other
    
    
    442,383
    
    
    
    453,831
 Advances from customers consist of down payments made by customers prior to shipment for systems
included in ASMLs current product portfolio or systems currently under development. The Company provides standard warranty coverage on its systems for twelve 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 cost is based on historical product performance, expected results from
improvement programs and field expenses. Based upon historical service records, the Company
calculates the charge of average service hours and parts per system to determine the estimated
warranty charge and updates these estimated charges periodically. Changes in product warranty
liabilities for the years 2003 and 2004 are as follows: As of December 31
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EURBalance, January 1
    
    
    24,292
    
    
    
    15,496Additions
    
    
    16,090
    
    
    
    27,357Usage
    
    
    (23,084
    )
    
    
    (20,508
    )Effect of exchange rates
    
    
    (1,802
    )
    
    
    (2,685
    )Balance, December 31
    
    
    15,496
    
    
    
    19,660
 11. Long-term debt and borrowing arrangements The Companys obligations to make principal repayments under long-term debt and borrowing
arrangements as of December 31, 2004, for the next five years and thereafter, assuming no
conversions of the Companys convertible notes occur and excluding the fair value of interest rate
swaps used to hedge the fair value and excluding interest expense, are as follows: 2005
    
    
    
    1,1272006
    
    
    
    432,2782007
    
    
    
    2,0562008
    
    
    
    509
 F-20




---



##### Table of Contents



2009
    
    
    
    509Thereafter
    
    
    380,602Total
    
    
    817,081
 Convertible debt securities The following table summarizes the Companys outstanding Convertible Subordinated Notes as of
December 31, 2004 and 2003, including fair value of interest rate swaps used to hedge the fair
value of the underlying fixed loan coupon: As of December 31
    
    
    2003
    
    
    2004(in thousands)
    
    
    EUR
    
    
    EUR5.75 percent convertible notesNotional amount
    
    
    
    455,285
    
    
    
    421,431Fair value interest rate swaps
    
    
    
    8,411
    
    
    
    0Total
    
    
    
    463,696
    
    
    
    421,4315.50 percent convertible notesNotional amount
    
    
    
    380,000
    
    
    
    380,000Fair value interest rate swaps
    
    
    
    (1,153
    )
    
    
    1,379Total
    
    
    
    378,847
    
    
    
    381,379Total convertible debt
    
    
    
    842,543
    
    
    
    802,810
 In July and August 2003, ASML repurchased US$ 139.6 million of its US$ 520 million principal amount
of its 4.25 percent Convertible Subordinated Notes due November 30, 2004. In December 2003, ASML
redeemed all of the 4.25 percent notes that remained outstanding, at a redemption price of 100.85
percent of their principal amount plus accrued interest. Prior to redemption, bondholders converted
bonds for a total of US$ 120 thousand into 3,218 ordinary shares (on a post-share split basis), of which US$ 20 thousand were
converted into 536 shares in 2003. On December 5, 2003, the Company redeemed the remaining US$
380.3 million of convertible notes. In October 2001, ASML completed an offering of US$ 575 million principal amount of its 5.75 percent
Convertible Subordinated Notes due October 15, 2006, with interest payable semi-annually on April
15 and October 15 of each year, commencing on April 15, 2002. The notes are convertible into
30,814,576 ordinary shares at US$ 18.66 (EUR 13.68) per share, subject to adjustment, at any time
prior to maturity. ASML may pay cash (based on the trading prices of ASMLs shares) in lieu of
delivering shares upon conversion. At any time on or after October 22, 2004, the notes are
redeemable at the option of ASML, in whole or in part, at 100 percent of its principal amount,
together with accrued interest, provided that the Companys shares close above 130 percent of the
conversion price for twenty trading days out of a thirty-day period. During 2004 none of the notes
were converted into ordinary shares. In May 2003, ASML completed an offering of EUR 380 million principal amount of its 5.50 percent
Convertible Subordinated Notes due 2010, with interest payable annually on May 15 of each year,
commencing on May 15, 2004. The notes are convertible into an aggregate of 26,573,426 ordinary
shares at a conversion price of EUR 14.30 per share, subject to adjustment, at any time prior to
maturity. ASML may pay cash (based on the trading prices of ASMLs shares) in lieu of delivering
shares upon conversion. Unless previously converted, the notes are redeemable at 100% of its
principal amount on May 15, 2010. The notes are redeemable at the option of ASML, in whole or in
part, at any time on or after May 27, 2006, provided that ASMLs shares close above 150% of the
conversion price for twenty trading days out of a thirty-day period. The Company uses interest rate swaps to hedge the risk from interest rate fluctuations. As of
December 31, 2004 and 2003, deferred interest rate swap proceeds amounting to, respectively, EUR
1.4 million and EUR 7.3 million have been recorded in the balance sheet as an addition to the
Companys outstanding Convertible Subordinated Notes. The following table summarizes the estimated fair values of ASMLs Convertible Subordinated Notes: As of December 31
    
    2003
    
    
    
    
    
    
    2004Notional
    
    
    
    
    
    
    NotionalAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair Value(in thousands)
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EUR5.75 percent convertible
    
    
    455,285
    
    
    
    596,992
    
    
    
    421,431
    
    
    
    517,0405.50 percent convertible
    
    
    380,000
    
    
    
    541,975
    
    
    
    380,000
    
    
    
    465,245
    F-21




---



##### Table of Contents



The fair value of the Companys long-term debt is estimated based on the quoted market prices
as of December 31, 2003 and December 31, 2004, respectively. Other long-term debt In February 1997, the Company received a US$ 6.5 million (EUR 4.8 million) loan from the
Connecticut Development Authority. The loan has a ten-year term, bears interest at 8.25 percent,
and is secured by the Companys U.S. facility in Wilton, Connecticut. At December 31, 2004, the
Companys outstanding debt with respect to this loan amounted to US$ 1.9 million (EUR 1.4 million). In 1999, the Company assumed three yen-denominated loans in connection with its merger with SVG.
Approximately EUR 3.1 million (JPY 432 million) is outstanding at December 31, 2004, which is
secured by land and buildings in Japan, is payable in monthly installments through the year 2011,
bearing interest at 2.5 percent. Approximately EUR 9.7 million (JPY 1,350 million) and EUR 1.4
million (JPY 200 million) was outstanding at December 31, 2004. These loans are unsecured,
repayable in 2006 and 2007, and bear interest at a rate of 3.1 percent and 2.2 percent,
respectively, payable semi-annually. These loans do not contain any operating covenants. Lines of credit During 2004, the Company renewed its available credit facilities. At December 31, 2004, the Company
had available credit facilities for a total of EUR 400 million (2003, EUR 288 million), all of
which expire in November 2009. The credit facilities, available at December 31, 2004, 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. No amounts were outstanding under these credit facilities at the end of 2004 and 2003. 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, 2003 and 2004. ASML does not
currently anticipate any difficulty in continuing to meet these covenant requirements. 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 and purchase obligations, 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 46R, Consolidation of Variable Interest Entities. Under FIN
46R 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 Veldhoven headquarters. The Company is leasing these headquarters for a
period of 15 years from an entity (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 F-22




---



##### Table of Contents



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 shareholders 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 would result from purchase commitments that are expected to be
forfeited are provided for in the Companys financial statements. As of December 31, 2004, the
Company had purchase commitments for a total amount of approximately EUR 639 million, reflecting
its backlog level as of that date. In its negotiations with supplier, the Company continuously
seeks to align its purchase commitments with its business objectives. See Tabular Disclosure of Contractual Obligations below. Other Off-Balance Sheet Arrangements The Company has certain additional commitments and contingencies that are not recorded on its
balance sheet but may result in future cash requirements. In addition to the operating lease
commitments and the purchase obligations, these off-balance sheet arrangements consist of product
warranties and guarantees of subsidiaries debt to third parties. The Company provides guarantees to third parties in connection with transactions entered into by
its subsidiaries in the ordinary course of business, including bank loans reflected in Note 11.
Pursuant to a license agreement between Micronic and ASML, ASML will pay to Micronic in the first
quarter of 2005 an amount of EUR 20 million. In connection with this
payment, a letter of credit for the corresponding amount has been issued. Tabular Disclosure of Contractual Obligations The Companys off-balance sheet arrangements with respect to operating lease obligations and
purchase obligations as of December 31, 2004 can be summarized as follows: Less than
    
    
    1-2
    
    
    3-5
    
    
    After 5Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    years(in thousands)
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EUROperating Lease Obligations
    
    
    234,042
    
    
    
    36,596
    
    
    
    49,841
    
    
    
    39,766
    
    
    
    107,839Purchase Obligations
    
    
    638,947
    
    
    
    602,204
    
    
    
    36,743
    
    
    
    0
    
    
    
    0Other deferred Liabilities1
    
    
    19,790
    
    
    
    6,596
    
    
    
    13,194
    
    
    
    0
    
    
    
    0Total Contractual obligations
    
    
    892,779
    
    
    
    645,396
    
    
    
    99,778
    
    
    
    39,766
    
    
    
    107,839
   1
  Several operating leases for our buildings contain purchase options, exercisable at the option of
the Company at the end of the lease, and in some cases, during the term of the lease. The amounts
to be paid if ASML should exercise these purchase options at the end of the lease can be summarized
as of December 31, 2004 as follows: Less than
    
    
    1-2
    
    
    3-5
    
    
    After 5Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    years(in thousands)
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EURPurchase options
    
    
    69,077
    
    
    
    7,714
    
    
    
    0
    
    
    
    5,627
    
    
    
    55,736
 13. Employee benefits In February 1997, SVG adopted a non-qualified deferred compensation plan that allowed a select
group of management and highly compensated employees and directors to defer a portion of their
salary, bonus and commissions. The plan allowed SVG to credit additional amounts to participants
account balances, depending on the amount of the employees contribution, up to a maximum of 5
percent of an employees annual salary and bonus. In addition, interest is credited to the
participants account balances at 120 percent of the average Moodys corporate bond rate. For
calendar years 2002, 2003 and 2004, participants accounts were credited at 8.89 percent, 8.50
percent and 7.57 F-23




---



##### Table of Contents



percent, respectively. SVGs contributions and related interest became 100 percent vested in May
2001 with the merger of SVG and ASML. During fiscal years 2002, 2003 and 2004, the expense incurred
under this plan was EUR 1 million, EUR 0.9 million and EUR 0.4 million, respectively. As of
December 31, 2003 and 2004, the Companys liability under the deferred compensation plan was EUR 9
million and EUR 5 million, respectively. In July 2002, ASML adopted a non-qualified deferred compensation plan for its U.S. employees that
allows a select group of management or highly compensated employees to defer a portion of their
salary, bonus, and other benefits. The plan allows ASML to credit additional amounts to the
participants account balances. The participants invest their funds between the 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 2004. On December 31, 2003 and 2004, the Companys
liability under the deferred compensation plan was EUR 2 million and EUR 3 million, respectively. Pension plans ASML maintains various pension plans covering substantially all of its employees. The Companys
approximately 2,600 employees in the Netherlands participate in a multi-employer union plan
determined in accordance with the collective bargaining agreements effective for the industry in
which ASML operates. This multi-employer plan spans approximately 1,400 companies and 145,000
workers. 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% 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. 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, 2004 were: Year ended December 31
    
    2002
    
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EUR
    
    
    EURPension plan based on multi-employer union plan
    
    
    15,059
    
    
    
    16,514
    
    
    
    17,747Pension plans based on defined contribution
    
    
    7,265
    
    
    
    6,636
    
    
    
    8,103Total
    
    
    22,324
    
    
    
    23,150
    
    
    
    25,850
 Bonus plan ASML has a performance-related bonus plan for senior management, who are not members of the Board
of Management. Under this plan, the bonus amount is dependant on the actual performance on
corporate, departmental and personal targets. The bonus for senior management can range between 0
percent and 60 percent of their annual salary.
The Companys bonus expenses for all participants under this plan were: Year ended December 31
    
    2002
    
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EUR
    
    
    EURBonus expenses
    
    
    0
    
    
    
    6,495
    
    
    
    7,481
 The 2004 bonus is accrued for in the statement of operations for the year ended December 31, 2004
and expected to be paid in the first quarter of 2005. 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 2002, 2003 and 2004 was 0
percent, 0 percent and 5 percent, respectively. This profit-sharing bonus is accrued for in the
statement of operations for the year ended December 31, 2004 for an amount of EUR 13.0 million,
expected to be paid in the first quarter of 2005. 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 F-24




---



##### Table of Contents



number of stock options that can be granted in that year. The determination is subject to the
approval of the Supervisory Board and the holders of priority shares 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. The following tables have not been restated for discontinued operations: Stock option transactions are summarized as follows: Number of
    
    
    Weighted averageshares
    
    
    exercise price per share (EUR)Outstanding, December 31, 2001
    
    
    21,199,270
    
    
    
    26.01Granted
    
    
    4,483,070
    
    
    
    19.30Exercised
    
    
    (1,539,132
    )
    
    
    9.45Cancelled
    
    
    (266,760
    )
    
    
    17.46Outstanding, December 31, 2002
    
    
    23,876,448
    
    
    
    25.13Granted
    
    
    2,516,980
    
    
    
    9.66Exercised
    
    
    (335,977
    )
    
    
    10.98Cancelled
    
    
    (1,486,427
    )
    
    
    21.82Outstanding, December 31, 2003
    
    
    24,571,024
    
    
    
    24.58Granted
    
    
    2,485,782
    
    
    
    12.35Exercised
    
    
    (875,530
    )
    
    
    9.76Cancelled
    
    
    (561,282
    )
    
    
    17.73Outstanding, December 31, 2004
    
    
    25,619,994
    
    
    
    23.19Exercisable, December 31, 2004
    
    
    19,568,177
    
    
    
    26.65Exercisable, December 31, 2003
    
    
    15,494,969
    
    
    
    23.99Exercisable, December 31, 2002
    
    
    9,551,860
    
    
    
    14.77
 Information with respect to stock options outstanding at December 31, 2004 is as follows: Weighted
    
    
    WeightedOptions
    
    
    
    
    
    
    
    average
    
    
    averageoutstanding
    
    Number
    
    
    Number
    
    
    remaining
    
    
    exercise priceRange of exercise
    
    outstanding
    
    
    exercisable
    
    
    contractual
    
    
    of outstandingprices (EUR)
    
    December 31, 2004
    
    
    December 31, 2004
    
    
    life (years)
    
    
    options (EUR)2.35 - 9.29
    
    
    731,527
    
    
    
    290,747
    
    
    
    5.81
    
    
    
    7.499.30 - 12.79
    
    
    7,978,576
    
    
    
    3,745,482
    
    
    
    6.58
    
    
    
    11.3012.80 - 31.79
    
    
    10,840,831
    
    
    
    9,462,888
    
    
    
    3.06
    
    
    
    21.3631.80 - 47.15
    
    
    6,069,060
    
    
    
    6,069,060
    
    
    
    5.30
    
    
    
    44.00Total
    
    
    25,619,994
    
    
    
    19,568,177
    
    
    
    4.51
    
    
    
    23.19
 Stock Option Extension Plans In 2002, employees were offered an extension of the option period for options granted in 1997 up to
and including 2000. For the years 1997 up to and including 1999, this extension is either until
October 21, 2008, or October 21, 2005. For 2000, the option period is extended until 2012.
Employees who accepted the extension became subject to additional exercise periods in respect of
their options. At the modification date, there was no intrinsic value of the modified award because
the exercise price under each plan still exceeded ASMLs stock price on the modification date. As a
result, these stock option extensions did not result in recognition of any compensation expense in
accordance with APB Opinion No. 25 and related interpretations. Financing of stock option plans Stock option plans that were issued before 2001 were constructed with a virtual financing
arrangement whereby ASML loaned the tax value of the options granted to employees subject to the
Netherlands tax-regime. The loans issued under this arrangement are repayable to ASML on the
exercise date of the respective option, provided that the option was actually exercised. If the
options expire unexercised, the loans are forgiven. 14. Contingencies Legal Contingencies ASML is party to various legal proceedings generally incidental to its business. Since late 2001,
ASML was a party to a series of litigation and administrative proceedings in which Nikon alleges
ASMLs infringement of Nikon patents relating to photolithography. Pursuant to agreements executed
on December 10, 2004 (effective F-25




---



##### Table of Contents



November 12, 2004), ASML and Nikon settled these claims as discussed below. ASML also faces
exposure from other actual or potential claims and legal proceedings. In addition, ASML customers may be subject to claims of infringement from third parties alleging
that the ASML equipment used by those customers in the manufacture of semiconductor products,
and/or the methods relating to use of the ASML equipment, infringes one or more patents issued to
those third parties. If these claims were successful, ASML could be required to indemnify such
customers for some or all of any losses incurred or damages assessed against them as a result of
that infringement. The Company accrues for legal costs related to litigation in its statement of operations at the
time when the related legal services are actually provided to ASML. Patent litigation with Nikon From 2001 through late 2004, ASML was 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, and is obligated to make additional payments to Nikon of US$ 9 million in 2005, 2006 and
2007. Zeiss made an initial payment to Nikon of US$ 40 million (approximately EUR 32 million) in
2004, and is required to make additional payments to Nikon of US$ 6 million in 2005, 2006 and 2007. Ultratech case U.S. In May 2000, Ultratech Stepper, Inc. (Ultratech) filed a lawsuit against ASML that is proceeding
in the United States District Court for the Northern District of California. Ultratech alleges that
ASML is infringing Ultratechs rights under a United States patent in connection with its
manufacture and commercialization in the U.S. of advanced photolithography equipment embodying
technology that, in particular, is used in Step & Scan equipment. Ultratechs complaint seeks
injunctive relief prohibiting future sales and damages for past sales of this equipment. Ultratech
may also seek prejudgment interest. Ultratechs complaint also seeks enhanced damages based on
alleged willful infringement. If the jury finds that ASML willfully infringed the patent, the court
has the discretion to award three times the damages.
In August 2002, the Court granted ASMLs motion for summary judgment of non-infringement, following
which Ultratech appealed this judgment to the United States Court of Appeals for the Federal
Circuit. On March 30, 2004, the Federal Circuit reversed the District Courts grant of summary
judgment and remanded the case to the District Court for determination of infringement under the
Federal Circuits new construction of one of the terms of the asserted patent. As a result of the Federal Circuits new construction, ASML is seeking additional discovery from
Ultratech, with trial scheduled for May 2005. ASML believes it has meritorious defenses to
Ultratechs claims, including that ASML does not infringe Ultratechs patent, and that the patent
is invalid, and will vigorously defend itself against these claims. In the event a final
non-appealable decision were to be rendered that was adverse to ASML, it could result in a damages
award and substantially restrict or prohibit ASMLs sales in the United States, which in turn could
have a material adverse effect on the Companys financial position and results of operations. Other Contingencies ASML has research and development agreements with the government of the Netherlands, Ministry of
Economic Affairs. In previous years, credits were received for research and development projects
relating to new generations of semiconductor lithography systems. The agreements required that the
majority of the amounts received were to be repaid, with interest, to the extent that product sales
occurred that related to the research. The amount of the repayment due was based on a percentage of
the selling price of the product and was charged to cost of sales when such a sale was recorded.
As of December 31, 2004, ASML had no contingent obligations to repay such credits received in
previous years. 15. Research and development credits ASML receives subsidies and credits for research and development from various sources as follows: As of December 31
    
    2002
    
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EUR
    
    
    EURNetherlands government technology subsidy
    
    
    25,981
    
    
    
    19,119
    
    
    
    20,532European community and other subsidies
    
    
    34
    
    
    
    0
    
    
    
    400Non-European subsidies
    
    
    0
    
    
    
    0
    
    
    
    1,029Total subsidies and credits received
    
    
    26,015
    
    
    
    19,119
    
    
    
    21,961
 F-26




---



##### Table of Contents



16. Income taxes Income tax expense (benefit) from continuing and discontinued operations is set forth below: Year ended December 31
    
    2002
    
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EUR
    
    
    EURIncome tax expense (benefit) from continuing operations
    
    
    (42,779
    )
    
    
    (59,675
    )
    
    
    127,380Income tax expense (benefit) from discontinued operations
    
    
    (63,846
    )
    
    
    (23,316
    )
    
    
    0Total income tax expense (benefit)
    
    
    (106,625
    )
    
    
    (82,991
    )
    
    
    127,380
 The amounts below include tax effects that arose from the Companys discontinued operations but
that reside and will remain with ASML group companies on a continuing basis. The components of income before income taxes are as follows: Year ended December 31
    
    2002
    
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EUR
    
    
    EURDomestic
    
    
    (206,001
    )
    
    
    (288,370
    )
    
    
    216,790Foreign
    
    
    (108,447
    )
    
    
    45,163
    
    
    
    146,050Total
    
    
    (314,448
    )
    
    
    (243,207
    )
    
    
    362,840
 The Netherlands domestic statutory tax rate is 34.5 percent. At the end of 2004, the Netherlands
Government has enacted a tax rate reduction. As a result of this law change the Netherlands
statutory tax rate will be reduced in steps to 30% through 2007. This led to a remeasurement of the
Companys deferred tax assets and liabilities, resulting in a one time increase in the tax charge
of EUR 15 million in 2004. 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
    
    2002
    
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EUR
    
    
    EURIncome tax expense based on domestic rate1
    
    
    (108,485
    )
    
    
    (83,906
    )
    
    
    125,180Change in statutory tax rate
    
    
    0
    
    
    
    0
    
    
    
    14,544Different tax rates
    
    
    12,362
    
    
    
    (6,568
    )
    
    
    (24,477
    )Other credits and non-taxable items 2
    
    
    (10,502
    )
    
    
    7,483
    
    
    
    12,133Provision for income taxes shown
in the statement of operations
    
    
    (106,625
    )
    
    
    (82,991
    )
    
    
    127,380
   1
 2
 ASMLs provision for income taxes consists of the following: Year ended December 31
    
    2002
    
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EUR
    
    
    EURCurrentDomestic
    
    
    26
    
    
    
    2,307
    
    
    
    1,318Foreign
    
    
    5,668
    
    
    
    17,094
    
    
    
    6,375DeferredDomestic
    
    
    (46,020
    )
    
    
    (99,426
    )
    
    
    96,053Foreign
    
    
    (66,299
    )
    
    
    (2,966
    )
    
    
    23,634Total
    
    
    (106,625
    )
    
    
    (82,991
    )
    
    
    127,380
 F-27




---



##### Table of Contents



Deferred tax assets (liabilities) consist of the following: As of December 31
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EURTax effect carry-forward losses
    
    
    294,534
    
    
    
    184,448Inventories
    
    
    49,961
    
    
    
    22,830Temporary depreciation investments
    
    
    (152,745
    )
    
    
    (133,262
    )Other temporary differences
    
    
    11,185
    
    
    
    (20,411
    )Total
    
    
    202,935
    
    
    
    53,605
 The main components of the deferred tax asset related to inventories are tax on eliminated
intercompany profit in inventories (EUR 20.1 million), temporary differences on timing of inventory
provisions (EUR 26.9 million) and temporary differences on inventory valuation (EUR (24.2)
million). Temporary differences on timing of inventory provisions result from tax laws that defer deduction
for an inventory provision until the moment the related inventory is actually disposed of or
scrapped, rather than when the provision is recorded for accounting purposes. Temporary differences
on inventory valuation result from tax laws that allow the allocation of direct cost rather than
full cost to work-in-progress and finished product inventories, while these indirect costs are
currently tax deductible. Deferred tax assets (liabilities) are classified in the consolidated financial statements as
follows: As of December 31
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EURDeferred tax assets  current
    
    
    49,590
    
    
    
    54,554Deferred tax assets  non-current
    
    
    325,271
    
    
    
    201,100Deferred tax liabilities  current
    
    
    (2,285
    )
    
    
    (1,332
    )Deferred tax liabilities  non-current
    
    
    (169,641
    )
    
    
    (200,717
    )Total
    
    
    202,935
    
    
    
    53,605
 Deferred tax assets result predominantly from net operating loss carry-forwards incurred mainly in
the U.S. and the Netherlands. Net operating losses qualified as tax losses under Dutch tax laws
incurred by Netherlands group companies can in general be offset for an indefinite period against
future taxable profits. Net operating losses qualified as tax losses under U.S. federal tax laws
incurred by U.S. group companies can in general be offset against future profits realized in the 20
years following the year in which the losses are incurred. The Companys ability to carry forward
its U.S. federal tax losses in existence at December 31, 2004 will expire in the period 2021
through 2023. Net operating losses qualified as tax losses under U.S. state tax laws incurred by
U.S. group companies can in general be offset against future profits realized in the 5 to 20 years
following the year in which the losses are incurred. The period of net operating loss carry forward
for U.S. state tax purposes depends on the state in which the tax loss arose. The Companys ability
to carry forward U.S. state tax losses in existence at December 31, 2004 will expire in the period
2006 through 2023. The total amount of losses carried forward as of December 31, 2004 is EUR 577
million. Based on its analysis, management believes that it is more likely than not that all U.S.
qualified tax losses will be offset by future taxable income before the Companys ability to
utilize those losses expires. This analysis takes into account the Companys projected future
taxable income from operations, possible tax planning alternatives available to the Company, and a
realignment of group assets that the Company effected during the period 2001 through 2003 and that
included the transfer of certain tangible and intangible assets of ASML US Inc. to ASML Netherlands
BV. The value of the assets transferred resulted in an additional income stream to ASML US, Inc.,
which the Companys management believes 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 ASML
requested a bilateral advance pricing agreement (APA) from the US and Netherlands tax
authorities. Since December 2002, ASMLs management has held numerous meetings with representatives
of those authorities. In December 2004, the U.S. and Netherlands tax authorities formally met to
review ASMLs APA submission. Based on these meetings, and feedback from both these authorities,
ASML is confident that ASMLs APA request will be successful. Although the Company remains
optimistic that the APA will be completed in the course of calendar year 2005, the specific timing
remains in the control of those tax authorities. Pursuant to Netherlands tax laws, ASML has temporarily depreciated part of its investment in its
U.S. group companies. This depreciation has been deducted from the taxable base in The Netherlands.
The depreciation 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, 2004, the remaining net tax effect of this repayment obligation, amounted to EUR
133 million, is recorded as a long-term deferred tax liability in the Companys financial
statements. F-28




---



##### Table of Contents



17. Segment disclosure Segment information has been prepared in accordance with SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. The Company has only one reporting segment in continuing operations: lithography. ASML markets and
sells its products in the United States, Europe and Asia principally through its direct sales
organization. ASML makes all its sales into the United States through its U.S. subsidiary and its
sales into Asia primarily through its Hong Kong subsidiary. The following table summarizes net sales, operating income and identifiable assets of ASMLs
operations in Asia, Europe and the United States, the significant geographic areas in which ASML
operates. Asia
    
    
    Europe
    
    
    United States
    
    
    Eliminations
    
    
    Consolidated(in thousands)
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EUR
    
    
    EUR2002Net sales to
unaffiliated customers
    
    
    1,066,476
    
    
    
    190,196
    
    
    
    702,000
    
    
    
    0
    
    
    
    1,958,672Inter-company sales
    
    
    0
    
    
    
    1,580,790
    
    
    
    27,971
    
    
    
    (1,608,761
    )
    
    
    0Total
net sales
    
    
    1,066,476
    
    
    
    1,770,986
    
    
    
    729,971
    
    
    
    (1,608,761
    )
    
    
    1,958,672Operating income (loss)
    
    
    5,569
    
    
    
    (84,460
    )
    
    
    30,392
    
    
    
    (45,544
    )
    
    
    (94,043
    )Identifiable assets
    
    
    438,976
    
    
    
    2,996,019
    
    
    
    630,824
    
    
    
    (884,295
    )
    
    
    3,181,524 2003Net sales to
unaffiliated customers
    
    
    762,384
    
    
    
    220,190
    
    
    
    560,163
    
    
    
    0
    
    
    
    1,542,737Inter-company sales
    
    
    26,897
    
    
    
    1,212,740
    
    
    
    54,331
    
    
    
    (1,293,968
    )
    
    
    0Total net sales
    
    
    789,281
    
    
    
    1,432,930
    
    
    
    614,494
    
    
    
    (1,293,968
    )
    
    
    1,542,737Operating income (loss)
    
    
    5,038
    
    
    
    (224,608
    )
    
    
    95,404
    
    
    
    (30,866
    )
    
    
    (155,032
    )Identifiable assets1
    
    
    611,477
    
    
    
    2,596,866
    
    
    
    526,307
    
    
    
    (885,965
    )
    
    
    2,848,685 2004Net sales to
unaffiliated customers
    
    
    1,664,916
    
    
    
    304,051
    
    
    
    496,410
    
    
    
    0
    
    
    
    2,465,377Inter-company sales
    
    
    17,053
    
    
    
    1,893,013
    
    
    
    149,237
    
    
    
    (2,059,303
    )
    
    
    0Total net sales
    
    
    1,681,969
    
    
    
    2,197,064
    
    
    
    645,647
    
    
    
    (2,059,303
    )
    
    
    2,465,377Operating income (loss)
    
    
    83,575
    
    
    
    236,505
    
    
    
    61,503
    
    
    
    (2,670
    )
    
    
    378,913Identifiable assets2
    
    
    697,605
    
    
    
    2,883,129
    
    
    
    455,674
    
    
    
    (827,155
    )
    
    
    3,209,253
   1
 2
 Assets, liabilities and capital expenditures by geographical area are not evaluated by
executive management and are not used for the purpose of making decisions about allocating
resources to the segment or assessing its performance. In 2004, sales to one customer accounted for EUR 434 million or 18 percent of net sales. In 2003,
sales to one customer accounted for EUR 314 million, or 20 percent of net sales. In 2002, sales to
one customer accounted for EUR 377 million or 19 percent of net sales. ASMLs three largest
customers accounted for 38 percent of accounts receivable at December 31, 2004, compared to 44
percent at December 31, 2003. 18. Board of Management and Supervisory Board remuneration Board of Management The remuneration of the members of the Board of Management is determined by the Supervisory Board
on the advice of the Remuneration Committee of the Supervisory Board. This remuneration policy has
been approved by the General Meeting of Shareholders of March 18, 2004. The remuneration policy is
such that ASML will continue to attract, reward and retain qualified and seasoned industry
professionals in an international labor market. The remuneration structure and levels will be
determined by referencing to the appropriate local top executive pay market practices by
benchmarking positions on the basis of job responsibilities. The total remuneration consists of base salary, a
short-term performance cash bonus and performance stock options, long-term performance stock and
benefits. The members of the Board of Management employed by the Company at the time of adoption
of the new remuneration policy on March 18, 2004 were given the opportunity to opt for either the
new package under the new policy or to retain their old package including the same base salary as
under the new policy. All members of the Board of Management employed with the Company at that
time, F-29




---



##### Table of Contents



being Mr. Dunn,
Mr. Wennink, Mr. Van den Brink, Mr. McIntosh and Mr. Chavoustie, chose the
latter. Base salary, short-term performance cash bonus The remuneration in euros of the members of the Board of Management was as follows: 2002
    
    
    2003
    
    
    2004Year ended December 31
    
    EUR
    
    
    EUR
    
    
    EURSalaries
    
    
    2,016,000
    
    
    
    1,912,966
    
    
    
    2,176,085Bonuses1
    
    
    0
    
    
    
    1,052,131
    
    
    
    1,305,651Pension cost
    
    
    263,000
    
    
    
    212,058
    
    
    
    486,045Other benefits2
    
    
    165,135
    
    
    
    189,873
    
    
    
    827,574Total
    
    
    2,444,135
    
    
    
    3,367,028
    
    
    
    4,795,355
   1
 2
 The 2004 remuneration in euros of the individual members of the Board of Management was as
follows: Base
    
    
    Cash1
    
    
    OtherSalary
    
    
    Bonus
    
    
    benefits2
    
    
    TotalEUR
    
    
    EUR
    
    
    EUR
    
    
    EURD.J. Dunn3
    
    
    631,300
    5
    
    
    378,780
    
    
    
    42,090
    
    
    
    1,052,170E. Meurice4
    
    
    150,000
    
    
    
    90,000
    
    
    
    45,793
    
    
    
    285,793P.T.F.M. Wennink
    
    
    321,000
    5
    
    
    192,600
    
    
    
    37,509
    
    
    
    551,109M.A. van den Brink
    
    
    401,250
    5
    
    
    240,750
    
    
    
    40,122
    
    
    
    682,122S.K. McIntosh
    
    
    379,850
    5
    
    
    227,910
    
    

    
    630,990
    6
    
    
    1,238,750D.P. Chavoustie7
    
    
    292,685
    
    
    
    175,611
    
    
    
    31,070
    
    
    
    499,366
   1
 2
 3
 4
 5
 6
 7
 On October 12, 2004, the Company entered into an agreement with Mr. McIntosh in connection
with his retirement from the Board of Management. Pursuant to the agreement, as amended, Mr.
McIntosh retired from the Board of Management effective January 3, 2005, and from employment by
ASML effective April 30, 2005. In accordance with the terms of the agreement, Mr. McIntosh is
entitled to payments totalling EUR 589,845, which is equal to the
amount he would have
received during the remaining term of his employment agreement. These payments have been provided
for in ASMLs statement of operations for the year ended December 31, 2004. ASML has an annual short-term performance bonus plan for the Board of Management. Under this plan,
the annual performance bonus will range between 0% and 50% of base salary, under the new
remuneration policy as adapted by the AGM on March 18, 2004. Under the old remuneration policy the
percentages range between 0% and 60%. Under these plans the ultimate bonus amount is dependent on
the actual achievement of corporate targets. These targets are market share and financial and
operation performance parameters relating to return on invested capital parameters. The 2004 vested pension benefit1(in euro) of individual members of the Board of
Management was as follows: D.J. Dunn
    
    
    91,130E. Meurice
    
    
    15,452P.T.F.M. Wennink
    
    
    32,512M.A. van den Brink
    
    
    40,938S.K. McIntosh
    
    
    54,167D.P. Chavoustie 2, 3
    
    
    251,846
   1
 2
 F-30




---



##### Table of Contents



3
 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: ShareGranted
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    price onduring
    
    
    during
    
    
    Dec. 31,
    
    
    Exercise
    
    
    exercise
    
    
    Expiration01-Jan-04
    
    
    2004
    
    
    2004
    
    
    2004
    
    
    price
    
    
    date
    
    
    dateD.J. Dunn
    
    
    600,000
    
    
    
    
    
    
    
    
    
    
    
    600,000
    
    
    
    17.51
    
    
    
    
    
    
    
    01-04-200567,500
    
    
    
    
    
    
    
    
    
    
    
    67,500
    
    
    
    58.00
    
    
    
    
    
    
    
    20-01-201230,000
    
    
    
    
    
    
    
    
    
    
    
    30,000
    
    
    
    40.40
    
    
    
    
    
    
    
    22-01-200730,000
    
    
    
    
    
    
    
    
    
    
    
    30,000
    
    
    
    20.28
    
    
    
    
    
    
    
    21-01-200830,000
    
    
    
    
    
    
    
    
    
    
    
    30,000
    
    
    
    7.02
    
    
    
    
    
    
    
    22-04-201330,000
    
    
    
    
    
    
    
    30,000
    
    
    
    14.23
    
    
    
    
    
    
    
    23-04-2014P.T.F.M. Wennink
    
    
    30,000
    
    
    
    
    
    
    
    30,000
    
    
    
    0
    
    
    
    11.05
    
    
    
    11.83
    
    
    
    01-01-200531,500
    
    
    
    
    
    
    
    
    
    
    
    31,500
    
    

    
    58.00
    
    
    
    
    
    
    
    20-01-201215,660
    
    
    
    
    
    
    
    
    
    
    
    15,660
    
    
    
    40.40
    
    
    
    
    
    
    
    22-01-200750,000
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    29.92
    
    
    
    
    
    
    
    22-01-200720,960
    
    
    
    
    
    
    
    
    
    
    
    20,960
    
    
    
    22.12
    
    
    
    
    
    
    
    20-07-200720,000
    
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    20.28
    
    
    
    
    
    
    
    21-01-200820,000
    
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    7.02
    
    
    
    
    
    
    
    22-04-201320,000
    
    
    
    
    
    
    
    20,000
    
    
    
    14.23
    
    
    
    
    
    
    
    23-04-2014M.A. van den Brink
    
    
    21,600
    
    
    
    
    
    
    
    21,600
    
    
    
    0
    
    
    
    14.87
    
    
    
    17.02
    
    
    
    21-01-200531,500
    
    
    
    
    
    
    
    
    
    
    
    31,500
    
    
    
    58.00
    
    
    
    
    
    
    
    20-01-201219,860
    
    
    
    
    
    
    
    
    
    
    
    19,860
    
    
    
    40.40
    
    
    
    
    
    
    
    22-01-200726,560
    
    
    
    
    
    
    
    
    
    
    
    26,560
    
    
    
    22.12
    
    
    
    
    
    
    
    20-07-200720,000
    
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    20.28
    
    
    
    
    
    
    
    21-01-200820,000
    
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    7.02
    
    
    
    
    
    
    
    22-04-201320,000
    
    
    
    
    
    
    
    20,000
    
    
    
    14.23
    
    
    
    
    
    
    
    23-04-2014D.P. Chavoustie
    
    
    60,000
    
    
    
    
    
    
    
    
    
    
    
    60,000
    
    
    
    15.24
    
    
    
    
    
    
    
    20-10-200530,000
    
    
    
    
    
    
    
    
    
    
    
    30,000
    
    
    
    10.42
    
    
    
    
    
    
    
    20-10-200546,800
    
    
    
    
    
    
    
    
    
    
    
    46,800
    
    
    
    14.87
    
    
    
    
    
    
    
    20-10-200567,500
    
    
    
    
    
    
    
    
    
    
    
    67,500
    
    
    
    56.48
    
    
    
    
    
    
    
    20-01-201225,500
    
    
    
    
    
    
    
    
    
    
    
    25,500
    
    
    
    29.92
    
    
    
    
    
    
    
    22-01-200730,240
    
    
    
    
    
    
    
    
    
    
    
    30,240
    
    
    
    22.12
    
    
    
    
    
    
    
    20-07-200720,000
    
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    20.28
    
    
    
    
    
    
    
    21-01-200820,000
    
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    7.02
    
    
    
    
    
    
    
    22-04-201320,000
    
    
    
    
    
    
    
    20,000
    
    
    
    14.23
    
    
    
    
    
    
    
    23-04-2014S.K. McIntosh
    
    
    21,000
    
    
    
    
    
    
    
    
    
    
    
    21,000
    
    
    
    40.40
    
    
    
    
    
    
    
    22-01-2007250,000
    
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    29.92
    
    
    
    
    
    
    
    22-01-200728,080
    
    
    
    
    
    
    
    
    
    
    
    28,080
    
    
    
    22.12
    
    
    
    
    
    
    
    20-07-200720,000
    
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    20.28
    
    
    
    
    
    
    
    21-01-200820,000
    
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    7.02
    
    
    
    
    
    
    
    22-04-201320,000
    
    
    
    
    
    
    
    20,000
    
    
    
    14.23
    
    
    
    
    
    
    
    23-04-2014E. Meurice
    
    
    
    
    
    
    125,000
    
    
    
    
    
    
    
    125,000
    
    
    
    10.62
    
    
    
    
    
    
    
    15-10-2014
 Certain members of ASMLs 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. F-31




---



##### Table of Contents



Performance Stock Mr. Meurice received a conditional award of performance stock with a maximum value equal to Euro
37,500. The maximum number of performance stock that will be awarded
to Mr. Meurice under the conditions set forth
in the remuneration policy is 6,049 shares. Supervisory Board The annual remuneration for Supervisory Board members covers the period from one annual General
Meeting of Shareholders to the next one. This annual remuneration is paid out over the past period
after the annual General Meeting of Shareholders. 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. During 2003 and 2004, ASML paid out the following amounts to the individual members of the
Supervisory Board (in euros): 2003
    
    
    2004Year ended December 31
    
    EUR
    
    
    EURH. Bodt
    
    
    40,000
    
    
    
    60,000P.H. Grassmann
    
    
    25,000
    
    
    
    25,000S. Bergsma1
    
    
    25,000
    
    
    
    45,000J.A. Dekker
    
    
    25,000
    
    
    
    35,000M.J. Attardo2
    
    
    25,000
    
    
    
    35,000J.W.B. Westerburgen
    
    
    25,000
    
    
    
    35,000
   1
 2
 In the first half of 2005, ASML expects to pay the following amounts to the individual
members of the Supervisory Board (in euro): H. Bodt
    
    
    70,000P.H. Grassmann
    
    
    25,000S. Bergsma1
    
    
    0J.A. Dekker
    
    
    45,000M.J. Attardo
    
    
    35,000J.W.B. Westerburgen
    
    
    45,000F. Fröhlich2
    
    
    35,000A. van der Poel2
    
    
    25,000
   1
 2
 Members of the Board of Management and Supervisory Board are free to acquire or dispose of
ASML shares or options for their own account, provided they comply with the ASML Insider Trading
Rules 2002. 19. Selected operating expenses and additional information Personnel expenses for all employees were: Year ended December 31
    
    2002
    
    
    2003
    
    
    2004(in thousands)
    
    EUR
    
    
    EUR
    
    
    EURWages and salaries
    
    
    371,281
    
    
    
    326,678
    
    
    
    345,026Social security expenses
    
    
    31,897
    
    
    
    24,640
    
    
    
    24,517Pension and retirement expenses
    
    
    22,324
    
    
    
    23,150
    
    
    
    25,850Total
    
    
    425,502
    
    
    
    374,468
    
    
    
    395,393
 The average number of employees from continuing operations during 2002, 2003 and 2004 was 5,640,
5,323 and 5,038, respectively (excluding non-payroll employees). The total number of personnel
employed per sector was: F-32




---



##### Table of Contents



As of December 31
    
    2002
    
    
    2003
    
    
    2004Marketing & Technology
    
    
    1,708
    
    
    
    1,507
    
    
    
    1,401Goodsflow
    
    
    1,416
    
    
    
    1,184
    
    
    
    1,207Customer Support
    
    
    2,090
    
    
    
    1,717
    
    
    
    1,818General
    
    
    588
    
    
    
    518
    
    
    
    509Sales
    
    
    169
    
    
    
    133
    
    
    
    136Total continuing operations
    
    
    5,971
    
    
    
    5,059
    
    
    
    5,071Total discontinued operations
    
    
    712
    
    
    
    119
    1
    
    
    0Total number of employees
(including non-payroll employees)
    
    
    6,683
    
    
    
    5,178
    
    
    
    5,071
   1
 In 2002, 2003 and 2004, a total of 2,857, 2,649 and 2,584 employees in the Companys
continuing operations (excluding non-payroll employees), respectively, were employed in the
Netherlands. 20. Vulnerability due to certain concentrations ASML relies on outside vendors to manufacture the components and subassemblies used in its systems,
each of which is obtained from a sole supplier or a limited number of suppliers. ASMLs reliance on
a limited group of suppliers involves several risks, including a potential inability to obtain an
adequate supply of required components and reduced control over pricing and timely delivery of
these subassemblies and components. In particular, the number of systems ASML has been able to
produce has occasionally been limited by the production capacity of Zeiss. Zeiss is currently
ASMLs sole external supplier of lenses and other critical optical components and is capable of
producing these lenses only in limited numbers and only through the use of its manufacturing and
testing facility in Oberkochen and Wetzlar, Germany. ASML sells a substantial number of lithography
systems to a limited number of customers.
In 2004, sales to one customer accounted for EUR 434 million or 18 percent of net sales. In 2003,
sales to one customer accounted for EUR 314 million, or 20 percent of net sales. As a result of the
limited number of customers, credit risk on receivables is concentrated. ASMLs three largest
customers accounted for 38 percent of accounts receivable at December 31, 2004, compared to 44
percent at December 31, 2003. Business failure of one of ASMLs main customers may result in
adverse effects on its business, financial condition and results of operations. 21. Capital stock 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 and the Meeting of Priority Shareholders. 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 Bijlage X
bij het Fondsenreglement van 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. Priority shares The priority shares are held by the Stichting Prioriteitsaandelen ASML Holding N.V. (the
Priority Foundation), a foundation having a self-elected board that must consist solely of
members of the Companys Supervisory Board and Board of Management. F-33




---



##### Table of Contents



As of December 31, 2004, the board members of the Priority Foundation were:  
    Eric Meurice
    Henk Bodt
    Jos W.B. Westerburgen
    Jan A. Dekker
    Peter T.F.M. Wennink An overview of the other positions held by above persons can be obtained at the Companys office.
In the joint opinion of the Company and the foregoing members of the board of the Priority
Foundation, the composition of the board conforms with Appendix X, Article C.10 of the Listing and
Issuing Rules of the Euronext Amsterdam. Article C10 states that the issuer shall ensure that not more than half of
the priority shares are being held by managing directors of the issuer or, where the priority
shares are held by a legal entity, that no more than half of the number of votes to be exercised in
meetings of the foundation in which decisions are made about the exercise of the voting rights of
the priority shares, can be exercised, directly or indirectly, by persons who are also managing
directors of the issuer. The priority shares are not entitled to dividends but have a preferred right over all other
outstanding preferred and ordinary shares on the return of their nominal value in the case of
winding up the Company. Holders of priority shares are required to approve certain significant
corporate decisions and transactions of the Company. These decisions and transactions encompass,
but are not limited to, amendment of the Articles of Association, winding up of the Company,
issuance of shares, limitation of pre-emptive rights and repurchase and cancellation of shares. Veldhoven, the Netherlands
January 28, 2005 /s/ Eric Meurice,
Chief Executive Officer /s/Peter T.F.M. Wennink,
Chief Financial Officer F-34




---



##### Table of Contents



Report of Independent Registered Accounting Firm To
the Supervisory Board and Board of Management 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, 2003 and 2004, and the related
consolidated statements of operations, comprehensive income, shareholders equity and cash flows
(as restated) for each of the three years in the period ended December 31, 2004 (all expressed in euros). These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (PCAOB). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2003 and 2004, and the results of its
operations, comprehensive income and its cash flows (as restated) for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted in the United States
of America. (DELOITTE ACCOUNTANTS B.V. SIG) Eindhoven, The
NetherlandsJanuary 28, 2005 F-35




---



##### Table of Contents



Exhibit Index Exhibit No.
    
    Description1
    
    Articles of Association of ASML Holding N.V. (English translation)
(Incorporated by reference to Amendment No. 7 to the Registrants Registration
Statement on Form 8-A/A, filed with the Commission on June 10, 2004 (File No.
0-25566))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 5.75 percent Convertible
Subordinated Notes due 2006 (Incorporated by reference to the
Registrants Annual Report on Form 20-F for the year ended
December 31, 2001)2.2
    
    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 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 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
    
    Employee Agreement between ASML Holding N.V. and Eric Meurice*4.6
    
    Employee Agreement between ASML Holding N.V. and Stuart K. McIntosh
(Incorporated by reference to the Registrants Annual Report on Form 20-F for the
year ended December 31, 2003)4.7
    
    Employee Agreement between ASML Holding N.V. and David P. Chavoustie
(Incorporated by reference to the Registrants Annual Report on Form 20-F for the
year ended December 31, 2003)4.8
    
    Form of Employee Agreement for members of the Board of Management
(Incorporated by reference to the Registrants Annual Report on Form 20-F for the
year ended December 31, 2003)4.9
    
    ASML New Hires and Incentive Stock Option Plan For Management (Version
2003) (Incorporated by reference to the Registrants Statement on
Form S-8, filed with the Commission on September 2, 2003
(File No. 333-109154))4.10
    
    Nikon-ASML Patent Cross License
Agreement, dated December 10, 2004, between ASML Holding N.V. and
Nikon Corporation*#4.11
    
    ASML/Zeiss Sublicense Agreement,
dated December 10, 2004, between Carl Zeiss SMT AG and ASML
Holding N.V.*#4.12
    
    Agreement, dated October 12,
2004, between ASML Holding N.V. and Stuart
K. McIntosh*4.13
    
    ASML Incentive and New Hire Option Plan for Board of Management (Incorporated by reference to the Registrants Registration Statement on
Form S-8, filed with the Commission on June 9, 2004 (File No. 333-116337))8.1
    
    List of 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 herewith # Certain information omitted pursuant to a request for confidential treatment filed separately
with the Securities and Exchange Commission