**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-K**

 

| **(Mark One)**                                                                                                                                       |
|------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                           |   | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                 |   |   |
| **For the Fiscal Year Ended December 31, 2003**                                                                                                 |
|                                                                                                                                                 |
| **OR**                                                                                                                                               |
|                                                                                                                                                 |   |   |
| **o**                                                                                                                                                |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                 |   |   |
| **FOR THE TRANSITION PERIOD FROM                      TO** |

 

**Commission File Number 0-21321**

 

**CYMER, INC.**

(Exact name of registrantas specified in its charter)

 

| **Nevada**                                                                           |   | **33-0175463**                        |
|--------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                      |   | (I.R.S. Employer  Identification No.) |
|                                                                                 |   |                                  |
| **17075 Thornmint Court, San Diego, CA**                                             |   | **92127**                             |
| (Address of principal executive offices)                                             |   | (Zip Code)                            |
|                                                                                 |
| Registrant’s  telephone number including area code: **(858)  385-7300**         |
|                                                                                 |
| Securities  registered pursuant to Section 12(b) of the Act: **None**                |
|                                                                                 |
| Securities  registered pursuant to Section 12(g) of the Act:                         |
|                                                                                 |
| **Common Stock, $.001 par value  Preferred Share Purchase Rights**  (Title of class) |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes  ý  No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be containedto the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K.  o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Act).Yes  ý   No  o

 

The aggregate market value of the voting stock heldby non-affiliates of the registrant, based upon the closing price of $32.07 forshares of the registrant’s Common Stock on June 30, 2003 as reported on theNasdaq National Market, was approximately $1,106,405,764.  In calculating such aggregate market value, shares of Common Stock ownedof record or beneficially by officers or directors, and persons known to theregistrant to own more than ten percent of the registrant’s voting securitieswere excluded because such persons may be deemed to be affiliates.  The registrant disclaims the existence ofcontrol or any admission thereof for any other purpose.

 

Number of shares of Common Stock outstanding as of March 3,2004:  36,655,892.

 

DOCUMENTS INCORPORATED BY REFERENCE

The following document is incorporated by reference in Part III of thisAnnual Report on Form 10-K: portions of registrant’s proxy statement for itsannual meeting of stockholders to be held on May 20, 2004.

 

 

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CYMER, INC.

 

2003 Annual Report on Form 10-K

 

TABLE OF CONTENTS

 
| PART I   |       |
|----------|------------|
|     | Item 1.    | Business |   |
|     | Item 2.    | Properties |   |
|     | Item 3.    | Legal Proceedings |   |
|     | Item  4.   | Submission  of Matters to a Vote of Security Holders |   |
|     |       |   |   |
| PART II  |       |
|     | Item  5.   | Market  for Registrant’s Common Stock and Related Stockholder Matters |   |
|     | Item 6.    | Selected Financial  Data |   |
|     | Item  7.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|     | Item  7A.  | Quantitative  and Qualitative Disclosures About Market Risk |   |
|     | Item  8.   | Financial  Statements and Supplementary Data |   |
|     | Item  9.   | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure |   |
|     | Item 9A.   | Controls and  Procedures |   |
|     |       |   |   |
| PART III |       |
|     | Item  10.  | Directors  and Executive Officers of the Registrant |   |
|     | Item 11.   | Executive Compensation |   |
|     | Item  12.  | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters |   |
|     | Item  13.  | Certain  Relationships and Related Transactions |   |
|     | Item  14.  | Principal  Accounting Fees and Services |   |
|     |       |   |   |
| PART IV  |       |
|     | Item 15.   | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K |   |
|     |       |   |   |
|     | Signatures |   |

 

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**Forward-LookingStatements**

 

Statements in this annual report on Form 10-K thatare not strictly historical in nature are forward-looking statements. Thesestatements include, but are not limited to, references to manufacturingactivities; expected domestic and international product sales and development;service and support; research and development activities and expenditures;adequacy of capital resources and investments; effects of business cycles inthe semiconductor business; competitive positioning; and relationships withthird-party manufacturers for product manufacturing, and may contain words suchas “believes,” “anticipates,” “expects,” and words of similar meaning. Thesestatements are only predictions based on current information and expectationsand involve a number of risks and uncertainties. The underlying information andexpectations are likely to change over time. Actual events or results may differ materially from those projected inthe forward-looking statements due to various factors, including, but notlimited to, those set forth under the caption “Risks and Uncertainties That MayAffect Results”  and elsewhere in thisannual report on Form 10-K.

 

PART I

 

**Item 1.  Business**

 

**Overview**

 

Cymer is the world’s leading supplier of excimer lightsources, the essential light source for deep ultraviolet, (“DUV”),photolithography systems. DUV photolithography is a key enabling technologythat has allowed the semiconductor industry to meet the exacting specificationsand manufacturing requirements for volume production of today’s most advancedsemiconductor chips. Cymer’s light source systems are incorporated intostep-and-repeat (“steppers”) and step-and-scan (“scanners”) photolithographysystems for use in the manufacture of semiconductors with critical featuresizes below 0.35 microns.  One micron equalsone millionth of a meter.  Cymer’sexcimer light source systems constitute a substantial majority of all excimerlight sources incorporated in DUV photolithography tools. Cymer’s productsconsist of photolithography light source systems, replacement parts andservice.  Cymer maintains a worldwideservice organization that supports its installed base of light sources.  As of December 31, 2003, this installed basetotaled 2,217 light sources.  Cymer’scustomers include all three manufacturers of DUV photolithography systems:  ASM Lithography, Canon and Nikon.  Photolithography systems incorporatingCymer’s excimer light sources have been purchased by each of the world’s 20largest semiconductor manufacturers: Fujitsu, Hynix, IBM, Infineon, Intel,Matsushita, Micron, Motorola, NEC, Qualcomm, Renesas Technology, Rohm, Philips,Samsung, Sanyo, Sharp, Sony, ST Microelectronics, Texas Instruments, andToshiba.

 

**Other Information**

 

Cymer is a Nevada corporation, incorporated on July 12,1996. Cymer was originally incorporated in California in 1986 andreincorporated in Nevada in 1996.

 

Cymer’s website address is http://www.cymer.com.  Cymer’s filings with the Securities andExchange Commission (“SEC”) including its Annual Report on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K and any amendments to thosereports are available free of charge through Cymer’s website as soon asreasonably practicable after being filed with or furnished to the SEC.

 

**Productsand Services**

 

Cymer’s products primarily consist of photolithography light sourcesystems, replacement parts and service.

 

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*Photolithography Light Sources*

 

Cymer’s photolithography light sources produce narrow bandwidth pulsesof short wavelength light within the DUV spectrum. The three DUV wavelengthsare measured in nanometers (“nm”).  Onenanometer equals one billionth of a meter. The light sources are referred to according to the gases mixed to producethe light or by the wavelength.  KryptonFluoride (“KrF”) gases produce 248nm light, Argon Fluoride (“ArF”) gases 193nmlight, and Fluorine (“F2”) gas 157nm light. The light sources permit very finefeature resolution for imaging the circuitry on the wafer and high throughputin wafer processing.  Cymer has designedits light sources to be highly reliable, easy to install and compatible withexisting semiconductor manufacturing processes.  Cymer’s light sources are used to pattern the integratedcircuits, which are also called semiconductors or “chips”, that power many oftoday’s advanced consumer and business electronics. In 2003, Cymer sold 163light source systems at an average selling price of $983,000.

 

***248nm KrF LightSources***

 

**ELS-7010******–The ELS-7010, 4 kilohertz (“kHz”) KrF excimer light source will address theaggressive performance and cost requirements demanded by the semiconductorindustry for the sub-100nm design nodes. With the ELS-7010, Cymer will enhance its 7000 Series product family byincreasing the power and bandwidth performance parameters of its previously deliveredKrF light source, the ELS-7000, and decreasing the overall cost of consumables.Cymer engineered these performance and cost improvements to be upgradeable forits current installed base of ELS-7000 light sources.

 

**ELS-7000TM**** –**Thetechnically-advanced ELS-7000 meets the requirements of high volume productionof sub-0.13 micron devices on 248nm exposure tools. The ELS-7000 offers a 4kHz, 30 watt (“W”) optical output, plus ultra-low bandwidth performance andhigh speed wavelength control. Advanced architecture and materials incorporatedinto the design of the ELS-7000 reduce laser consumables costs.

 

### **6000 Series**–The 6000 Seriesconsists of light source models that are within Cymer’s cutting-edge 248nm KrFportfolio and are designed for the production of semiconductor devices down to130nm (0.13 micron) design rules:

 

•                  **ELS-6010****–** Cymer’s ELS-6010 enables semiconductormanufacturers to leverage their existing KrF experience during the transitionto 130nm design rules. It provides a highly line-narrowed spectral bandwidth of< 0.5 picometer (“pm”) full width half maximum (“FWHM”) and <1.4 pm 95 percent energy integral. The ELS-6010 enables full image performancefrom lithography steppers and scanners using lenses with numerical apertures(“NA”) > 0.75.

 

•                  **ELS-6000TM****–**The ELS-6000 is a 2kHz light source designed for advanced steppers and scanners forthe production of devices with 180 nm and below geometries. The 20 W ELS-6000is designed for the most advanced optical systems with up to 0.70 NA lens designs.Incorporating advances in the light source chamber, pulse power and opticsmodules, the ELS-6000 enables significant improvements in throughput rates andcritical dimension (“CD”) control through its ±0.4% energy dose stability, 0.6pm bandwidth FWHM, and 2.0 pm bandwidth at 95% energy integral.

 

### **5000 Series**– With a repetition rateof 1 kHz, this solid-state pulse power light source series is engineered usingmodular construction. Enabling higher device yields by delivering improvedenergy stability, this series is designed specifically for use in themanufacture of semiconductors with 250nm and smaller design rules.  The 5000 series consists of the followingmodels: ELS-5010, ELS-5005 upgrade, ELS-5000 and EX-5000.

 

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***193nm ArF LightSource****s*

 

**XLA 105** – The XLA 105 is Cymer’s latest, ultraline-narrowed, high power 4kHz ArF production light source. This is the secondgeneration lithography light source to feature a dual chamber Master OscillatorPower Amplifier (“MOPA”) design. The XLA 105 leverages the XLA 100 platform andoptical architecture and provides improved optical performance. The XLA 105delivers spectral bandwidth of less than 0.20pm FWHM, the tightest spectralbandwidth performance of any DUV production light source.  In addition, the XLA 105 adds a 4x pulsestretcher which increases the pulse duration with the benefit of extendingscanner lens lifetimes.

 

The XLA 105 is targeted atenabling the process development for the next ArF technology node at 65nm thatwill utilize lithography tools with an NA greater than 0.9.

 

**XLA 100** – The XLA 100 isCymer’s first, ultra line-narrowed, high power 4 kHz ArF production lightsource featuring the dual chamber MOPA design. The XLA 100 provides outstandingoptical and power performance.  MOPAenables the XLA 100 to produce 40 W of output power, which is twice the outputpower of Cymer’s earlier and most powerful, single chamber-based ArF models.

 

By utilizing the ArF (193nm) exposure wavelength,the XLA 100 enables chip design rules to shrink, which leads to fasterprocessing speeds and boosts memory capacity per chip. With an ultraline-narrowed spectral bandwidth of 0.25pm FWHM, the tightest spectralbandwidth performance of any DUV production light source, the XLA 100 produceshigh contrast imaging for lithography tools with an NA up to 0.9.

 

**NanoLithTM7000****–**A fourth-generation design,the NanoLithTM 7000 providesthe required output power and stability while providing a highly line-narrowedbandwidth to meet the stringent requirements of high volume production today.The NanoLith 7000 offers a bandwidth of <= 0.5 pm FWHM and <= 1.3 pm 95percent energy integral, which enables next-generation scanners with highNumerical Aperture lenses to produce the resolution for sub 100nm devices.

 

Today’schipmakers seek light sources that make the critical transition in exposurewavelength from 248nm using KrF to 193nm using ArF while maintaining theperformance and volume demands of mainstream manufacturing. The NanoLith 7000was designed to meet these demands.

 

**ELS-6010A****–**The ELS-6010A is a highly line-narrowed,high power 193nm light source designed to meet resolution, image contrast, andwafer throughput requirements in semiconductor chip production at the <130nmnode.

 

TheELS-6010A, 2 kHz 10 W ArF production laser for 193nm step-and-scan tools providesdependable optical performance. With highly line-narrowed bandwidth, theELS-6010A enables high contrast imaging from lithography scanners using high NAlenses.

 

Built-inlaser metrology provides pulse-to-pulse data acquisition and feedback controlto minimize transient wavelength instabilities, thereby enhancing exposurelatitude and CD control. In life tests the ELS-6010A revealed a potential for70% cost of consumables reduction compared to the ELX-5000A predecessor. TheELS-6010A is built on Cymer’s highly reliable ELS-6000® platform.

 

Revenues generated from sales of light sources were approximately $189.5million, $203.1 million, and $160.3 million for 2001, 2002, and 2003,respectively.

 

*ReplacementParts*

 

Certain components and subassemblies included in Cymer’s light sourcesrequire replacement or refurbishment following extended operation.  For example, the discharge chamber ofCymer’s light sources has an expected life of approximately three to sixteenbillion pulses, depending on the model.

 

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Cymer estimates that a light source used in asemiconductor production environment will require one to two replacementchambers per year, depending upon the level of usage.  Similarly, certain optical components of the light sourcedeteriorate with continued exposure to DUV light and require periodicreplacement.  Cymer provides these andother spare and replacement parts for its photolithography light sources asneeded by its customers.

 

Revenues generated from sales of replacement parts were approximately$62.5 million, $66.8 million, and $83.2 million for 2001, 2002, and 2003,respectively.  Revenues from replacementparts is dependent on both the utilization of Cymer’s light source systems andthe size of the installed base of light sources.  The size of Cymer’s installed base increased from 1,986 lightsources as of December 31, 2002 to 2,217 light sources as of December 31, 2003,and the utilization of Cymer’s light source systems at chipmakers grew significantlyin 2003.  We believe that chipmakers arerunning photolithography tools at or near maximum utilization rates.

 

*Service*

 

As the life and usage of Cymer’s installed base of light sources inproduction at chipmakers exceeds the original warranty periods (generally 17 to26 months from date of shipment), some chipmakers request service contractsfrom Cymer.  Additionally, Cymerprovides service contracts directly to the three semiconductor DUVphotolithography equipment manufacturers. These contracts require Cymer tomaintain and/or service these light sources either on an on-call or regularinterval basis or both.  Some of thesecontracts include replacement of consumable parts.

 

In addition to servicecontracts, Cymer provides an on-line diagnostic product, CymerOnLineTM. CymerOnLine is a diagnostic and performancesoftware product which delivers critical laser diagnostics and performanceinformation in near real-time directly to authorized users anywhere.  The software simplifies reporting and allowsusers to efficiently manage consumables management.  CymerOnLine features a user-friendly browser-based interfacefeatures a robust design and provides a secure data environment.  Event-initiated messages sent to pagers,email, mobile phones, or other handheld devices enable up-to-the minutecommunication and proactive management.

 

Revenues generated from service and service contracts were approximately$11.7 million, $15.8 million, and $21.3 million for 2001, 2002, and 2003,respectively.  We expect service andservice contract revenues to continue this upward trend in the future asCymer’s installed base grows and the warranty period of those light sourcesystems expire.

 

**Customersand End Users**

 

Cymer sells its photolithography light source products to each of thethree manufacturers of DUV photolithography tools:

 

| ASM  Lithography |   | Canon |   | Nikon |
|------------------|--------|-------|--------|-------|

 

Cymer believes that maintaining and strengthening customer relationshipswill play an important role in maintaining its leading position in thephotolithography market.  Cymer worksclosely with its customers to integrate Cymer’s products into theirphotolithography tools.  Sales to ASMLithography,  Canon, and Nikon accountedfor 24%,  24% and 21%, respectively, oftotal revenue in 2003.

 

Revenues generated from customers within the United States were $41.3million, $29.1 million and $31.0 million for 2001, 2002 and 2003,respectively.  Revenues generated fromcustomers outside of the United States were $228.1 million, $261.1 million and$236.5 million for 2001, 2002, and 2003, respectively.

 

Revenues generated from customers located in Japan were $111.6 million,$123.4 million and $116.5 million for 2001, 2002 and 2003, respectively.  Revenues generated from customers located inEurope were $91.7 million, $102.1 million and $74.6 million for 2001, 2002, and2003, respectively.

 

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End users of Cymer’s light sources include the world’s 20 largestsemiconductor manufacturers. The following semiconductor manufacturers havepurchased one or more DUV photolithography tools incorporating Cymer’s lightsources:

 
| **United  States**      |   | **Japan**               |   | **Singapore**      |   | **Taiwan/China** |   | **Korea**              |
|-------------------------|--------|-------------------------|--------|--------------------|--------|------------------|--------|------------------------|
|                    |   |                    |   |               |   |             |   |                   |
| Agere  Systems          |   | CASMAT                  |   | 1st  Silicon       |   | ASMC             |   | ANAM  F1               |
| Agilent  Technologies   |   | Denso                   |   | Chartered  Silicon |   | ERSO             |   | Dongbu                 |
| AMD                     |   | Elpida  Memory Inc.     |   | Partners           |   | GSMC             |   | Hynix  Semiconductor   |
| Applied  Materials      |   | Fuji  Film              |   | Peregrine          |   | Hejian           |   | Inc                    |
| Atmel                   |   | Fujitsu                 |   | Semiconductor      |   | Inotera          |   | Samsung                |
| Clariant  Corp.         |   | Gifu  Sanyo Electronics |   | Silterra           |   | Mosel            |   |                   |
| Cypress                 |   | Hitachi                 |   | SSMC               |   | MXIC             |   | **Europe**             |
| Headway  Technologies   |   | JSR                     |   | TECH               |   | Nan-ya           |   | Altis  Semiconductor   |
| Honeywell               |   | Kawasaki  Seitetsu      |   | UMCI  Pte Ltd.     |   | Promos           |   | C-NET                  |
| HP                      |   | Matsushita              |   |               |   | PSC              |   | Communicant            |
| IBM                     |   | NEC                     |   |               |   | SIS              |   | Semiconductor          |
| Integrated  Device      |   | OKI                     |   |               |   | SMIC             |   | Technologies           |
| Technology              |   | Rohm                    |   |               |   | TSMC             |   | Ericsson               |
| Intel                   |   | Sanyo                   |   |               |   | UMC  Group       |   | Microelectronics  AB   |
| Jazz  Semiconductor     |   | Seiko                   |   |               |   | VISC             |   | IHP                    |
| LSI  Logic Corp.        |   | SELETE  †          |   |               |   | Winbond  Group   |   | IMEC  v.z.w. †    |
| Lucent                  |   | Sharp                   |   |               |   |             |   | Infineon  Technologies |
| Maxim  Integrated       |   | Sony                    |   |               |   |             |   | AG                     |
| Products                |   | Tokyo  Electron Ltd.    |   |               |   |             |   | LETI                   |
| Microchip  Technology   |   | Tokyo  Ohka Kougyo      |   |               |   |             |   | Micronas  GmbH         |
| Inc.                    |   | Co.                     |   |               |   |             |   | Philips                |
| Micron  Technology      |   | Toshiba                 |   |               |   |             |   | RENESAS                |
| Motorola                |   | Trecenti  Technologies  |   |               |   |             |   | Semiconductor          |
| National  Semiconductor |   |                    |   |               |   |             |   | ST  Microelectronics   |
| SEMATECH  †        |   |                    |   |               |   |             |   |                   |
| Shipley                 |   |                    |   |               |   |             |   |                   |
| Texas  Instruments      |   |                    |   |               |   |             |   |                   |
| VLSI                    |   |                    |   |               |   |             |   |                   |
| Wafertech               |   |                    |   |               |   |             |   |                   |

 

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†  Asemiconductor industry consortium.

 

**Backlog**

 

Cymerschedules production of light sources based upon order backlog and informalcustomer forecasts.  Cymer includes inbacklog only those orders to which a purchase order number has been assigned bythe customer and for which delivery has been specified within 12 months.  Because customers may cancel or delay orderswith little or no penalty, Cymer’s backlog as of any particular date may not bea reliable indicator of actual sales for any succeeding period.  At December 31, 2003, Cymer had abacklog of approximately $103.9 million compared with a backlog of $101.0million at December 31, 2002.

 

**Manufacturing**

 

Cymer’smanufacturing activities consist of material management, assembly, integrationand testing.  These activities areperformed in a 265,000 square foot facility in San Diego, California thatincludes approximately 31,000 square feet of Class 10,000 cleanroommanufacturing and test space.  In orderto focus its own resources, capitalize on the expertise of its key suppliersand respond more efficiently to customer demand, Cymer has contracted themanufacture of many of its subassemblies. Cymer’s manufacturing outsourcingstrategy is exemplified by the modular design of Cymer’s products.  Substantially all manufacturing ofnonproprietary subassemblies has been contracted to third-party suppliers. As aresult, Cymer is increasingly dependent upon these contract suppliers to meetCymer’s manufacturing schedules.  Thefailure by one or more of these suppliers to supply Cymer on a timely basiswith sufficient quantities of components or subassemblies that perform toCymer’s specifications could affect Cymer’s ability to deliver completed lightsources to its customers on schedule. Cymer believes that the highly outsourcedcontent and manufacturable design of its products allows for reducedmanufacturing cycle times and increased output per employee. To improve current

 

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production efficiencies, control costs, andmanage overall manufacturing capacity, Cymer intends to continue to provideadditional training to manufacturing personnel, improve its assembly and testprocesses in order to reduce cycle time, invest in additional manufacturingtooling and further develop its supplier management and engineeringcapabilities.

 

In addition to the manufacturing capacity at its facilities in SanDiego, California, Cymer completed the construction of a manufacturing facilityin Korea in late 2002.  This facility isused as a refurbishment facility and refurbishes one of Cymer’s core modules,its chamber, initially for light sources in Korea and ultimately for theAsia-Pacific region.  The refurbishmentfacility in Korea includes 6,550 square feet of Class 10,000 cleanroommanufacturing space.  All of the finalqualification phases for this facility were completed during the fourth quarterof 2002 and the first chamber was shipped to a customer from this facility inJanuary 2003.  Throughout 2003 chambersfor several of Cymer’s light source models were refurbished in the Koreafacility and successfully shipped to customers.

 

During the period from 1997 through March 2003, Cymer also hadadditional manufacturing capacity as a result of its contract manufacturingagreement with Seiko Instruments, Inc. (“Seiko”).  Seiko was qualified as a contract manufacturer of Cymer’s lightsource systems and began production of its light sources in 1997.  Although the original agreement could havebeen renewed for an additional two years, Cymer and Seiko mutually consented tothe termination of this contract.  As aresult, Seiko ceased manufacturing light source systems for Cymer effectiveMarch 31, 2003.  The termination of thisagreement has not impacted Cymer’s production of light source systems to date.

 

Alimited number of components and subassemblies included in Cymer’s products areobtained from a single supplier or a small group of suppliers.  For certain optical components used in itslight source systems, Cymer currently utilizes a single supplier.  Where possible, Cymer is working with secondarysuppliers to qualify additional sources of supply.  To reduce the risk associated with this single supplier, Cymercarries significant strategic stock of these components.  Strategic inventories are managed as apercentage of future demand.  Cymer hasalso negotiated to have vendor-managed inventory of critical components to furtherreduce the risk of a single supplier. To date Cymer has been able to obtain adequate supplies of thecomponents and subassemblies used in the production of Cymer’s light sourcesystems in a timely manner from existing sources.  If in the future Cymer is unable to obtain sufficient quantitiesof required materials, components or subassemblies, or if such items do notmeet Cymer’s quality standards, delays or reductions in product shipments couldoccur which could have a material adverse effect on Cymer’s business, financialcondition and results of operations.

 

**Sales andMarketing**

 

Cymer’s sales and marketing efforts have been predominately focused onDUV photolithography tool manufacturers. Cymer markets and sells its products through its own worldwide directsales force. Cymer has developed product and applications engineering teams tosupport the account managers and Cymer’s customers.  Cymer believes that to facilitate the sales process it must workclosely with and understand the requirements of semiconductor manufacturers,the end users of Cymer’s products.

 

**Service andSupport**

 

Cymer believes its success in the semiconductor photolithography marketis highly dependent upon after-sales support of both the direct customer andthe end user.  Cymer supports itscustomers with field service, technical service engineers and trainingprograms, and in some cases provides ongoing on-site technical support at thecustomer’s manufacturing facility. Prior to shipment, Cymer’s support personnel typically assist thecustomer in site preparation and inspection and provide customers with trainingat Cymer’s facilities or at the customer’s location.  Direct customers and end users are also provided with acomprehensive set of manuals, including operations, maintenance, service,diagnostic and safety manuals.

 

Cymer’s field engineers and technical support specialists provide fieldservice and front-line technical support capability from Cymer's San Diegoheadquarters, and at its field service offices

 

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located throughout the United States. Supportin Europe, Japan, Korea, Singapore, the People’s Republic of China, andSoutheast Asia are provided by Cymer’s subsidiaries located within thoseregions.  As part of its customerservice, Cymer maintains an inventory of spare parts at each of its servicefacilities.  As Cymer’s installed basegrows, replacement parts required to satisfy worldwide support requirements, aswell as Cymer’s own logistics support organization, will be subject to thefluctuating demands of the semiconductor industry. In order to meet thesedemands, Cymer must continue to effectively manage its production of componentmodules which are required for new systems, as well as for support and warrantyrequirements for installed systems.

 

Cymer believes that the need to provide fast and responsive service tothe semiconductor manufacturers using its light sources is critical and that itcannot depend solely on its customers and end users to provide this service.  Therefore, Cymer believes it is essential tomaintain, through its own personnel, a rapid response capability to service itscustomers throughout the world. Accordingly, Cymer has an ongoing effort to continuously develop itsdirect support infrastructure in Japan, Korea, Taiwan and Southeast Asia,Singapore, the People’s Republic of China, Europe and the United States.  This task entails recruiting and trainingqualified field service personnel or identifying qualified independent firmsand maintaining effective and highly trained organizations that can provideservice to customers in various countries in their assigned regions.

 

Cymer generally warrants its new light source products against defectsin design, materials, and workmanship. The warranty coverage period and terms vary by light source model.  In general, the warranty coverage periodranges from 17 to 26 months after shipment. Cymer also warrants consumables and spare parts sold to its customersand the coverage period varies by spare part type as some types include timebased warranty periods and others include usage based warranty periods.  On average the warranty period for spares is6 months from the date of shipment.

 

#### **Researchand Development**

 

The semiconductor industry is subject to rapid technological change andnew product introductions and enhancements. Cymer believes that continued and timely development and introduction ofnew and enhanced light source products are essential for Cymer to maintain itscompetitive position.  Cymer intends tocontinue to develop its technology and innovative products to meet customerdemands. Current projects include enhancements to Cymer’s KrF and ArF lightsources and the new MOPA platform.  Cymer has significant development efforts toaddress the technology and products that will be based on the extremeultraviolet (“EUV”) technology needed for future generation photolithographyillumination sources.  Cymer is also continuingits scientific investigation related to F2 since the timing for a commercializedproduct at this wavelength is still unclear. Cymer may also invest inother product and technology areas in order to expand its portfolio within thesemiconductor capital equipment market sector.  In addition there are ongoing efforts to improveexisting products, reduce manufacturing costs, lower the cost of light sourceoperation, enhance light source performance, develop new features for existinglight sources, and conduct research and development of non-light sourceproducts.

 

Cymer has historically devoted a significant portion of its financialresources to research and development programs and expects to continue toallocate significant resources to these efforts. Research and developmentexpenses for 2001, 2002, and 2003 were approximately $58.4 million, $73.7million, and $58.2 million, respectively.

 

In addition to funding its own research and development projects, Cymerhas pursued a strategy of securing research and development contracts fromcustomers, government agencies and SEMATECH, a semiconductor industryconsortium, in order to develop advanced technology for current and futurelight source systems based on Cymer’s core technology.  In March 2002, Cymer announced an agreementwith a major U.S. chipmaker to provide funding for Cymer’s research anddevelopment efforts on EUV technology. In 2003, Cymer entered into an agreement with a government agency toprovide funding for EUV technology research and development efforts. Revenuesgenerated from research and development contracts amounted to approximately$2.4 million, $2.2 million, and $1.7

 

7

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million during 2001, 2002, and 2003,respectively.

 

InJanuary 2004, Cymer signed a research and development agreement with IntelCorporation (“Intel”).  This agreementwill provide Cymer with funding of $20.0 million over the next three years toaccelerate the development of production-worthy EUV lithography light sources.The funding to be received from Intel under this agreement is milestone basedand will be netted against Cymer’s total research and development expenses inthe period that the milestone is completed.

 

#### **IntellectualProperty Rights**

 

Cymerbelieves that the success of its business depends more on such factors as thetechnical expertise of its employees, as well as their innovative skills andmarketing and customer relations ability, than on patents, copyrights, tradesecrets and other intellectual property rights. Nevertheless, the success ofCymer may depend in part on patents.  Asof December 31, 2003, Cymer owned 197 United States patents covering certainaspects of technology related to light sources and piezo techniques.  These patents will expire at various timesduring the period from January 2008 through November 2021. As of December 31,2003, Cymer had applied for 79 additional patents in the United States.  As of December 31, 2003, Cymer owned 267foreign patents and had 317 patent applications pending in various foreigncountries.

 

Cymer’spending patent applications and any future applications might not be approved.Cymer’s patents might not provide Cymer with competitive advantages.  Third parties might challenge Cymer’spatents.  In addition, patents held bythird parties might have an adverse effect on Cymer’s ability to do business.In this regard, due to cost constraints, Cymer did not begin filing for patentsin Japan or other countries with respect to inventions covered by its UnitedStates patents and patent applications until 1993. Therefore, Cymer lost theright to seek foreign patent protection for certain of its early inventions.Additionally, because foreign patents may afford less protection underapplicable foreign law than may be available under corresponding United Statespatent law, any such patents issued to Cymer might not adequately protectCymer’s technology in a given foreign jurisdiction. Furthermore, third partiesmight independently develop similar products, duplicate Cymer’s products or, tothe extent patents are issued to Cymer, design around those patents.

 

Othersmay have filed and in the future may file patent applications that are similaror identical to those of Cymer. To determine the priority of inventions, Cymermay have to participate in interference proceedings declared by the UnitedStates Patent and Trademark Office. Such interference proceedings could resultin substantial cost to Cymer.  Suchthird-party patent applications might have priority over patent applicationsfiled by Cymer.

 

Cymer also relies upon trade secret protection, employee and third-partynondisclosure agreements and other intellectual property protection methods toprotect its confidential and proprietary information.  Despite these efforts, third parties might independently developsubstantially equivalent proprietary information and techniques or otherwisegain access to Cymer’s trade secrets or disclose such technology.  Cymer might not be able to meaningfullyprotect its trade secrets.

 

Cymerhas in the past funded a portion of its research and development expenses fromoutside research and development contracts. Cymer has received such funding from customers, government agencies andfrom SEMATECH, a research consortium, in connection with the design anddevelopment of specific products. Although Cymer’s arrangements with thesemanufacturers and SEMATECH seek to clarify the ownership of the intellectualproperty arising from research and development services performed by Cymer,disputes over the ownership or rights to use or market such intellectualproperty might arise between Cymer and such parties.

 

Thirdparties have in the past notified, and may in the future notify, Cymer that itmay be infringing intellectual property rights of others.  Conversely, Cymer has in the past notified,and may in the future notify, third parties that they may be infringing Cymer’sintellectual property rights.

 

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Specifically,Cymer has engaged in discussions with Gigaphoton, Inc., a joint venture betweenUshio, Inc. and Komatsu, Ltd. with respect to certain of Komatsu’s Japanesepatents, in the course of which Komatsu has also identified to Cymer a numberof additional Japanese and U.S. patents that Komatsu asserts may be infringedby****Cymeror by Cymer’s former Japanese manufacturing partner, Seiko.  Komatsu has also notified one of Cymer’sintegrator customers, Nikon, of its belief that Cymer’s light sources infringeseveral of Komatsu’s Japanese and U.S. patents.  Cymer, in consultation with Japanese patent counsel, initiatedoppositions to certain Komatsu Japanese patents and patent applications in theJapanese Patent Office. These oppositions have been dismissed by the JapanesePatent Office. Litigation might ensue with respect to the Komatsu Japanesepatents or Komatsu U.S. patents.  Also,Komatsu might assert infringement claims under other or additionalpatents.  Komatsu has notified Seikothat Komatsu intends to enforce its rights under the Komatsu Japanese patentsagainst Seiko if Seiko engages in manufacturing activities for Cymer.  In connection with its former manufacturingagreement with Seiko, Cymer has agreed to indemnify Seiko against such claimsunder certain circumstances. Cymer and Seiko might not ultimately prevail inany such litigation.

 

Cymer has notified itscompetitors and others of Cymer’s United States patent portfolio.  Cymer has specifically asserted certain ofits U.S. patents against Komatsu when informed that Komatsu light sources mightbe integrated into steppers intended for shipment into the U.S.  Cymer and Komatsu have engaged indiscussions with regard to each party’s claims.  Those discussions might not be successful and litigation couldresult.  Attorneys representing Komatsuchallenged one of Cymer’s U.S. patents in the U.S. Patent Office, but the patentwas subsequently re-issued by the United States Patent and Trademark Office(“USPTO”).  During 2000, Komatsu’slithography light source business was transferred to Gigaphoton.  Subsequently, Cymer and Gigaphoton haveengaged in discussions regarding each party’s patents.  Those discussions might not be successfuland litigation could result.  Cymer alsoengaged in patent discussions with another competitor, Lambda-Physik, concerningallegations by each party against the other of possible patent infringement.  These discussions also might not besuccessful and litigation could result.

 

Anypatent litigation initiated by Cymer, or initiated by Cymer’s competitorsagainst Cymer, would, at a minimum, be costly. Litigation could also divert the efforts and attention of Cymer’smanagement and technical personnel. Both could have a material adverse effect on Cymer’s business, financialcondition and results of operations. Furthermore, in the future other third parties might assert otherinfringement claims, and customers and end users of Cymer’s products mightassert other claims for indemnification resulting from infringementclaims.  Such assertions, if proven tobe true, might materially adversely affect Cymer’s business, financialcondition and results of operations. If any such claims are asserted againstCymer, Cymer may seek to obtain a license under the third party’s intellectualproperty rights.  However, such alicense might not be available on reasonable terms or at all. Cymer coulddecide, in the alternative, to resort to litigation to challenge such claims orto design around the patented technology. Any of these actions could be costly and would divert the efforts andattention of Cymer’s management and technical personnel, which could materiallyadversely affect Cymer’s business, financial condition and results ofoperations.

 

Effective August 1, 1989and lasting until the expiration of the licensed patents, Cymer entered into anagreement for a nonexclusive worldwide license to use or sell certain patentedlight source technology with Patlex Corp., a patent holding company.  Under the terms of the agreement, Cymer isrequired to pay royalties ranging from 0.25% to 5.0% of gross sales and leasesof its light sources, subject to an annual cap of $100,000 per year.  During 2001, 2002 and 2003, royalty feestotaled $100,000 per year.

 

Cymer has granted Seiko a right of first refusal to fund Cymer’sdevelopment of, and receive a license to, new industrial light sourcetechnologies not developed with funding from other parties.  In exchange for these rights, Cymer receivedup-front license fees of $3.0 million in aggregate during 1992 and 1993. Cymerwas also entitled to royalties of 5% on related product sales through September1999, after which the royalty rate is subject to renegotiation.  Through 1999, Cymer earned no royaltiesunder the agreement. The license agreement also provides that product salesbetween Cymer and Seiko will be at a 15% discount from the respectivecompanies’ list prices.  The agreementterminates in August

 

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2012. There has been no Seiko production or sales activity associated withthis contract to date and this contract does not apply to Cymer’s current lightsource system products.

 

Cymerhas registered the trademark “CYMER” & “INSIST ON CYMER” and others in theUnited States and certain other countries and is seeking additionalregistrations of additional trademarks in the United States and in certainother countries.  Cymer uses these and avariety of other marks in its advertisements and other business activitiesaround the world.  Based on the use ofthese or other marks, Cymer might be subjected to actions for trademarkinfringement, which could be costly to defend. If a challenge to a mark were tobe successful, Cymer might be required to cease use of the mark and,potentially, to pay damages.

 

**Competition**

 

Cymer believes that the principal elements of competition in Cymer’smarkets are the technical performance characteristics of the excimer lightsource products and the operating efficiency of the system, which is based onavailability, performance efficiency and rate of quality. Cymer believes thatit competes favorably with respect to these factors.

 

Cymercurrently has two significant competitors in the market for light sourcesystems for DUV photolithography applications: Gigaphoton, headquartered in Japan, and Lambda-Physik,  a subsidiary of Coherent, Inc. headquarteredin Germany.  In 2003, Coherent purchasedan additional 34% of the outstanding shares of Lambda-Physik, increasingCoherent’s ownership to 94%.  Cymerbelieves that Gigaphoton and Lambda-Physik are aggressively seeking to gainlarger positions in this market.  Cymerbelieves that its three DUV photolithography tool manufacturing customers haveeach purchased products offered by these competitors and that its customershave qualified the competitors’ light sources for use with their products. BothGigaphoton and Lambda-Physik are located in closer proximity to certain ofCymer’s customers than Cymer. Cymer believes that Gigaphoton in particular hasbeen qualified for production use by chipmakers in Japan and elsewhere.  Cymer also believes that Lambda-Physik hasbeen qualified for production use by chipmakers in the U.S. and Europe.  Cymer could lose market share and its growthcould slow or even decline as competitors gain market acceptance.

 

In the future, Cymer will likely experience competition from othertechnologies, such as EUV and electron projection lithography (“EPL”).  To remain competitive, Cymer believes thatit will need to manufacture and deliver products to customers on a timely basiswithout significant defects and maintain a high level of investment in researchand development and sales and marketing. Cymer might not have sufficientresources to continue to make the investments necessary to maintain itscompetitive position.

 

Largercompetitors with substantially greater financial resources, including othermanufacturers of industrial light sources for advanced lithography, may attemptto enter the market.  Further, othercompetitors may introduce new and enhanced product offerings that customersdeem superior to Cymer’s products. Future competitors may also be attracted to Cymer’s growing installedbase of light sources and seek to provide consumables and refurbished parts tothat installed base.

 

**Employees**

 

On December 31, 2003, Cymer employed 766 persons worldwide. No employeesare currently covered by collective bargaining agreements or are members of anylabor organization as far as Cymer is aware. Cymer has not experienced any workstoppages and believes that its employee relations are good.

 

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### **ExecutiveOfficers**

 

Set forth below is certain information regarding the executive officersof Cymer and their ages as of March 8, 2004.

 
| **Name**             |   | **Age** |   | **Position**                                                     |
|----------------------|--------|---------|--------|------------------------------------------------------------------|
|                 |   |    |   |                                                             |
| Robert  P. Akins     |   | 52      |   | Chairman  of the Board and Chief Executive Officer               |
| Pascal  Didier       |   | 45      |   | President  and Chief Operating Officer                           |
| Nancy  J. Baker      |   | 41      |   | Senior  Vice President, Chief Financial Officer                  |
| James  M. Caltrider  |   | 50      |   | Executive  Vice President, Manufacturing                         |
| Hugh  R. Grinolds    |   | 52      |   | Executive  Vice President, Corporate Process and Services        |
| Edward  P. Holtaway  |   | 48      |   | Executive  Vice President, Lithography System Solutions          |
| Brian  C. Klene      |   | 46      |   | Executive  Vice President, Emerging Technology and Applications  |
| John  Shin           |   | 49      |   | Executive  Vice President, Semiconductor Manufacturing Solutions |
| Rae  Ann Werner      |   | 39      |   | Vice  President, Controller and Chief Accounting Officer         |
| Tsunehisa  Yamashita |   | 57      |   | President,  Cymer Japan                                          |
| Anthony  Yen         |   | 42      |   | Senior  Vice President, Lithography Marketing Development        |

 

**Robert P.Akins**,****oneof Cymer’s co-founders, hasserved as its chairman and chief executive officer since its inception in 1986,and served as president of the company as well from its inception until May2000. He currently serves on the board of directors of SEMI (SemiconductorEquipment and Materials International), the board of SEMI North America, and onthe board of directors of Extraction Systems, Inc, as well as on the council ofadvisors to the Irwin and Joan Jacobs School of Engineering at the Universityof California, San Diego (“UCSD”). Mr. Akins currently serves as a board memberof the UCSD Foundation Board of Trustees. Mr. Akins received the Ernst & Young Entrepreneur of the Year Awardfor San Diego County in 1997, and with fellow co-founder Rick Sandstrom,received the outstanding alumnus award from UCSD, and the prestigious SEMIAward for North America, the highest honor conferred by SEMI, in 1996 forcontributions to the field of DUV lithography. Mr. Akins received a bachelor’sdegree in physics, a bachelor’s degree in literature, and a doctorate inapplied physics from the University of California, San Diego.

 

**PascalDidier** has served aspresident and chief operating officer since May 2000. He served as senior vicepresident, worldwide customer operations from November 1997 until May 2000, andserved as vice president of sales and marketing from July 1997, when he joinedthe company, until November of that year. He served as vice president ofworldwide sales and field operations with GaSonics International, asemiconductor capital equipment manufacturer, from June 1995 to June 1997, andserved in the additional capacity of vice president of Asia/Pacific for thatcompany from June 1995 to June 1996. Prior to that, Mr. Didier served for twoyears as vice president of international operations for Megatest Corporation, asemiconductor test equipment manufacturer. Mr. Didier received a bachelor’sdegree in business and administration from the College de Paris VII and abachelor’s degree in electronics from the Institut Universitaire de Lyon.

 

**Nancy J.Baker** has served assenior vice president and chief financial officer since January 2002.  Prior to that, she served as Cymer’s vicepresident, finance and treasurer from June 1998 to December 2001.  During 2000, she headed the company’s successfuleffort to implement a new Enterprise Resource Planning system, which wasimplemented in San Diego in only six months, and globally in only nine months.From October 1996 to June 1998 she served as director, corporate finance andtreasurer.  She joined Cymer ascorporate controller for worldwide operations in August 1992.  Ms. Baker’s professional career spans morethan 18 years, and prior to joining Cymer, she held a variety of financialmanagement positions with an international manufacturer in the San Diegoarea.  Ms. Baker received a bachelor’sdegree in accounting from the University of Texas at Austin in 1985 andcompleted the executive advanced management program at Harvard Business Schoolin 1999.

 

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**James M. Caltrider**has served as executive vice president ofthe Manufacturing Operations business unit since October 2003.  He served as vice president of manufacturingand order fulfillment from September 1999 until October 2003, and served asvice president of manufacturing systems from October 1998 to September1999.  Prior to joining Cymer,  Mr. Caltrider provided consulting servicesto a range of clients including Hewlett-Packard, Sprint, Robert Bosch andAndersen Consulting, while holding a faculty position in the Graduate School ofBusiness at the University of San Diego and instructing in the AdvancedManufacturing Systems Program in the UCSD Graduate Engineering School.  Mr. Caltrider also served as director oftraining and development at Brooktree Corporation from 1990 to 1992.  He received a doctorate in mineral economicsfrom the Colorado School of Mines, and a bachelor’s degree in businessadministration from Michigan State University.

 

**Hugh R. Grinolds**has served as executive vice president ofthe Corporate Processes and Services group since October 2002. Before that, heserved as a senior director of the EUV program, the post he had held sincejoining the company in May 2002. Prior to joining Cymer, he served as sitemanager for Agilent Technologies in Fort Collins, Colorado from 1999, whenAgilent was spun-off from Hewlett Packard, until May 2002. Dr. Grinolds beganhis business career with Hewlett-Packard Co. in 1979, and during his tenurewith that company, served in a variety of increasingly responsible positions,including managing VLSI design for HP’s internal ASIC needs in Corvallis,Oregon, and serving as manufacturing manager in Fort Collins, Colorado for HP’sinternal ASICs which included responsibility for the production of HP’s PA-RISCprocessors. He assumed the role of worldwide manufacturing manager at HP in1998. Dr. Grinolds has published 21 technical articles and papers, and holdsone patent. He received bachelor’s, master’s and doctorate degrees inelectrical engineering from the University of Minnesota.

 

**Edward P. (Ted) Holtaway** has served as executive vice president ofthe Lithography System Solutions business unit since October 2002. He served assenior vice president of operations and business process management from May2000 until October 2002. He joined Cymer in July 1998 as senior vice presidentof process quality. Prior to joining Cymer, Mr. Holtaway spent 13 yearsdeveloping processes for San Diego-based Brooktree Corp., a fablesssemiconductor company acquired by Rockwell Semiconductor Systems in September1996. During his tenure, Mr. Holtaway’s executive posts included director ofRockwell’s San Diego operations from 1997 to 1998, vice president and managingdirector of Brooktree’s Singapore operations from 1995 to 1996, and vicepresident of corporate quality from 1989 to 1995. Mr. Holtaway received abachelor’s degree in electrical engineering from the New Jersey Institute ofTechnology, a master’s degree in electrical engineering from the PolytechnicInstitute of New York, and a master’s degree in business administration fromSan Diego State University.

 

**Brian C. Klene** has served as executive vice president of the Emerging Technology andApplications business unit since October 2002. Previously, he served as seniorvice president, marketing and business development, which he had held sincejoining Cymer in June 2000. Prior to joining Cymer, Mr. Klene spent two yearsas vice president, strategic planning and business development at CharteredSemiconductor Manufacturing Ltd. in Singapore. From 1995 to 1997, he served asexecutive vice president, sales and marketing at Micron Electronics, Inc.,Nampa, Idaho. Before that, he served as director of North American sales withMicron Technology, Inc., Boise, Idaho, from 1989 to 1994. He also served in avariety of sales and marketing positions of increasing responsibility with IBMCorp. Mr. Klene received a master’s degree in business administration from theUniversity of Southern California, and a bachelor’s degree from The Citadel,Charleston, South Carolina.

 

**John Shin** has served as executive vice president of the SemiconductorManufacturing Solutions business unit since October 2002. He served as seniorvice president, worldwide customer operations from June 2000 until October2002. Previously, he served as vice president, worldwide customer operationsfrom September 1999 to June 2000, as vice president of worldwide fieldoperations from April to September 1999, and as vice president, Asia/PacificOperations from March 1998 to April 1999. He joined Cymer as president, CymerKorea in May 1997. Immediately prior to joining Cymer, Mr. Shin served aspresident of Tencor Instruments Korea. From early 1993 to late 1996 he servedas country manager in Korea with Watkins-Johnson Co, sales account manager inKorea for Applied Materials, and business development manager with SamsungAmerica. Mr. Shin received a master’s

 

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degree in computer science from IndianaUniversity and a bachelor’s degree in business from Hankuk University ofForeign Studies, Seoul, Korea.

 

**Rae Ann Werner**has served as vice president, controller,and chief accounting officer since January 2003. Prior to that, she served asCymer’s Controller from February 1999 to January 2003. From 1993 to 1999 sheheld a variety of finance positions with increasing responsibilities sincejoining Cymer in November 1993.  Ms.Werner’s professional career spans more than 16 years, and prior to joiningCymer, she held a variety of financial positions with semiconductor andcommunications companies in the San Diego area.  Ms. Werner received a bachelor’s degree in accounting from SanDiego State University in 1987.

 

**Tsunehisa Yamashita**has served aspresident of Cymer Japan since March 2003. Prior to joining Cymer, Mr. Yamashita served for more than four years asgeneral manager of the Japanese Division of Teradyne, Inc., a leading supplierof automatic test equipment for the semiconductor industry. From 1997 to 1998,he served as president of Brooks Automation, Japan where he managed theJapanese operations—including sales and technical support of semiconductorwafer and LCD plate handling automation androbotics.  During the first 24 years ofhis career, he served in a variety of positions with Nikon Corporation,including one year as general manager of business planning and strategicmarketing, and nine years as a senior manager responsible for developingproduct-marketing plans.  During histenure, he also supported overseas sales and marketing activities at various U.S.-and European-based Nikon subsidiaries. Prior to that, Mr. Yamashita was instrumental in establishing Nikon’sU.S.-based lithography operations in San Bruno, California.  He holds a bachelor’s degree in mechanicalengineering from Hokkaido University in Japan.

 

**Anthony (Tony) Yen**has served as senior vicepresident of the Lithography Market Development business unit since September2003.  Mr. Yen served as co-director ofthe Lithography division of International SEMATECH from May 2001 to September2003. Prior to his SEMATECH assignment, he managed the Advanced Lithography andAdvanced Lithography Technology departments at Taiwan SemiconductorManufacturing Co., Ltd., which he joined in 1997. Before that, he worked inlithography development and conducted pioneering work on resolution enhancementtechniques at Texas Instruments (“TI”) in Dallas, and as a TI assignee at IMEC,the Belgium-based research institute of semiconductor technology. Mr. Yen holdsa bachelor’s degree from Purdue University as well as his master’s, engineer’s,and doctorate degrees from Massachusetts Institute of Technology, all inelectrical engineering. He is a fellow of the International Society for OpticalEngineering and has served as a member of Cymer’s Scientific Advisory Boardsince 2000.

 

Executive officers serve at the discretion of the Board ofDirectors.  There are no familyrelationships between any of the directors and executive officers of Cymer.

 

**Item 2.  Properties**

 

Cymer’s corporate headquarters is located inSan Diego, California and includes administrative, manufacturing, engineering,and research and development facilities. In addition, Cymer has field service offices located throughout theUnited States and internationally. Cymer completed construction of a refurbishment facility in Korea at theend of 2002.  This manufacturingfacility is used to refurbish chamber assemblies and was qualified forproduction at the end of 2002.  Cymer completed construction of a 265,000square foot building adjacent to its corporate headquarters located in SanDiego, California in the third quarter of 2003.  Also in the third quarter of 2003, Cymer transferred allmanufacturing activities and corporate services from two leased facilities inSan Diego to this company-owned manufacturing and office facility.  As of December 31, 2003, these two leasedfacilities were vacant.  Cymer intendsto sub-lease these two buildings, and as of the end of the year was workingwith a real estate broker to locate a tenant.

 

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At December 31, 2003, details on Cymer’sleased and owned property were as follows:

** **
| **Location**                               |            | **Lease  Expiration** |   | **Total  Square  Footage** |   | **Primary Usage**                                                         |
|--------------------------------------------|-----------------|-----------------------|--------|----------------------------|--------|---------------------------------------------------------------------------|
|                                       |            |                  |   |                       |   |                                                                      |
| San  Diego, California (1)                 |            | Owned                 |   | 135,000                    |   | Corporate headquarters, engineering, research and  development facilities |
| San  Diego, California (1)                 |            | Owned                 |   | 265,000                    |   | Manufacturing  and administrative office                                  |
| San  Diego, California                     |            | January  2010         |   | 155,000                    |   | Vacant                                                                    |
| San  Diego, California                     |            | January  2010         |   | 65,755                     |   | Facility  sub-leased                                                      |
| San  Diego, California                     |            | February  2004        |   | 22,200                     |   | Vacant                                                                    |
| Santa  Clara, California                   |            | February  2005        |   | 1,857                      |   | Field  service office                                                     |
| Austin,  Texas                             |            | October  2005         |   | 1,627                      |   | Field  service office                                                     |
| Portland,  Oregon                          |            | April  2006           |   | 1,857                      |   | Field  service office                                                     |
| Charlestown,  Massachusetts                |            | January  2008         |   | 21,262                     |   | Vacant                                                                    |
| Motoyata,  Japan                           |            | June  2004            |   | 13,831                     |   | Field  service and sales office                                           |
| Osaka,  Japan                              |            | December  2005        |   | 807                        |   | Field  service and sales office                                           |
| Hsin-Chu,  Taiwan                          |            | June  2004            |   | 4,821                      |   | Field  service and sales office                                           |
| United  Square, Singapore                  |            | May  2004             |   | 1,866                      |   | Field  service and sales office                                           |
| Maarssen,  Netherlands                     |            | May  2009             |   | 3,715                      |   | Field  service and sales office                                           |
| Veldhoven,  Netherlands                    |            | December  2008        |   | 2,605                      |   | Field  service and sales office                                           |
| Pyongtaek-city,  Kyonggi, Korea - Land (2) |            | December  2020        |   |                       |   |                                                                      |
|                                       | -  Building (2) |                  | Owned  |                       | 26,000 |                                                                      | Manufacturing,  sales and administrative |
| Pudong,  Shanghai, China                   |            | October  2004         |   | 4,746                      |   | Field  service and sales office                                           |
|                                            |                 |                       |        |                            |        |                                                                           |  |

 

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(1)         Land andbuilding is owned by Cymer.

(2)         Land lease is through December 2020.  Building is owned by Cymer.

 

#### **Item 3. Legal Proceedings**

 

None.

 

**Item 4.****          ****Submission ofMatters to a Vote of Security Holders**

 

No matters were submitted to a vote of the security holders of Cymerduring the fourth quarter of the fiscal year ended December 31, 2003.

 

##### PART II

 

**Item 5.****          ****Market forRegistrant’s Common Stock and Related Stockholder Matters**

 

Cymer’s Common Stock is publicly traded on the Nasdaq National Marketunder the symbol “CYMI”.  The followingtable sets forth, for the periods indicated, the high and low prices of Cymer’s Common Stock as reported by theNasdaq National Market.

 
|                             |   | **High** |       | **Low** |       |
|----------------------------------|--------|----------|------------|---------|------------|
| **Year ended December 31, 2002** |   |     | ** ** |    | ** ** |
| First quarter                    |   | $        | 50.80      |    | $          | 26.55 |   |
| Second quarter                   |   | $        | 53.44      |    | $          | 31.05 |   |
| Third quarter                    |   | $        | 35.48      |    | $          | 17.19 |   |
| Fourth quarter                   |   | $        | 38.91      |    | $          | 16.31 |   |
|                             |   |     |       |    |       |
| **Year ended December 31, 2003** |   |     |       |    |       |
| First quarter                    |   | $        | 40.00      |    | $          | 23.63 |   |
| Second quarter                   |   | $        | 36.75      |    | $          | 23.06 |   |
| Third quarter                    |   | $        | 49.09      |    | $          | 30.52 |   |
| Fourth quarter                   |   | $        | 49.89      |    | $          | 39.05 |   |

 

The closing sales price ofCymer’s Common Stock on the Nasdaq National Market was $39.24 on March 3, 2004and there were 303 registered holders of record as of that date.

 

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Cymer has never declared or paid cash dividends on its Common Stock andcurrently does not anticipate paying cash dividends in the future.

 

The information required to be disclosed by Item 201(d) of RegulationS-K *“Securities Authorized for IssuanceUnder Equity Compensation Plans”* is incorporated herein by referenceto Cymer’s Proxy Statement.

 

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**Item6.  Selected Financial Data**

 

The following selected consolidated financial data should be read inconjunction with Cymer’s consolidated financial statements and notes theretoand with “Management’s Discussion and Analysis of Financial Condition andResults of Operations,”  which areincluded elsewhere in this report.

 
|                                                                       |   | **Years ended  December 31,**              |    |
|----------------------------------------------------------------------------|--------|--------------------------------------------|---------|
|                                                                       |   | **1999**                                   |    | **2000** |   | **2001****(1)** |   | **2002** |   | **2003** |   |
|                                                                       |   | **(in  thousands, except per share data)** |    |
| **Consolidated Statements of Operations Data:**                            |   |                                       |    |   |   |   |   |   |   |   |   |
| Revenues:                                                                  |   |                                       |    |   |   |   |   |   |   |   |   |
| Product sales                                                              |   | $                                          | 220,051 |   | $ | 366,280 |   | $ | 267,003 |   | $ | 287,995 |   | $ | 265,816 |   |
| Other                                                                      |   | 399                                        |    | 1,180 |   | 2,441 |   | 2,165 |   | 1,680 |   |
| Total revenues                                                             |   | 220,450                                    |    | 367,460 |   | 269,444 |   | 290,160 |   | 267,496 |   |
|                                                                       |   |                                       |    |   |   |   |   |   |   |   |   |
| Costs and expenses:                                                        |   |                                       |    |   |   |   |   |   |   |   |   |
| Cost of product sales                                                      |   | 143,105                                    |    | 187,579 |   | 151,340 |   | 162,095 |   | 187,679 |   |
| Research and development                                                   |   | 34,518                                     |    | 45,433 |   | 58,368 |   | 73,714 |   | 58,231 |   |
| Sales and marketing                                                        |   | 16,742                                     |    | 20,098 |   | 19,617 |   | 17,153 |   | 16,966 |   |
| General and administrative                                                 |   | 13,101                                     |    | 22,510 |   | 18,990 |   | 18,212 |   | 39,094 |   |
| Amortization of goodwill and intangible assets                             |   | —                                     |    | 108 |   | 3,148 |   | 160 |   | 160 |   |
| Purchased in-process research and development                              |   | —                                     |    | — |   | 5,050 |   | — |   | — |   |
| Loss (gain) on debt extinguishment (2)                                     |   | —                                     |    | — |   | (610 | ) | 163 |   | — |   |
| Total costs and expenses                                                   |   | 207,466                                    |    | 275,728 |   | 255,903 |   | 271,497 |   | 302,130 |   |
| Operating income (loss)                                                    |   | 12,984                                     |    | 91,732 |   | 13,541 |   | 18,663 |   | (34,634 | ) |
|                                                                       |   |                                       |    |   |   |   |   |   |   |   |   |
| Other expense - net                                                        |   | (3,748                                     | )       | (1,230 | ) | (1,447 | ) | (1,914 | ) | (1,139 | ) |
| Income (loss) before income tax provision (benefit)  and minority interest |   | 9,236                                      |    | 90,502 |   | 12,094 |   | 16,749 |   | (35,773 | ) |
| Income tax provision (benefit)                                             |   | —                                     |    | 26,246 |   | 2,871 |   | 2,706 |   | (21,464 | ) |
| Minority interest                                                          |   | (663                                       | )       | (484 | ) | (368 | ) | (447 | ) | (1,091 | ) |
|                                                                       |   |                                       |    |   |   |   |   |   |   |   |   |
| Income (loss) before cumulative change in  accounting principle            |   | 8,573                                      |    | 63,772 |   | 8,855 |   | 13,596 |   | (15,400 | ) |
|                                                                       |   |                                       |    |   |   |   |   |   |   |   |   |
| Cumulative change in accounting principle, net of  taxes                   |   | —                                     |    | — |   | (370 | ) | — |   | — |   |
|                                                                       |   |                                       |    |   |   |   |   |   |   |   |   |
| Net income (loss)                                                          |   | $                                          | 8,573   |   | $ | 63,772 |   | $ | 8,485 |   | $ | 13,596 |   | $ | (15,400 | ) |
|                                                                       |   |                                       |    |   |   |   |   |   |   |   |   |
| Basic earnings (loss) per share                                            |   | $                                          | 0.31    |   | $ | 2.19 |   | $ | 0.28 |   | $ | 0.41 |   | $ | (0.44 | ) |
| Weighted average common shares outstanding                                 |   | 27,907                                     |    | 29,113 |   | 30,474 |   | 33,317 |   | 35,065 |   |
|                                                                       |   |                                       |    |   |   |   |   |   |   |   |   |
| Diluted earnings (loss) per share                                          |   | $                                          | 0.29    |   | $ | 2.07 |   | $ | 0.27 |   | $ | 0.39 |   | $ | (0.44 | ) |
| Weighted average common and dilutive potential  common shares outstanding  |   | 29,640                                     |    | 30,758 |   | 31,108 |   | 34,712 |   | 35,065 |   |

 

16

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|                                 |   | **December  31,**   |   |
|--------------------------------------|--------|---------------------|--------|
|                                 |   | **1999**            |   | **2000** |   | **2001****(1)** |   | **2002** |   | **2003** |   |
|                                 |   | **(in  thousands)** |   |
| **Consolidated Balance Sheet Data:** |   |                |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents            |   | $                   | 75,765 |   | $ | 79,678 |   | $ | 111,195 |   | $ | 196,643 |   | $ | 230,657 |   |
| Working capital                      |   | 213,121             |   | 278,546 |   | 257,851 |   | 351,127 |   | 397,846 |   |
| Total assets                         |   | 404,825             |   | 501,562 |   | 483,346 |   | 766,887 |   | 803,221 |   |
| Total long-term debt                 |   | 175,771             |   | 175,510 |   | 151,772 |   | 255,154 |   | 255,660 |   |
| Treasury stock                       |   | (24,871             | )      | (24,871 | ) | (24,871 | ) | — |   | — |   |
| Stockholders’ equity            |   | 126,893             |   | 212,968 |   | 254,814 |   | 412,334 |   | 453,330 |   |
|                                      |        |                     |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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### **(1)**          Includes results of operations of ActiveControl Experts, Inc. acquired on February 13, 2001 for the periods subsequentto its acquisition. See further discussion under Item 8. Financial Statementsand Supplementary Data.

(2)          The loss (gain) on extinguishment of debtwas reclassed in 2003 in accordance with the provisions of Statement ofFinancial Accounting Standards No. 145.

 

### **Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

*In this section, references to “we”, “us” or “our” arereferences to Cymer.**The following discussion ofour financial condition and results of operations should be read in conjunctionwith our consolidated financial statements and notes thereto included in thisannual report on Form 10-K.*

 

### **Overview**

 

Weare the world’s leading supplier of light source solutions for thesemiconductor industry.  Our productsprovide the essential light source for DUV photolithography systems. Almost allconsumer electronic devices manufactured in the last several years contain asemiconductor manufactured using light sources, such as ours.  We currently supply light sources to allthree DUV lithography system manufacturers, ASM Lithography, Canon, and Nikon,who in turn supply their wafer steppers and scanners to chipmakers.  Ourlight source systems currently constitute a substantial majority of all excimerlight sources incorporated in DUV photolithography stepper and scanner tools.Our products consist of photolithography light source systems, replacementparts and service.  A large portion ofour revenue is derived from customers located outside of the United States. Inorder to support our foreign customers and our installed base of light sourcesin foreign countries, we maintain a manufacturing and field service office inKorea and field service and support offices in Japan, Taiwan, Singapore, thePeople’s Republic of China and the Netherlands. We also maintain field serviceoffices in the United States to service our installed base of light sourceslocated in the United States.

 

Sincewe derive a substantial portion of our revenues from the photolithography toolmanufacturers, we are subject to the volatile and unpredictable nature of thesemiconductor industry. The semiconductor industry is highly cyclical in natureand historically has experienced periodic ups and downs. Since 2000, the lastpeak year in the cycle, the semiconductor industry has been in one of thelongest downturns in its history. This downturn has negatively impacted ourbusiness and results of operations during the three year period from 2001through 2003.  Although we experiencedthe largest negative impact to our revenues from 2000 to 2001, we have beenable to maintain our revenues at a fairly constant level over the last twoyears.  In addition, during most of thedownturn, we have remained profitable. The only year in which we incurred a net loss since the start of thedownturn was in 2003.  The loss of $15.4million in 2003 was mainly due to our decreased revenues, inefficiencies in theinitial manufacturing of our newest XL series light source in early 2003, andthe write-down of tenant improvements and other assets primarily associatedwith vacating three facilities during 2003. We are very conscious of the volatile nature of the semiconductorindustry and make every effort to manage our business through the cycles suchthat we maintain profitability during the downturn and take the necessary stepsduring the downturns to strategically position ourselves for the next upturn.

 

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Asa result of the continued downturn in the semiconductor industry in 2003, wetook several steps during the year to control our expenses and reduce ouroperating break-even level, including:

 

•                  In April 2003, we conducted a reduction inour workforce.  This reduction inworkforce affected all areas of the company and resulted in additional expensesduring the second quarter.  We realizedthe cost benefits of this reduction in workforce in the third quarter of 2003.

•                  In April 2003, we wrote down certain of ourcorporate assets.  These asset writedowns totaled approximately $1.8 million and were recorded as an additionalexpense during the second quarter. Again, we realized the cost saving benefits of these transactions in thethird quarter of 2003.

•                  In December 2003, we had a small reductionin workforce which primarily impacted the sales and marketing area. As ofDecember 31, 2003, there was $462,000 in outstanding liabilities associatedwith this reduction in force, which included accrued payroll and benefits.

•                  Throughout 2003, we worked to reduce thecycle times and material costs associated with our XLA 100 light source.  We made significant progress during the yearand realized some of the benefits from these efforts in the second half of2003.

 

In order to position ourselves for the next upturn inthe semiconductor industry, we completed several key investments in 2003 thathad been initiated during the first two years of the downturn, including:

 

•                  We developed therevolutionary MOPA technology, designed the extendable XL common platform, andramped the production of our XLA 100 model ArF light source during 2002 and2003.  The first production model wasintroduced in the first quarter of 2003. We are currently the only light source provider with a production worthy40 W ArF light source.

•                  We constructed andqualified our chamber refurbishment factory in Korea in 2002 and officiallyopened it in 2003, offering faster and less expensive consumable moduleturn-around.

•                  We completed theconstruction of our new San Diego manufacturing facility and qualified it in2003.  This facility is designed tohandle light source manufacturing with special emphasis on XL platform-basedmodels.

•                  We consolidated ourfacilities in San Diego in 2003 and transferred all manufacturing activitiesand corporate services from our two leased facilities to this new manufacturingfacility.

•                  We are also in astrong competitive position for leading edge KrF light sources, with our modelELS-7000 and the new improved performance and power of the ELS-7010 planned forinitial shipment in mid-2004.

•                  We continued toimprove upon our business processes over the last few years which has improvedour overall efficiencies and has allowed us to execute our plan throughout thedownturn.

 

At this time, we believe the long-awaited semiconductorindustry upturn has begun, based on a number of positive indicators that becameincreasingly evident during the second half of 2003, including:

 

•                  We experienced strongorder growth and our direct customers announced increasing orders and extendeddelivery times.

•                  The chipmakers’utilization of our DUV light sources has exceeded the levels achieved in 2000,the peak of the last upturn, and leveled off at these historically highrates.  We believe that chipmakers arerunning these tools at or near the maximum utilization possible and thatfurther increases in factory wafer throughput can only be achieved by adding moresemiconductor manufacturing equipment, which will in turn drive demand for ourlight sources.

•                  The mix of our lightsource model shipments and orders shifted toward leading edge KrF, reflectingchipmakers’ need for more capacity expansion.

•                  Semiconductor andelectronic market forecasters believe that capital spending will increase in2004 by 30% to 50% over 2003 levels.

•                  The future growth insemiconductor demand is expected to span a wide spectrum of applications.

 

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The positive order momentum we experienced in the latterhalf of 2003 has moderately improved our visibility into our futureoperations.  We have seen no slowdown inorders for the spares and consumables needed to support our installed base oflight sources in the field.  It appearsthat chipmakers are increasing their inventories of consumables and spares inorder to avoid unnecessary downtime in the future. Based upon these positiveindicators, we expect that 2004 will be characterized by sequential increasesin light source system unit sales and a record revenue year overall.

 

### **RESULTS OF OPERATIONS**

 

Thefollowing table sets forth certain items in our consolidated statements ofoperations as a percentage of total revenues for the periods indicated:

 
|                                                                       |   | **Years ended  December 31,** |   |
|----------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                       |   | **2001**                      |   | **2002** |   | **2003** |   |
| Revenues:                                                                  |   |                          |   |   |   |   |   |
| Product sales                                                              |   | 99.1                          | %      | 99.2 | % | 99.4 | % |
| Other                                                                      |   | 0.9                           |   | 0.8 |   | 0.6 |   |
| Total revenues                                                             |   | 100.0                         | %      | 100.0 | % | 100.0 | % |
|                                                                       |   |                          |   |   |   |   |   |
| Cost and expenses:                                                         |   |                          |   |   |   |   |   |
| Cost of product sales                                                      |   | 56.2                          |   | 55.8 |   | 70.1 |   |
| Research and development                                                   |   | 21.6                          |   | 25.4 |   | 21.8 |   |
| Sales and marketing                                                        |   | 7.3                           |   | 5.9 |   | 6.3 |   |
| General and administrative                                                 |   | 7.0                           |   | 6.3 |   | 14.6 |   |
| Amortization of goodwill and intangible assets                             |   | 1.2                           |   | 0.1 |   | 0.1 |   |
| Purchased in-process research and development                              |   | 1.9                           |   | — |   | — |   |
| (Gain) loss on debt extinguishment                                         |   | (.2                           | )      | 0.1 |   | — |   |
| Total costs and expenses                                                   |   | 95.0                          |   | 93.6 |   | 112.9 |   |
|                                                                       |   |                          |   |   |   |   |   |
| Operating income (loss)                                                    |   | 5.0                           |   | 6.4 |   | (12.9 | ) |
|                                                                       |   |                          |   |   |   |   |   |
| Other expense – net                                                   |   | (0.5                          | )      | (0.6 | ) | (0.4 | ) |
|                                                                       |   |                          |   |   |   |   |   |
| Income (loss) before income tax provision (benefit)  and minority interest |   | 4.5                           |   | 5.8 |   | (13.3 | ) |
|                                                                       |   |                          |   |   |   |   |   |
| Income tax provision (benefit)                                             |   | 1.1                           |   | 1.0 |   | (8.0 | ) |
| Minority interest                                                          |   | (0.2                          | )      | (0.1 | ) | (0.4 | ) |
|                                                                       |   |                          |   |   |   |   |   |
| Income (loss) before cumulative change in accounting  principle            |   | 3.2                           |   | 4.7 |   | (5.7 | ) |
|                                                                       |   |                          |   |   |   |   |   |
| Cumulative change in accounting principle, net of  taxes                   |   | (.1                           | )      | — |   | — |   |
|                                                                       |   |                          |   |   |   |   |   |
| Net income (loss)                                                          |   | 3.1                           | %      | 4.7 | % | (5.7 | )% |
| Gross margin on product sales                                              |   | 43.3                          | %      | 43.7 | % | 29.4 | % |

# ** **

# **CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

*General*

 

The discussion andanalysis of our financial condition and results of operations are based uponour consolidated financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States ofAmerica.  The preparation of thesefinancial statements requires us to make estimates and use judgment that mayimpact the reported amounts of assets, liabilities, revenues, expenses, andrelated disclosure of contingent assets and liabilities.  As a

 

19

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part of our ongoing internal processes, we regularly evaluate ourestimates, including those related to inventory allowances, warranty provision,income taxes, allowances for bad debts, long-lived assets valuation, intangibleassets valuation, and contingencies and litigation.  We base these estimates upon both historical information andother assumptions that we believe to be valid and reasonable under thecircumstances.  These assumptions form thebasis for making judgments and determining the carrying values of assets andliabilities that are not apparent from other sources.  Actual results could vary from our estimates if we were to usedifferent assumptions and conditions.

 

We believe that inventory allowances, warrantyprovisions, and income taxes require more significant judgments and estimatesin the preparation of our consolidated financial statements than do other ofour accounting estimates.

 

*InventoryAllowance*

 

We perform an analysis ofour inventory allowances on at least a quarterly basis to determine theadequacy of this allowance on our financial statements.  The amount of the inventory allowance isdetermined by taking into consideration certain assumptions related to marketconditions and future demands for our products, including changes to productmix, new product introductions, and/or product discontinuances, which mayresult in excess or obsolete inventory. We determine the level of excess andobsolete inventory associated with our raw materials and production inventoryby comparing the on hand inventory balances and inventory on order to the next12 months of forecasted demand.  We thenadjust this calculation for inventory that has a high likelihood of use beyondone year or can be used in other products which may have lower demands.  After this adjustment, we arrive at ourtotal exposure for excess and obsolete inventory within our raw materials andproduction inventory.  As part of thisanalysis, we also determine whether there are potential amounts owed to vendorsas a result of cancelled or modified inventory orders.  We estimate and record a separate liabilitywhich is included in accrued and other liabilities in the accompanying balancesheets for such amounts owed. For spare parts inventory, we calculate theinventory allowance based upon a percentage of total spare parts inventorybalances.  This percentage is calculatedusing certain estimates and assumptions, including comparisons of on handinventory to build forecasts, historical obsolescence in our spare partswarehouses, and spare parts specifically identified as excess or obsolete.

 

Both methodologies foranalyzing excess and obsolete inventory and determining the inventory allowanceare significantly affected by future demand and usage of our products.  There are many factors that couldpotentially affect the future demand or usage of our products, including thefollowing:

 

•                  Overall condition of thesemiconductor manufacturing equipment industry which is highly cyclical innature;

•                  Rate at which our customers takedelivery of our light source systems;

•                  Loss of any of our three majorcustomers or significant change in demand from any of these three customers;

•                  Mix of light source system models andany changes to that mix required by our customers; and

•                  Utilization rates of our lightsources at semiconductor device manufacturers

 

Based upon ourexperience, we believe that the estimates we use in calculating the inventoryallowance are reasonable and properly reflect the risk of excess and obsoleteinventory.  If actual demand or theusage period for our inventory are substantially different from our estimates,adjustments to our inventory allowance may be required, which could have amaterial adverse effect on our financial condition and results of operations.

 

*Warranty Provision*

 

We maintain an accrualfor the estimated cost of product warranties associated with our productsales.  Warranty costs include thereplacement parts and labor costs to repair our products during the warrantyperiods.  At the time revenue isrecognized, we record a warranty provision, which is included in

 

20

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cost of product sales in the accompanying consolidated statements ofoperations. The warranty coverage period and terms vary by light sourcemodel.  In general, the light sourcesystem warranty period ranges from 17 to 26 months after shipment.  We also warrant consumables and spare partssold to our customers and the coverage period varies by spare part type as sometypes include time based warranty periods and others include usage basedwarranty periods.  On average, thewarranty period for consumables and spare parts is approximately 6 months fromthe date of shipment. The warranty provision for light source systems isreviewed monthly and determined by using a financial model, which takes intoconsideration actual historical expenses, and potential risks associated withour different light source system models. This financial model is then used to estimate future expenses related towarranty and the required warranty provision. The risk levels used within this model are reviewed and updated as risklevels change by model over its product life cycle.  Due to the highly technical nature of our light source systemproducts, the newer model light sources have higher inherent warranty risks andrequire higher warranty provisions. The warranty provision for consumables andspare parts is determined by using actual historical data.

 

We actively engage inproduct improvement programs and processes to limit our warranty costs, but ourwarranty obligation is affected by the complexity of our product, productfailure rates and costs incurred to correct those product failures at customersites. The industry in which we operate is subject to rapid technologicalchange, and as a result, we periodically introduce newer, more complex lightsources.  Although we classify thesenewly released light source models as having a higher risk in our warrantyfinancial model resulting in higher warranty provisions, we are more likely tohave differences between the estimated and actual warranty costs for these newproducts.  This is due to limited or nohistorical product performance data on which to base our future warrantycosts.  Warranty provisions for ourolder and more established light source models are more predictable as we havemore historical information available on these products.  If actual product failure rates or estimatedcosts to repair those product failures were to differ from our estimates,revisions to our estimated warranty provision would be required, which couldhave a material adverse effect on our financial condition and results ofoperations.

 

*IncomeTaxes*

 

We account for incometaxes in accordance with Statement of Financial Accounting Standards No. 109(“SFAS 109”), “Accounting for Income Taxes.” Pursuant to SFAS 109, a deferred tax asset or liability is generallyrecognized for the estimated future tax effects attributable to temporary differences,net operating loss carryforwards and tax credit carryforwards.  Deferred tax assets are to be reduced by avaluation allowance if, based on the weight of available evidence, it is morelikely than not that some portion or all of the deferred tax assets will not berealized within the carryback or carryforward periods.  Information about an enterprise’s currentfinancial position and its results of operations for the current and precedingyears, as well as all currently available information about future years shouldbe considered.

 

We have considered our industry’s outlook for thefuture, our historical performance and estimated future taxable income, andongoing tax planning strategies in assessing the need for a valuationallowance.  Using this information, wehave prepared a model to forecast our expected taxable income in future yearsin order to estimate when the benefits of our deferred tax assets are likely tobe realized.  Based upon the analysis, webelieve that it is more likely than not that the results of future operationswill generate sufficient taxable income to realize the deferred tax assetswithin the period allowed by current applicable tax law and, as such, novaluation allowance against deferred tax assets is provided.

 

A material adverse change in the outlook forworldwide lithography tool sales, in the expected selling prices or profitmargins for our products, or in our expected share of the global market forlithography light sources could cause us to determine that a valuationallowance is needed for some or all of our deferred tax assets, and wouldresult in an increase to our income tax provision in the period in which suchdetermination is made.

 

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### **YEARS ENDED DECEMBER 31,2002 AND 2003**

 

*Revenues*. Our revenues consist of productsales, which include sales of light source systems, consumable and spare parts,upgrades, service, service contracts and training. Our revenues also consist ofother revenues which include revenue from funded development activitiesperformed for customers and government contracts and license agreements.  We do not recognize any revenue for lightsource systems prior to shipment.  Thesystems are tested by us in environments similar to those used by our customersprior to shipment to ensure that they meet the customers’ specifications andwill interface with the customers’ software. Our installation obligations are perfunctory within the framework ofStaff Accounting Bulletin 104.  One ofour customers has an acceptance provision, which is satisfied by the issuanceof an acceptance certificate following a visual inspection of the system by thecustomer. We do not recognize revenue on systems shipped to that customer untilwe receive the acceptance certificate. There are no customer retentions. Revenue from consumables and spare parts sales is recognized at thepoint that legal title passes to the customer, which is generally upon shipmentfrom our facility.  Service and trainingrevenue is generally recognized at the time that the services are rendered orthe training class is completed. Service contract revenues are generally recorded as revenue ratably overthe life of the contract or per the specific terms of the agreement. Fundeddevelopment contracts are accounted for on the percentage-of-completion methodbased on the relationship of costs incurred to total estimated costs.  Revenues generated from funded developmentcontracts are derived from cost sharing contracts between us and certain customers.  The costs associated with these contractsare included in research and development expenses in the period incurred andare not listed separately as other cost or expenses in the consolidatedstatements of operations.  If milestoneson funded development contracts require that specific results be achieved orreported by us, revenue is not recognized until that milestone is completed.

 

The following tablesummarizes the components of our revenue:

 
|                                            |   | **December  31,**                      |    |
|-------------------------------------------------|--------|----------------------------------------|---------|
|                                            |   | **2001**                               |    | **2002** |   | **2003** |   |
|                                            |   | **(in  thousands, except units sold)** |    |
|                                            |   |                                   |    |   |   |   |   |
| Light source systems:                           |   |                                   |    |   |   |   |   |
| Revenue                                         |   | $                                      | 189,518 |   | $ | 203,106 |   | $ | 160,302 |   |
| Units sold                                      |   | 335                                    |    | 282 |   | 163 |   |
| Average selling price                           |   | $                                      | 566     |   | $ | 720 |   | $ | 983 |   |
|                                            |   |                                   |    |   |   |   |   |
| Consumable and spare parts and service products |   | $                                      | 77,485  |   | $ | 84,889 |   | $ | 105,514 |   |
| Other revenue                                   |   | $                                      | 2,441   |   | $ | 2,165 |   | $ | 1,680 |   |
|                                            |   |                                   |    |   |   |   |   |
| Total revenue                                   |   | $                                      | 269,444 |   | $ | 290,160 |   | $ | 267,496 |   |

 

Product sales decreased 8% from $288.0****millionin 2002 to $265.8****million in 2003, primarily due to a 42% decrease in thenumber of light source systems sold offset by a 37% increase in the averageselling price.  A total of 282 lightsource systems were sold in 2002 at an average selling price of $720,000,compared to 163 systems sold in 2003 at an average selling price of$983,000.  On a foreign currencyadjusted basis, the average selling price for 2002 was $716,000 compared to$963,000 for 2003. This increase in foreign currency adjusted average sellingprice from year to year reflects the inclusion in the product mix of the higherpriced XLA 100 light source system which was introduced in the first quarter of2003 and has a higher average selling price. Sales of consumable and spare parts and service products increased 24%from $84.9 million in 2002 to $105.5 million in 2003.  The increase in this type of product sales was due to increasedutilization of our DUV light source by chipmakers and

 

22

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an increasedinstalled base in 2003.  Revenues fromfunded development projects were $2.2 million in 2002 and $1.7 million in 2003.

 

Ourbacklog at December 31, 2002 was $101.0 million compared to $103.9 million atDecember 31, 2003.  Bookings for theyear ended December 31, 2002 and December 31, 2003 were $294.0 million and $270.4million, respectively.  This decrease inbookings was primarily due to a lower volume of laser light source systemsbookings offset by an increase in bookings of consumable and spare parts andservice products.  The book-to-billratio for the quarter ended December 31, 2002 was 1.25 compared to .92 for thequarter ended December 31, 2003.  Thisdecrease in the book-to-bill ratio was primarily due to the combined impact ofreduced light source system lead times and the light source systems product mixshifting toward KrF systems, which have a lower average selling price.  This shift in product mix toward KrF systemsreflects chipmakers' need for more capacity tools.

 

Weinstalled 284 light sources at chipmakers and other end-users during 2002 ascompared to 231 light sources installed during 2003.

 

Oursales are generated primarily by shipments to customers in Japan, Europe, andthe United States.  Approximately 90% in2002 and 88% in 2003 of our sales were derived from customers outside theUnited States.  We maintain awholly-owned Japanese subsidiary, which sells to our Japanese customers.  Revenues from Japanese customers, generatedprimarily by this subsidiary, accounted for 43% in 2002 and 44% in 2003.  The activities of our Japanese subsidiaryare limited to sales and service of products purchased by the subsidiary fromthe parent corporation.  We anticipatethat international sales will continue to account for a significant portion ofour net sales.

 

Salesto our three largest customers, ASM Lithography, Canon, and Nikon, amounted to32%, 21% and 24%, respectively, of total revenue for 2002, and 24%, 24% and21%, respectively, of total revenue for 2003.

 

*Cost of Product Sales*. Cost of product sales includes directmaterial and labor, warranty expenses, license fees, and manufacturing andservice overhead, and foreign exchange gains and losses on foreign currencyforward exchange contracts associated with purchases of our products by ourJapanese subsidiary for resale under firm third-party sales commitments.  Shipping costs associated with ourproduct sales are also included in cost of product sales.  We do not charge our customers for shippingfees and such costs are not significant.

 

Although the number of light source systems recordedas revenue was significantly lower in 2003 as compared to 2002, in absolutedollars, the cost of product sales increased 16% from $162.1 million for 2002to $187.7 million for 2003. This increase in the cost of product sales fromyear to year is primarily due to the overall costs associated with our new XLA100 light source systems and its initial transition to manufacturing in thefirst quarter of 2003.  These additionalcosts included infrastructure building and facilities expenses as well asreduced efficiencies associated with the learning curve for the production ofthis new light source system.  Inaddition, the increase in the cost of product sales reflects the costsassociated with the increase in sales of consumables and spare parts andservice products in 2003 compared to 2002.

 

The gross margin on product sales was 43.7% for 2002as compared to 29.4% in 2003.  Thislower gross margin in 2003 reflects the lower revenues with higher overallcosts associated with the introduction of our new XL series light source system.Gross margins were also negatively impacted by additional expenses ofapproximately $4.2 million recorded in the second quarter of 2003 for costsassociated with the April 2003 reduction in workforce and the write down ofmanufacturing assets. Gross margins were further reduced in 2003 as a result ofadditional Korean customs expenses associated with our Korean operationsincurred in the third quarter of 2003. We anticipate that the gross margins will increase over the next coupleof quarters as a result of increasing revenues and improved efficienciesassociated with the production of the XL series light source as well as thecontinued benefits resulting from the cost savings measures taken in the secondquarter of 2003.

 

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*Researchand Development*.  Research and development expenses includecosts of internally-funded and externally-funded projects as well as continuingresearch support expenses,  whichprimarily include employee and material costs, depreciation of equipment andother engineering related costs. Research and development expenses decreased21% from $73.7 million for the year ended December 31, 2002 to $58.2 millionfor the year ended December 31, 2003, due primarily to the early stages of theMOPA common platform development effort in 2002 and its release tomanufacturing with the introduction of the XLA 100 in the first quarter of2003.  We shipped the first light sourcesystem that utilizes the MOPA technology, the XLA 100, in February 2003.  We also continued to invest in EUV, F2 andbeam delivery unit technology and to focus on next generation KrF and ArFproducts based on the XL platform.  As apercentage of total revenues, research and development expenses decreased from25.4% for 2002 to 21.8% for 2003, primarily due to the different stages of theMOPA platform development effort.

 

*Sales andMarketing*. Sales andmarketing expenses include the expenses of the sales, marketing and customersupport staff and other marketing expenses.  Sales and marketing expenses decreased 1% from $17.2 million for2002 to $17.0 million for 2003, due to additional expenses associated withreductions in workforce in the second and fourth quarters of 2003 and assetwrite-offs in the second quarter of 2003. These additional expenses were morethan offset by lower expenses resulting from the transfer of various seniormembers of the sales and marketing staff to general and administrativefunctions as part of an organizational structure change made in the lastquarter of 2002.  As a percentage oftotal revenues, such sales and marketing expenses increased from 5.9% for 2002to 6.3% for 2003.

 

*General andAdministrative*.General and administrative expenses consist primarily of management andadministrative personnel costs, professional services and administrativeoperating costs.  General andadministrative expenses increased 115% from $18.2 million for 2002 to $39.1million for 2003, due primarily to a $15.6 million tenant improvementwrite-off associated with the leased facilities vacated during the thirdquarter of 2003.  This write-off waspartially offset by the cost savings realized in the third and fourth quartersof 2003 as a result of the cost reduction efforts implemented in the secondquarter of 2003.  In addition, generaland administrative expenses in 2003 increased from 2002 levels due to thetransfer of various senior personnel from the sales and marketing staff togeneral and administrative functions in the last quarter of 2002.  As apercentage of total revenues, such expenses increased from 6.3% for 2002 to14.6% for 2003.

 

*Amortization of intangibleassets. *Amortization ofintangible assets totaled $160,000 for 2002 and 2003. This amortization ofintangible assets expense is consistent from year to year and relates to theexisting technology associated with the acquisition of Active Control eXperts,Inc., or ACX, which was completed in early 2001.  With our adoption of Statement of Financial Accounting StandardsNo. 142, (“SFAS 142”), “Goodwill and Other Intangible Assets”, on January 1,2002, we discontinued the amortization of goodwill and intangible assets withindefinite useful lives associated with previous purchase businesscombinations.

 

*OtherIncome (Expense) - Net.*  Net other income (expense) consistsprimarily of interest income and expense and foreign currency exchange gainsand losses associated with fluctuations in the value of the functionalcurrencies of our foreign subsidiary offices against the United States dollar.  Net other expense totaled $1.9 million and$1.1 million for 2002 and 2003, respectively. The decrease in net other expense was primarily due to foreign currencyexchange gains in 2003 compared to foreign currency exchange losses recorded in2002, and decreases in interest expense and interest income from year toyear.  Also included in net otherexpenses for 2003 was a loss on disposal of assets of approximately $427,000 asa result of a fixed asset audit conducted in the fourth quarter of 2003.  The decreased interest expense from periodto period was caused by the lower interest rate on the 2002 ConvertibleSubordinated Notes ("2002 Notes") issued by us in 2002, which isreflected in the interest expense amounts for 2003 as compared to additionalinterest which was recorded in 2002 as the result of the principal amounts ofboth our old 1997 Convertible Subordinated Notes ("1997 Notes")issued in 1997 and the 2002 Notes issued in 2002 being outstanding during partof 2002. The decreased interest income in 2003 was primarily due to loweraverage cash and investment balances in 2003 as compared to 2002 as a result ofcash used during 2003 for the continued

 

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construction of our new manufacturing and office facility in San Diegowhich was completed in the third quarter of 2003, and cash used in operatingactivities.  Foreign currency exchangelosses totaled $723,000, interest income totaled $10.1 million and interestexpense totaled $11.2 million for the year ended December 31, 2002, compared toa foreign currency exchange gain of $436,000, interest income of $8.9 millionand interest expense of $10.5 million for the year ended December 31, 2003.

 

*Income TaxProvision (Benefit)*.  The tax provision of $2.7 million and thetax benefit of $21.5 million for the years ended December 31, 2002 and 2003,respectively, reflects an annual effective rate of 16% and 60%,respectively.  The change in the annualeffective tax rate during the year ended December 31, 2002 from 16% to a benefitrate of 60% is primarily attributable to tax benefits from U.S. exportincentive programs and research and development and manufacturing investmentcredits. The annual effective tax rates for both periods are less than the U.S.statutory rate of 35% primarily as a result of permanent book/tax differencesand tax credits. The tax benefit rate for 2003 reflects the increased impact ofour tax credits and foreign sales incentives in a low income or lossenvironment.  The effective taxrate is a function of current tax law and geographic location of pre-taxincome.  There is currently pendinglegislation to repeal the existing U.S. export incentives and the federalresearch credit is scheduled to expire for expenses incurred on or after June30, 2004.  Should these items berepealed or allowed to expire with no replacement benefits, our effective taxrate would likely increase.

 

### **YEARS ENDED DECEMBER31, 2001 AND 2002**

 

*Revenues*.  Productsales increased 8% from $267.0****million in 2001 to $288.0****millionin 2002, primarily due to a 27% increase in the average selling price of ourlight source systems and an increase in consumable and spare parts, servicerevenue and other non-system products. A total of 335 light source systems were sold in 2001 at an average sellingprice of $566,000, compared to 282 systems sold in 2002 at an average sellingprice of $720,000.  On a foreigncurrency adjusted basis, the average selling price for 2001 was $578,000compared to $716,000 for 2002.  Thisincrease in foreign currency adjusted average selling price from period toperiod reflects increased sales in 2002 of our NanoLith 7000 and ELS-7000series products which had higher average selling prices compared to theELS-6000/6010 KrF series products sold in 2001.  Sales of consumable and spare parts and service productsincreased 10% from $77.5 million to $84.9 million for 2001 and 2002,respectively.  The increase in this typeof product sales was due to slightly increased utilization of our DUV lightsources by chipmakers and an increased installed base in 2002.  Revenues from funded development projectswere $2.4 million and $2.2 million for 2001 and 2002, respectively.

 

Approximately85% and 90% of our sales in 2001 and 2002, respectively, were derived fromcustomers outside the United States. Revenues from Japanese customers, generated primarily by thissubsidiary, accounted for 41% and 43% of revenues in 2001 and 2002,respectively.

 

Salesto our three largest customers, ASM Lithography, Canon, and Nikon, amounted to32%, 15% and 29%, respectively, of total revenue for 2001, and 32%, 21% and24%, respectively, of total revenue for 2002.

 

*Cost ofProduct Sales*.  Although the number of light sourcesystems recognized to revenue was lower in 2002 as compared to 2001, the costof product sales increased 7% from $151.3 million in 2001 to $162.1 million in2002.  This increase from period toperiod is primarily due to the higher material cost of the ELS-7000 andNanoLith 7000 light source systems and the higher warranty provisions requiredfor the early shipments of these newer model light sources in 2002.  In addition,  net losses in 2002 as compared to net gains in 2001 on theforeign currency forward exchange contracts entered into by our Japanesesubsidiary contributed to this overall cost of sales increase.  These cost of product increases during 2002were partially offset by increased manufacturing efficiencies in 2002.

 

The gross margin on product sales was 43.3% and 43.7%for 2001 and 2002, respectively. The increase in gross margin in 2002 ascompared to 2001 is primarily due to the building of inventories in 2002 inpreparation for the initial manufacturing of the XLA 100 product.  With the XLA 100 production starting in thefourth quarter of 2002, production activities were higher than normal in theearlier quarters

 

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of 2002 to accommodate the ramp of this new product.  Although there were fewer light sourcesystem unit sales during 2002 as compared to 2001, production levels were muchhigher, resulting in increased manufacturing efficiencies and higher endinginventory balances in 2002.  A portionof the dollar increase in inventory is due to the initial material buildrequirements and higher overall cost of the XLA 100 product.  During 2001, our inventory balancesdecreased by $15.2 million from December 31, 2000, whereas inventory balancesincreased by $38.3 million during the twelve months ended December 31, 2002.

 

*Researchand Development. *Research and development expenses increased 26%from $58.4 million for 2001 to $73.7 million for 2002, due primarily to ourmost recent product development effort, the MOPA platform, or XL series.  We shipped the first light source systemthat utilizes the MOPA platform, the XLA 100, in February 2003.  We also continued to invest in EUVtechnology and the continuing engineering of the ELS-7000 and NanoLith 7000products.  As a percentage of totalrevenues, such expenses increased from 21.6% to 25.4%, primarily due to MOPAplatform development effort.

 

*Sales andMarketing*.  Sales and marketing expenses decreased 13%from $19.6 million for 2001 to $17.2 million for 2002, due primarily toincreased operational efficiencies as well as heightened cost controls madenecessary by the continuing downturn in the semiconductor industry.  As a percentage of total revenues, suchexpenses decreased from 7.3% to 5.9%.

 

*General andAdministrative*.General and administrative expenses decreased 4% from $19.0 million for 2001 to$18.2 million for 2002, due primarily to ongoing improvements in operationalefficiencies and increased cost controls in 2002 necessitated by overallindustry conditions.  As a percentage oftotal revenues, such expenses decreased from 7.0% to 6.3%.

 

*Amortization of intangibleassets.  *Amortization ofintangible assets totaled $3.1 million for 2001 as compared to $160,000 for2002. This decrease in amortization of goodwill and intangible assets wasprimarily due to the adoption of SFAS 142 on January 1, 2002, whichdiscontinued the amortization of goodwill and intangible assets with indefiniteuseful lives associated with previous purchase business combinations.  In 2001, we amortized amounts associatedwith the goodwill and intangible assets resulting from the acquisition of ACXin February 2001.  In 2002, we onlyamortized intangible assets with definite lives per SFAS 142.

 

*PurchasedIn-Process Research and Development*. We incurred $5.1 million of such expenses during the year endedDecember 31, 2001 compared to no such expenses for the year ended December 31,2002. These expenses for the year ended December 31, 2001 were due to theacquisition of ACX and represented the fair value of ACX development projectsassociated with the application of its technology to the semiconductor market.  As of the date of the ACX acquisition, thispurchased in-process research and development was expensed because theapplication of this technology to the semiconductor market was at a stage ofdevelopment that required further research and development before reachingtechnological feasibility and commercial viability.

 

*OtherExpense - Net.*  Net other expense totaled $1.4million and $1.9 million for the years ended December 31, 2001 and 2002,respectively.  The increase in net otherexpense was primarily due to increased interest expense and foreign exchangelosses during the year, which were almost completely offset by increasedinterest income. Although the interest rate on the 2002 Notes is lower than theblended rate on the 1997 Notes, interest expense was higher in 2002 as comparedto 2001 as a result of additional interest from both the 1997 Notes and 2002Notes balances being outstanding in early 2002. The increased interest incomein 2002 was primarily due to higher cash balances, which resulted from the bondtransactions, which occurred in the first quarter of 2002.  These transactions included the privateplacement of the 2002 Notes in February 2002 and the redemption of the 1997Notes that were not converted to common stock prior to the March 25, 2002redemption date.  Foreign currencyexchange gains totaled $877,000, interest income totaled $8.3 million andinterest expense totaled $10.6 million for the year ended December 31, 2001,compared to foreign currency exchange

 

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losses of $723,000, interest income of $10.1 million and interestexpense of $11.2 million for the year ended December 31, 2002.

 

Ourresults of operations are subject to fluctuations in the value of the Japaneseyen against the United States dollar. Sales by us to our Japanese subsidiaryare denominated in dollars, and sales by the subsidiary to customers in Japanare denominated in yen. Our Japanese subsidiary manages its exposure to suchfluctuations by entering into foreign currency forward exchange contracts tohedge its cash flow exposure to Cymer. From January 1, 2001 through June 30,2001, gains or losses resulting from the change in the value of contractsentered into prior to July 1, 2001 were recorded as other income (expense) inthe consolidated statements of operations. Subsequent to June 30, 2001, gainsor losses resulting from contracts entered into after July 1, 2001 wereinitially recorded in other comprehensive income (loss).  The net amount of unrealized effective gainor loss on the date the light source system is received by our Japanesesubsidiary is reclassified to cost of sales on the date that the light sourcesystem is sold to the third party. Gains and losses resulting from foreigncurrency translation are accumulated as a separate component of consolidatedstockholders’ equity.

 

*Income TaxProvision*.  The tax provision of $2.9 million and $2.7million for the years ended December 31, 2001 and 2002, respectively, reflectsan annual effective rate of 25% and 16%, respectively.  The decrease in the annual effective taxrate during the year ended December 31, 2002 from 25% to 16% is primarilyattributable to tax benefits from U.S. export incentive programs and researchand development and manufacturing investment credits. The annual effective taxrates for both periods are less than the U.S. statutory rate of 35% primarilyas a result of permanent book/tax differences and tax credits.

 

#### **LIQUIDITYAND CAPITAL RESOURCES**

 

Asof December 31, 2003, we had approximately $230.7 million in cash and cashequivalents, $93.5 million in short-term investments, $77.5 million inlong-term investments, and $397.8 million in working capital.

 

In August 1997, we issued $172.5 million in aggregateprincipal amount in a private placement of notes. These 31⁄2% / 71⁄4% Step-Up Convertible SubordinatedNotes were due on August 6, 2004 and wereconvertible at the option of the holder into shares of common stock of Cymer.The conversion rate on the 1997 Notes was 21.2766 shares per $1,000 principalamount or an effective conversion price of $47.00 per share.  In 2001, we repurchased a total of $24.9million of the 1997 notes then outstanding. The 1997 Notes were called for redemption on March 25, 2002.  Immediately prior to the March 25, 2002 redemptiondate, holders of $113.0 million of the outstanding principal amount convertedtheir 1997 Notes into shares of our common stock.  As a result of these conversions, 2,325,542 shares of our commonstock were issued to the note holders and the remaining $38.0 million of theoutstanding principal amount of the 1997 Notes was redeemed.

 

In February 2002, we issued $250.0 million in aggregateprincipal amount in a private placement of notes.  The 2002 Notes are due on February 15, 2009 with interest payablesemi-annually on February 15 and August 15 of each year at 31⁄2% per annum.  These 2002 Notes are convertible into sharesof our common stock at a conversion rate of 20 shares per $1,000 principalamount or an effective conversion price of $50.00 per share.  We used a portion of the net proceeds fromthis private placement to redeem the 1997 Notes. The remaining proceeds will beused for our future operating, investing and financing activities.

 

Netcash provided by operating activities was approximately $58.4 million and $25.8million for 2001 and 2002, respectively, compared to $3.6 million used inoperating activities for 2003.  Netcash provided by operating activities during 2001 primarily reflects asignificant reduction in net income from the prior year due to the downturn inthe semiconductor industry during 2001. As a result of this downturn and overall reduced business activitiesduring the period, there were significant decreases in accounts receivable andinventory during the period.  These wereoffset by decreases in accounts payable, accrued and other liabilities, andincome taxes payable during the same period. Net cash

 

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provided by operating activities during 2002 primarily reflects increasesin net income, accounts payable and other liabilities which were offset byincreases in inventory.  The increase ininventory was primarily due to the increased bookings and overall businessactivities in the first three quarters and new raw materials requirementsassociated with the initial production of the XLA 100 in the fourth quarter of2002. Cash was also used as part of our investment in research and developmentfor our MOPA platform effort in 2002.  Net cash used in operating activities during2003 reflects the net loss for the year due to the continued downturn in thesemiconductor industry. This net loss for the year also reflects additionaloverall costs associated with our new XLA 100 light source system and itsintroduction to manufacturing expenses in early 2003.  Cash was further reduced by increases in customer accountsreceivable, decreases in accounts payable, and accrued expenses and otherliabilities offset by a decrease in inventory from period to period.

 

Netcash used in investing activities was approximately $6.2 million, $166.5million, and $5.2 million for 2001, 2002, and 2003, respectively.  In 2001, the cash used in investingactivities was primarily due to the timing of short term and long terminvestments maturing and being reinvested during the period offset by a $6.0million payment made to acquire patents and the purchase of $20.4 million incapital equipment.  In 2002, the $166.5million used in investing activities primarily reflects short-term andlong-term investments made using the net proceeds generated by the 2002 Notetransactions in February and March 2002, and $45.2 million in capital equipmentpurchases. Included in these capital purchases for 2002 are costs associatedwith our new spare parts refurbishment factory in Korea, which was completed inSeptember 2002, and costs associated with the construction of a newmanufacturing and office facility adjacent to our corporate headquarterslocated in San Diego, California. In 2003, the cash used in investing activities was due primarily to thecontinued construction of the new manufacturing and office facility in SanDiego and purchases of required manufacturing equipment for the newfacility.  These capital acquisitionsduring the year were offset by the timing of short-term and long-terminvestments that matured and were reinvested.

 

Net cash used in financing activities wasapproximately $14.5 million for 2001 compared to net cash provided by financingactivities of approximately $225.2 million and $41.4 million for 2002 and 2003,respectively.  In 2001, the cashused in financing activities was attributable to the repurchase of $24.9million in outstanding notes and a net payment on the revolving loan of $1.1million during the period, partially offset by the receipt of $11.8 millionfrom the exercise of employee stock options. In2002, the $225.2 million provided by financing activities was primarily due tothe activity during the first quarter of 2002 related to our 2002 Notes. Theprivate placement of notes that we completed in February 2002 resulted in netproceeds of approximately $242.1 million. Of these proceeds, we used $39.6million to redeem a portion of our outstanding 1997 Notes and pay accruedinterest and premiums on those notes. In addition, during 2002 we receivedproceeds of $22.5 million from the exercise of employee stock options.  In 2003, the cash provided by financing activities was primarily due toproceeds from the exercise of employee stock options of $48.2 million offset bya $6.7 million payment on our Japanese revolving loan, which occurred in June2003.

 

Wehad certain loan agreements with a commercial bank which provided for unsecuredrevolving loan facilities allowing for borrowings of $10.0 million and $20.0million under a U.S. line of credit and Japanese line of credit,respectively.  Under the loanagreements, we were able to borrow in U.S. dollars or Japanese yen, andinterest accrued on outstanding borrowings at LIBOR plus 1.75% on U.S. dollar-denominatedborrowings and at the yen Cost of Funds rate plus 1.5% on yen-denominatedborrowings. The loan agreements required us to maintain compliance with certainfinancial and other covenants, including tangible net worth, quick ratio andprofitability requirements.  The loanagreements expired on June 16, 2003 and were not renewed.

 

Sinceour initial****public offering and a secondary public offering, both in1996, we have funded our operations primarily from cash generated fromoperations, the proceeds of the 1997 and 2002 Notes offerings in August 1997and February 2002, bank borrowings, and the proceeds from employee stock optionexercises.

 

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Werequire substantial working capital to fund our business, particularly tofinance inventories, including purchase orders with our vendors and accountsreceivable, and for capital expenditures. Our future capital requirementsdepend on many factors, including our manufacturing activity, the timing andextent of spending to support product development efforts, expansion of salesand marketing and field service and support, competitive labor marketcompensation requirements, the timing of introductions of new products andenhancements to existing products, and the market acceptance of our products.We believe that we have sufficient working capital to sustain operations andprovide for the future expansion of our business for at least the next 12months.

 

The following summarizes our contractual obligations and othercommitments as of December 31, 2003, and the impact such obligations could haveon our liquidity and cash flow in future periods (in thousands):

 
|                                       |   | **Amount of  Commitment Expiring by Period** |    |
|--------------------------------------------|--------|----------------------------------------------|---------|
|                                       |   | **2004**                                     |    | **2005** |   | **2006** |   | **2007** |   | **2008** |   | **Thereafter** |   | **Total** |   |
|                                       |   |                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital lease obligations                  |   | $                                            | 45      |   | $ | — |   | $ | — |   | $ | — |   | $ |   | $ | — |   | $ | 45 |   |
| Operating lease obligations                |   | 4,507                                        |    | 3,809 |   | 3,787 |   | 3,782 |   | 3,236 |   | 3,329 |   | 22,450 |   |
| Convertible subordinated notes             |   | —                                       |    | — |   | — |   | — |   | — |   | 250,000 |   | 250,000 |   |
| Interest on convertible subordinated notes |   | 8,750                                        |    | 8,750 |   | 8,750 |   | 8,750 |   | 8,750 |   | 4,375 |   | 48,125 |   |
| Purchase orders (1)                        |   | 93,878                                       |    | — |   | — |   | — |   | — |   | — |   | 93,878 |   |
|                                       |   |                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Total commitments                          |   | $                                            | 107,180 |   | $ | 12,559 |   | $ | 12,537 |   | $ | 12,532 |   | $ | 11,986 |   | $ | 257,704 |   | $ | 414,498 |   |
|                                            |        |                                              |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)  This balance reflects purchase ordersoutstanding as of March 2, 2004.

 

AtDecember 31, 2002 and 2003, we did not have any relationship withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance variable interest, or special purposeentities, which would have been established for the purpose of facilitatingoff-balance sheet arrangements or other contractually narrow or limitedpurposes.  In addition, we did notengage in trading activities involving non-exchange traded contracts.  As a result, we are not exposed to anyfinancing, liquidity, market or credit risk that could arise if we had engagedin such relationships.  We do not haverelationships and transactions with persons and entities that derive benefitsfrom their non-independent relationship with us or our related parties exceptas disclosed herein.

 

#### **SUBSEQUENT EVENTS**

 

InJanuary 2004, we signed a research and development agreement with Intel.  This agreement will provide us with fundingof $20.0 million over the next three years to accelerate the development ofproduction-worthy EUV lithography light sources.  The funding to be received from Intel under this agreement ismilestone based and will be netted against our total research and developmentexpenses in the period that the milestone is completed.

 

InFebruary 2004, we acquired 6% of the remaining 25% minority interest in ourmajority-owned subsidiary, Cymer Korea. We paid a total of $2.0 million for this 6% interest and recorded $1.3million of the $2.0 million as an additional investment in Cymer Korea and theremaining $711,000 as goodwill.  Thistransaction increased our total interest in Cymer Korea from 75% to 81%.

 

InFebruary 2004, we signed an intellectual property license agreement with Intelfor the use of certain Intel patents and trade secrets related to the EUVtechnology.  Under the terms of thisagreement, we will pay license fees to Intel if we are successful incommercializing an EUV lithography light source capable of high volumemanufacturing by the end of the second quarter of 2008.  The license payments under this agreementare triggered in the first quarter in which we successfully ship the firstcomplete high volume manufacturing EUV source system.  Upon shipment of this first unit, we will pay Intel $1.25 millionin license fees per quarter for a period of 16 quarters.  The quarterly license amounts paid to Intelwill be related to the sale of our EUV light source systems and, as a result,will be recorded as cost of sale in the period that the payment is made toIntel.

 

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# **RECENT ACCOUNTINGPRONOUNCEMENTS**

 

In January 2003, the FASB issued Interpretation No. 46(“FIN 46”), “Consolidation of Variable Interest Entities”.  FIN 46 provides guidance on how to identifya variable interest entity (VIE) and determines when the assets, liabilities,and results of operations of a VIE need to be included in a company’sconsolidated financial statements.  FIN46 also requires additional disclosures by primary beneficiaries and othersignificant variable interest holders in a VIE.  The provisions of FIN 46 are effective immediately for all VIEscreated after January 31, 2003.  ForVIEs created before February 1, 2003, the provisions of FIN 46 must be adoptedat the beginning of the first interim or annual reporting period beginningafter December 15, 2003.  We do notbelieve that we will be subject to the consolidation or disclosure requirementsof FIN 46.

 

In December 2003, FASB issued Interpretation No. 46R,“Consolidation of Variable Interest Entities”, which supersedes FIN 46.  The application of the revisedinterpretation is required in the financial statements of companies that haveinterests in special purpose entities for periods after December 15, 2003.  We do not believe the application of thisinterpretation will have a material effect on the consolidated financialstatements.

 

#### **RISKS AND UNCERTAINTIES THAT MAY AFFECT RESULTS**

 

*The risks described below may not be the only risks we face.Additional risks that we do not currently think are material may also impairour business operations.  If any of theevents or circumstances described in the following risks actually occur, ourbusiness, financial condition or results of operations could suffer, and thetrading price of our common stock could decline.*

 

Our revenues and operating results fromquarter-to-quarter have varied in the past and our future operating results maycontinue to fluctuate significantly due to many factors including those listedin this section and throughout this annual report on Form 10-K for the periodended December 31, 2003. These factors include:

 

•                  demand forsemiconductors in general and, in particular, for leading edge devices withsmaller circuit geometries;

•                  cyclicality in themarket for semiconductor manufacturing equipment;

•                  rates at whichsemiconductor device manufacturers take delivery of photolithography tools fromphotolithography tool manufactures (“our customers”);

•                  rates at which ourcustomers take delivery of light source systems from us;

•                  timing and size oforders from our small base of customers;

•                  product lead timedemands from our customers and the semiconductor manufacturers;

•                  mix of light sourcemodels, consumable and spare parts and service revenues in our total revenues;

•                  changes in the price andprofitability of our products;

•                  our ability to developand implement new technologies and introduce new products;

•                  changes in marketpenetration by our competitors;

•                  utilization rates oflight sources and sales of consumable and spare parts and services;

•                  our ability to manageour manufacturing requirements;

•                  foreign currencyexchange rate fluctuations, principally with respect to the Japanese yen (inwhich sales by our Japanese subsidiary are denominated);

•                  worldwide politicalinstability;

•                  changing global economicconditions; and

•                  intellectual propertyprotection.

 

We also have historically derived a large portion of ourquarterly and annual revenues from selling a small number of light sourcesystems. Because we sell a small number of products, the precise time that werecognize revenue from an order may have a significant impact on our totalrevenue for a particular period. Our customers may cancel or reschedule orderswith little or no penalty. Orders

 

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expected in one quartercould shift to another period due to changes in the anticipated timing ofcustomers’ purchase decisions or rescheduled delivery dates requested by ourcustomers. Our operating results for a particular quarter or year may beadversely affected if our customers, particularly our three largest customers,cancel or reschedule orders, or if we cannot fill orders in time due tounexpected delays in manufacturing, testing, shipping, and product acceptance.

 

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

 

**Our business depends on thesemiconductor equipment industry, which is highly volatile and unpredictable.**

 

The semiconductor equipment industry is highly cyclical.We derive a substantial percentage of our revenues from photolithography toolmanufacturers. Our customers depend in turn on the demand for theirphotolithography tool products from their customers, the semiconductor devicemanufacturers. The capital equipment expenditures of semiconductormanufacturers depend on a number of factors, including the current andanticipated market demand for semiconductors and products using semiconductors.

 

The semiconductor industry is cyclical in nature andhistorically has experienced periodic ups and downs and currently appears to berecovering from a significant and prolonged downturn. This cyclical nature ofthe industry in which we operate affects our ability to accurately predictfuture revenue and thus, future expense levels. When cyclical fluctuationsresult in lower than expected revenue levels, operating results may beadversely affected and cost reduction measures may be necessary in order for usto remain competitive and financially sound. During a down cycle, we must be in a position to adjust our cost andexpense structure to prevailing market conditions and to continue to motivateand retain our key employees.  Inaddition, during periods of rapid growth, we must be able to increasemanufacturing capacity and personnel to meet customer demand.  We can provide no assurance that theseobjectives can be met in a timely manner in response to industry cycles.

 

Although there is evidence that the prolonged downturnin the semiconductor industry may be over, we are not able to predict with anycertainty the recovery of the semiconductor industry or the order of magnitudeof any recovery.  The recent downturnhas had a severe effect on the demand for semiconductor manufacturingequipment, including photolithography tools that our customers produce.  If overall market conditions deteriorate inthe near term, our current operating levels may negatively impact ourprofitability. We believe that downturns in the semiconductor manufacturingindustry will occur periodically, and result in periodic decreases in demandfor all semiconductor manufacturing equipment, including photolithography toolsour customers manufacture. As a result, fluctuating levels of investment bysemiconductor device manufacturers and pricing volatility will continue tomaterially affect our aggregate bookings, revenues and operating results. Also,even during periods of reduced revenues we believe we must continue to investin research and development and to maintain extensive ongoing worldwidecustomer service and support capabilities to remain competitive, which maytemporarily harm our financial results. Accordingly, these downturns are likely to continue to adversely affectour business, financial condition and operating results and our operatingresults may fall below the expectations of public market analysts or investorsin some future quarter or quarters. Such failure to meet operating resultexpectations would materially adversely affect the price of our common stock.

 

Our customers try to manage their inventories andproduction requirements to appropriate levels that best reflect their expectedsales to semiconductor device manufacturers. Market conditions in the industryand production efficiency of the photolithography tool manufacturers can causeour customers to expand or reduce their orders for new light source systems asthey try to manage their inventories and

 

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production requirementsto these levels. We continue to work with our customers to better understandthese issues. However, we cannot guarantee that we will be successful inunderstanding our customers’ inventory management and production requirementsor that our customers will not build up an excess inventory of light sourceproducts. If our customers retain an excess inventory of light source products,our revenue could be reduced in future periods as the excess inventory isutilized, which could adversely affect our operating results, financialcondition and cash flows.  In addition,if our customers demand shorter product lead times as a solution to improvetheir inventory and cash positions, our inventory management and cash positionmay be impacted, which may adversely affect our operating results, financialcondition and cash flows.

 

**A significantpercentage of our revenue is derived from sales to a few large customers, andif we are not able to retain these customers, or they reschedule, reduce orcancel orders, delay or default on payments, our revenues would be reduced andour financial condition and cash flows would suffer.**

 

Three large companies, ASM Lithography, Canon and Nikondominate the photolithography tool business. Collectively, these threecompanies accounted for the following percentage of our total revenue duringthe periods indicated:

 
|            |   | **Years ended December 31,** |   |
|-----------------|--------|------------------------------|--------|
|            |   | **2001**                     |   | **2002** |   | **2003** |   |
|            |   |                         |   |   |   |   |   |
| ASM Lithography |   | 32                           | %      | 32 | % | 24 | % |
| Canon           |   | 15                           | %      | 21 | % | 24 | % |
| Nikon           |   | 29                           | %      | 24 | % | 21 | % |
|            |   |                         |   |   |   |   |   |
| Total           |   | 76                           | %      | 77 | % | 69 | % |

 

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

 
|            |   | **December 31,** |   |
|-----------------|--------|------------------|--------|
|            |   | **2002**         |   | **2003** |   |
|            |   |             |   |   |   |
| ASM Lithography |   | 43               | %      | 38 | % |
| Canon           |   | 13               | %      | 14 | % |
| Nikon           |   | 19               | %      | 18 | % |
|            |   |             |   |   |   |
| Total           |   | 75               | %      | 70 | % |

 

We expect that sales of our light source products tothese three customers will continue to account for a substantial majority ofour revenue in the foreseeable future. None of our customers are obligated topurchase a minimum number of our products in the aggregate or during anyparticular period. The loss of any significant business from or productionproblems for any one of these three customers may have a material adverseeffect on our business and financial condition. Sales to these customers may beaffected by many factors, some of which are beyond our control. These factorsinclude:

 

•                  a change in a customer’scompetitive position in its industry;

•                  a customer experiencingDUV photolithography tool production problems;

•                  a decision to purchaselight sources from other suppliers;

•                  changes in economicconditions in the semiconductor or the photolithography tool industries; and

•                  a decline in acustomer’s financial condition.

 

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**A substantial percentage of our revenue is derived from thesale of a limited number of primary products.**

 

Ouronly product line is excimer light source systems, which include KrF and ArFsystems, and we expect these primary products to continue to account for alarge percentage of our revenues in the near term. Continued market acceptanceof our primary products is, therefore, critical to our future success. Theprimary market for excimer light sources is in the use of DUV photolithographyequipment for manufacturing deep-submicron semiconductor devices using smallercircuit geometries. The demand for our products depends in part on the rate atwhich semiconductor device manufacturers further adopt excimer light sources asthe chosen light source for their photolithography tools. The rate with whichsemiconductor manufacturers adopt excimer light sources may vary for a varietyof reasons, including:

 

•                  inadequateperformance of photoresists used in advanced DUV photolithography;

•                  potentialshortages of specialized materials used in DUV optics;

•                  productivity of300mm lithography relative to 200mm tools; and

•                  consolidation ofchipmakers.

 

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

 

•                  a decline indemand for our customers’ DUV photolithography tools;

•                  a failure toachieve continued market acceptance of our products;

•                  an improvedversion of products being offered by a competitor in the market we participatein;

•                  technologicalchange that we are unable to address with our products; and

•                  a failure torelease new enhanced versions of our products on a timely basis.

 

**We depend on the introduction of new products for oursuccess, and we are subject to risks associated with rapid technologicalchange.**

 

Rapidtechnological changes in semiconductor manufacturing processes subject us toincreased pressure to develop technological advances enabling such processes.We believe that our future success depends in part upon our ability to develop,manufacture and timely introduce new light source products with improvedcapabilities and to continue to enhance our existing light source systems andprocess capabilities.  Due to the risksinherent in transitioning to new products, we must forecast accurate demand fornew products while managing the transition from older products.

 

Ournewest product introduction project consists of a technology change from asingle- discharge-chamber designed excimer light source to adual-discharge-chamber design called MOPA. This MOPA design represents a paradigm shift from current lithographytechnology and is projected to enable higher power, tighter bandwidth and lowercost of operation for future optical lithography applications across all threeDUV wavelengths - 248nm, 193nm and 157nm. There are risks inherent in transitioning to this new technology.  These risks include effective execution ofthe product development plan, adoption of the product by photolithography toolmanufacturers and semiconductor manufacturers, manufacturability and costeffectiveness of the new products and the development of a comparable productby our competitors.

 

Webelieve that semiconductor device manufacturers are currently developing acapability to produce devices that are measured at 0.13 micron or less, andthese efforts are driving the current demand for our light source products forDUV photolithography systems. After semiconductor device manufacturers havethis capability, their demand for our light source products will depend, inpart, on whether they want to expand their capacity to manufacture thesedevices. This will in turn depend on

 

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whethertheir sales forecasts and projected manufacturing process yields justify thenecessary investments.

 

Futuretechnologies, such as EUV and EPL, may render our excimer light source productsobsolete. We must manage product transitions, as introduction of new productscould adversely affect our sales of existing products. If new products are notintroduced on time, or have reliability or quality problems, our performancemay be impacted by reduced orders, higher manufacturing costs, delays inacceptance of and payment for new products, and additional service and warrantyexpenses. We may not be able to develop and introduce new products orenhancements to our existing products and processes in a timely or costeffective manner that satisfies customer needs or achieves market acceptance.Failure to develop and introduce these new products and enhancements couldmaterially adversely affect our operating results, financial condition and cashflows.

 

Weexpect to face significant competition from multiple current and futurecompetitors. We believe that other companies are developing systems andproducts that are competitive to ours and are planning to introduce newproducts to this market, which may affect our ability to sell our new products.Furthermore, new products represent significant investments of our resourcesand their success, or lack thereof, could have a material effect on ourfinancial results.

 

**We must effectively manage changes in our business.**

 

Inorder to respond to the business cycles of the semiconductor industry, in thepast few years we have sharply expanded and contracted the scope of ouroperations and the number of employees in many of our departments. As thesemiconductor industry grows and contracts we will need to:

 

•                  closely manage ourglobal operations;

•                  improve ourprocess and other internal management systems;

•                  improve ourquality control, order fulfillment, field service and customer supportcapabilities;

•                  quickly adapt tochanging sales and marketing channels;

•                  effectively manageour inventory levels; and

•                  attract, train,retain and manage key personnel.

 

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

 

**Economic, political, regulatory and other events ingeographic areas where we have significant sales or operations could interferewith our business.**

 

Weserve an increasingly global market.  Alarge portion of our total revenues is derived from customers located outsideof the United States, particularly in Asian countries.  We expect our international sales tocontinue to account for a very large portion of our total revenues. In order tosupport our foreign customers, we maintain a manufacturing and field servicesubsidiary in Korea as well as field service and support subsidiaries in Japan,Taiwan, Singapore, the People’s Republic of China and the Netherlands.

 

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

 

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

 

•                  unexpected changesin regulatory requirements;

•                  fluctuations inexchange rates and currency controls;

•                  political andeconomic conditions and instability;

 

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•                  imposition oftrade barriers and restrictions, including changes in tariff and freight rates,foreign customs and duties;

•                  difficulty in coordinatingour management and operations in several different countries;

•                  difficulties instaffing and managing foreign subsidiary and branch operations;

•                  limitedintellectual property protection in some countries;

•                  potentiallyadverse tax consequences in some countries;

•                  the possibility ofaccounts receivable collection difficulties;

•                  in the case ofAsia, the risk of business interruption and damage from earthquakes;

•                  the effect of actsof terrorism and war; and

•                  the burdens ofcomplying with a variety of foreign laws.

 

Many of our major customers and many of thesemiconductor device manufacturers who use our light source products in theirphotolithography systems are located in Asia. Economic problems and currencyfluctuations affecting these regions in Asia could create a larger risk for us.Further, even though it has not been difficult for us to comply with UnitedStates export controls, these export rules could change in the future and makeit more difficult or impossible for us to export our products to manycountries.  Any of these vulnerabilitiescould have a material adverse effect on our business, financial condition andresults of operations.

 

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

 

Wepurchase a limited number of components and subassemblies included in our lightsource products from a single supplier or a small group of suppliers.  For certain optical components used in ourlight source systems, we currently utilize a single supplier.  To reduce the risk associated with thissingle supplier, we carry a significant strategic inventory of thesecomponents.  Strategic inventories aremanaged as a percentage of future demand. We have also negotiated to have vendor-managed inventory of criticalcomponents to further reduce the risk of a single supplier.  In addition, we contract the manufacture ofvarious subassemblies more often than in the past. Further, some of oursuppliers have specialized in supplying equipment or manufacturing services tosemiconductor equipment manufacturers and therefore were adversely affected bythe industry downturn. Because many of these suppliers cut their work forces orotherwise downsized during the downturn they may not be able to meet our requirementsor respond quickly enough as the upturn gains momentum.  Due to the nature of our product developmentrequirements, these key suppliers must rapidly advance their own technologiesand production capabilities in order to support the introduction schedule ofour new products. These suppliers may not be able to provide new modules andsubassemblies when they are needed to satisfy our product schedulerequirements. If we cannot purchase enough of these materials, components orsubassemblies, or if these items do not meet our quality standards, there couldbe delays or reductions in our product shipments, which would have a materialadverse effect on our operating results, financial condition and cash flows.

 

**We face competition from two companies and may facecompetition from additional competitors who enter the market.**

 

Weare currently aware of two significant competitors that sell light sources forDUV photolithography applications. These competitors are:

 

•                  Gigaphoton, ajoint venture between two large companies, Komatsu and Ushio, which isheadquartered in Japan; and

•                  Lambda-Physik, acompany headquartered in Germany, owned by Coherent, Inc., a U.S. company.  In 2003, Coherent purchased an additional34% of the outstanding shares of Lambda-Physik, increasing Coherent’s ownershipto 94%.

 

Webelieve that Gigaphoton and Lambda-Physik are aggressively trying to gainlarger market penetration in the excimer light source industry. We know thatour customers have purchased products

 

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fromthese two competitors and that our customers have approved these competitors’light sources for use with their products. We know that Gigaphoton, in particular, has been approved by chipmakersin Japan, the U.S. and elsewhere for producing excimer light sources.  Also, we believe that Lambda-Physik has beenapproved by chipmakers in the U.S. and Europe for producing excimer lightsource products.

 

Themarket for excimer light sources is still small and immature. Larger competitorswith substantially greater resources, such as other manufacturers of industriallight sources for advanced lithography, may attempt to sell competitiveproducts to our customers. Potential competitors may also be attracted to ourgrowing installed base of light sources and may attempt to supply consumableproducts and refurbished parts to that installed base. If any existing orfuture competitors gain market acceptance we could lose market share and ourgrowth could slow or decline, which could have a material adverse effect on ouroperating results, financial condition and cash flows.

 

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

 

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

 

•                  engineering;

•                  research anddevelopment;

•                  sales andmarketing;

•                  field service;

•                  manufacturing; and

•                  management.

 

Inparticular, there are a limited number of experts in excimer light sourcetechnology, and we require highly-skilled hardware and software engineers.Competition for qualified personnel is intense and we cannot guarantee that wewill be able to continue to attract and retain qualified personnel asneeded.  We do not have employmentagreements with most of our employees. We believe that our future growth andoperating results will depend on:

 

•                  the continuedservices of our engineering, research and development, sales and marketing,manufacturing and field service, and management personnel;

•                  our ability toattract, train and retain highly-skilled key personnel; and

•                  the ability of ourpersonnel and key employees to continue to expand, train and manage ouremployee base.

 

Ifwe are unable to hire, train and retain key personnel as required, ouroperating results,  financial conditionand cash flows could be adversely affected.

 

**Decreased effectiveness of equity compensation couldadversely affect our ability to attract and retain employees, and proposedchanges in accounting for equity compensation could adversely affect earnings.**

 

Wehave historically used stock options and other forms of equity-relatedincentives as a key component of our employee compensation packages. We believethat stock options and other long-term equity incentives directly motivate ouremployees to maximize long-term stockholder value and, through the use oflong-term vesting, encourage employees to remain with us.  The Financial Accounting Standards Board andother agencies have proposed, and are currently considering, changes toaccounting principles generally accepted in the United States of America thatwould require us to record a charge to earnings for employee stock optiongrants and other equity incentives. Moreover, applicable stock exchange listingstandards relating to obtaining stockholder approval of equity compensationplans could make it more difficult or expensive for us to grant options toemployees in the future, which may result in changes in our equity compensationstrategy. These and other developments in the provision of

 

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equitycompensation to employees could make it more difficult to attract, retain andmotivate employees, and such a change in accounting rules may adversely impactour future financial condition and operating results.

 

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

 

Webelieve it is critical for us to provide quick and responsive service directlyto the semiconductor device manufacturers throughout the world that use ourlight source products in their photolithography systems, and that it isessential to maintain our own personnel or trained third-party resources toprovide these services.  Accordingly, wehave an ongoing effort to develop our direct support system with locations inthe United States, Japan, Europe, Korea, Singapore, Taiwan and the People’sRepublic of China. This requires us to do the following:

 

•                  recruit and trainqualified field service personnel;

•                  identify qualifiedindependent firms; and

•                  maintain effectiveand highly trained organizations that can provide service to our customers invarious countries.

 

Wemight not be able to attract and train qualified personnel to maintain ourdirect support operations successfully. We may not be able to find and engagequalified third-party resources to supplement and enhance our direct supportoperations.  Further, we may incursignificant costs in providing these support services. Failure to implement ourdirect support operation effectively could have a material adverse effect onour operating results, financial condition and cash flows.

 

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

 

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

 

Asof December 31, 2003, we owned 197 United States patents covering certainaspects of technology related to light sources and piezo techniques. Thesepatents will expire at various times during the period from January 2008 toNovember 2021.  As of December 31, 2003,we had applied for 79 additional patents in the United States.  As of December 31, 2003, we owned 267foreign patents and had 317 patent applications pending in various foreigncountries.

 

Ourpending patent applications and any future applications might not be approved.Our patents might not provide us with a competitive advantage and may bechallenged by third parties. In addition, third parties’ patents might have anadverse effect on our ability to do business. As a result of cost constraints,we did not begin filing in Japan and other countries our patents for inventionscovered by United States patents and patent applications until 1993.  As a result we do not have the right to seekforeign patent protection for some of our early inventions.  Additionally, laws of some foreign countriesin which our products are or may be developed, manufactured or sold, includingvarious countries in Asia, may not protect our products or intellectualproperty rights to the same extent as do the laws of the United States. Thus,the possibility of piracy of our technology and products are more likely inthese countries. Further, third parties might independently develop similarproducts, duplicate our products or, design around patents that are granted tous.

 

Othercompanies or persons may have filed or may file in the future patentapplications that are similar or identical to ours. We may have to participatein interference proceedings declared by the USPTO in order for the patentoffice to determine the priority of inventions. The patent office may

 

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determinethat these third-party patent applications have priority over our patentapplications. Loss of priority in these interference proceedings could resultin substantial cost to us.

 

Wealso rely on the following to protect our confidential information and our otherintellectual property:

 

•                  trade secretprotection;

•                  employeenondisclosure agreements;

•                  third-partynondisclosure agreements; and

•                  other intellectualproperty protection methods.

 

However,we may not be successful in protecting our confidential information andintellectual property, particularly our trade secrets, because third partiesmay:

 

•                  independentlydevelop substantially the same proprietary information and techniques;

•                  gain access to ourtrade secrets; or

•                  disclose ourtechnology.

 

**The parties to whom we provide research and developmentservices may dispute the ownership of the intellectual property that we developperforming these services.**

 

Inthe past, funds from research and development arrangements with third partieshave been used to pay for a portion of our own research and developmentexpenses. We receive these funds from government-sponsored programs, customersand from SEMATECH, a research consortium, in connection with our designing anddeveloping specific products. Currently, funds from SEMATECH, photolithographytool manufacturers and semiconductor manufacturers are used to fund a smallportion of our development expenses. In providing these research anddevelopment services to these manufacturers and SEMATECH, we try to make clearwho owns the intellectual property that results from the research anddevelopment services we perform. However, disputes over the ownership or rightsto use or market this intellectual property may arise between us and thephotolithography tool manufacturers and SEMATECH. Any dispute over ownership ofthe intellectual property we develop could restrict our ability to market ourproducts and have a material adverse effect on our business.

 

**In the future, we may be subject to patent litigation toenforce patents issued to us and defend ourselves against claimed infringementby our competitors or any other third party.**

 

Thirdparties have notified us in the past, and may notify us in the future, that weare infringing their intellectual property rights. Also, we have notified thirdparties in the past, and may notify them in the future, that they may beinfringing our intellectual property rights.

 

Specifically,Komatsu has notified us that we may be infringing some of its Japanese patents.During our discussions with Komatsu, they also asserted that we or our formerJapanese manufacturing partner, Seiko, may be infringing on some of Komatsu’sUnited States patents and a number of its additional Japanese patents. Komatsuhas also notified one of our customers, Nikon, of its belief that our lightsources infringe several of Komatsu’s Japanese and U.S. patents. As a result,we started proceedings in the Japanese Patent Office to oppose certain patentsand patent applications of Komatsu. The Japanese Patent Office has dismissedsome of our opposition claims. Thus, litigation may result in connection withKomatsu’s Japanese patents or U.S. patents. Also, Komatsu might claim that weinfringe other or additional patents. Komatsu notified Seiko that it intends toenforce its rights against Seiko with respect to its Japanese patents if Seikocontinued to engage in manufacturing activities for us. In connection with ourformer manufacturing agreement with Seiko, we agree to pay Seiko under certainconditions for damages associated with these types of claims. Seiko may notprevail in any litigation against Komatsu, and therefore, we may be required topay Seiko for such damages.

 

Wehave notified our competitors and others of our United States patent portfolio.Specifically, we have notified Komatsu that they may be infringing on some ofour U.S. patents. We have discussed

 

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withKomatsu our claims against each other. Komatsu challenged one of our U.S. patents in the USPTO but it wassubsequently re-issued by the USPTO. Also, Komatsu transferred its lithography light source business to oneof our competitors, Gigaphoton.  We alsohave had discussions with Lambda-Physik (a subsidiary of Coherent, Inc.),another competitor, regarding allegations by each party against the other forpossible patent infringement. Any of these discussions with our competitors maynot be successful and litigation could result.

 

Inthe future, patent litigation may result due to a claim of infringement by ourcompetitors or any other third party or may be necessary to enforce patentsissued to us.  Any such litigation couldresult in substantial cost and diversion of effort by us, which would have anadverse effect on our business, financial condition and operating results.Furthermore, our customers and the end users of our products might assert otherclaims for indemnification that arise from infringement claims against them. Ifthese assertions are successful, our business, financial condition andoperating results may be materially affected. Instead of litigation, we mayseek a license from third parties to use their intellectual property. However,we may not be able to obtain a license on reasonable terms. In the alternative,we may design around the third party’s intellectual property rights or we maychallenge these claims in legal proceedings. Any adverse determination in alegal proceeding could result in one or more of the following, any of whichcould have a substantial adverse effect on our business, financial conditionand operating results:

 

•                  loss of ourproprietary rights;

•                  exposure tosignificant liabilities by other third parties;

•                  requirement thatwe get a license from third parties on terms that are not favorable; or

•                  restriction frommanufacturing or selling our products.

 

Anyof these actions could be costly and would divert the efforts and attention ofCymer’s management and technical personnel, which would materially adverselyaffect Cymer’s business, financial condition and results of operations.

 

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

 

Weregistered the trademark ‘‘CYMER’’ & “INSIST ON CYMER” and others in theUnited States and in some other countries. We are also trying to registeradditional trademarks in the United States and in other countries.  We use these trademarks and many other marksin our advertisements and other business materials, which are distributedthroughout the world. We may be subject to trademark infringement actions forusing these marks and other marks on a worldwide basis and this would be costlyto defend. If a trademark infringement action was successful, we would have tostop using the mark and possibly pay damages.

 

**We are dependent on air transport to conduct our business anddisruption of domestic and international air transport systems could adverselyaffect our business.**

 

Wedepend on regular and reliable air transportation on a worldwide basis for manyof our routine business functions. If civil aviation in the United States orabroad is disrupted by terrorist activities or security responses to the threatof terrorism or for any other reason, our business could be adversely affectedin the following ways:

 

•                  supplies of rawmaterials and components for the manufacture of our products or our customers’products may be disrupted;

•                  we may not be ableto deliver our products to our customers in a timely manner;

•                  we may not be ableto provide timely support of installed light sources for semiconductor devicemanufacturers; and

•                  our sales andmarketing efforts may be disrupted.

 

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**We are exposed to risks related to the fluctuations in thecurrency exchange rates for the Japanese yen.**

 

Ifwe sell products to our Japanese subsidiary, the sale is denominated in U.S.dollars. If our Japanese subsidiary sells our products directly to customers inJapan, the sale is denominated in Japanese yen. Thus, our results of operationsmay fluctuate based on the changing value of the Japanese yen to the U.S.dollar. Our Japanese subsidiary manages its exposure to these fluctuationsthrough foreign currency forward exchange contracts to hedge its purchasecommitments. We will continue to monitor our exposure to these currencyfluctuations, and, when appropriate, use hedging transactions to minimize theeffect of these currency fluctuations. However, exchange rate fluctuations maystill have a material adverse effect on our operating results. In the future,we may need to sell our products in other foreign currencies other than theJapanese yen and the management of more currency fluctuations will be moredifficult and expose us to greater risks in this area.

 

**Compliance with changing regulation of corporate governanceand public disclosure may result in additional expenses***.*

 

Changinglaws, regulations and standards relating to corporate governance and publicdisclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations,Nasdaq Stock Market rules, and new accounting pronouncements are creatinguncertainty and additional complexities for companies such as ours. To maintainhigh standards of corporate governance and public disclosure, we intend toinvest all reasonable necessary resources to comply with evolving standards.This investment may result in increased general and administrative expenses anda diversion of management time and attention from strategic revenue-generatingand cost management activities.

 

**We are subject to many standards and regulations of foreigngovernments and, even though we intend to comply, we may not always be incompliance with these rules, or we may be unable to design or redesign ourproducts to comply with these rules.**

 

Manyforeign government standards and regulations apply to our products. Thesestandards and regulations are always being amended. Although we intend to meetall foreign standards and regulations, our products may not comply with theseforeign government standards and regulations. Further, it might not be costeffective for us to redesign our products to comply with these foreigngovernment standards and regulations. Our inability to design or redesignproducts to comply with foreign standards therefore could have a materialadverse effect on our business.

 

**Semiconductor device manufacturers’ prolonged use of ourproducts in high volume productions may not produce the results they desireand, as a result, our reputation and that of our customers who supplyphotolithography tools to the semiconductor manufacturers could be damaged inthe semiconductor industry.**

 

Overtime, our light source products may not meet semiconductor devicemanufacturers’ production specifications or operating cost requirements afterthe light source is used for a long period in high volume production. If anysemiconductor device manufacturer cannot successfully achieve or sustain theirvolume production using our light sources, our reputation could be damaged withthe semiconductor device manufacturers and our customers who are the limitednumber of photolithography tool manufacturers. This would have a materialadverse effect on our business.

 

**We have in the past and may in the future acquire a businessthat will involve numerous risks. We may not be able to address these riskssuccessfully without substantial expense, delay or other operational andfinancial problems.**

 

Therisks involved with acquiring a new company include the following:

 

•                  diversion ofmanagement’s attention and resources to integrate the new company;

 

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•                  failure to retainkey personnel;

•                  amortization ofacquired definite-lived intangible assets and deferred compensation;

•                  clientdissatisfaction or performance problems with the acquired company;

•                  the costassociated with acquisitions and the integration of acquired operations;

•                  failure tocommercialize purchased technologies;

•                  ability of theacquired companies to meet their financial projections; and

•                  assumption ofunknown liabilities or other unanticipated events or circumstances.

 

Mergersand acquisitions are inherently subject to multiple significant risks, and theinability to effectively manage these risks could have a material adverseeffect on our business.  Any of theserisks could materially harm our business, financial condition and operatingresults. Further, any business that we acquire may not achieve anticipatedrevenues or operating results.

 

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

 

Tocontinue to grow our business, our existing light source products and theirprocess capabilities must be enhanced, and we must develop and manufacture newproducts to serve other semiconductor applications. We cannot guarantee that wewill be able to manage our growth effectively. Nor can we guarantee that wewill be able to accelerate the development of new enhancements to our existingproducts and create new products. Further, we may not be able to effectivelyintegrate new products and applications into our current operations. Any ofthese risks could materially harm our business, financial condition and resultsof operations.

 

## ***We are dependent on ourmanufacturing facilities and subcontractors to assemble and test our products.***

 

Operationsat our primary manufacturing facility and our subcontractors are subject todisruption for a variety of reasons, including work stoppages, terrorism, fire,earthquake, energy shortages, flooding or other natural disasters.  Such disruptions could cause delays inshipments of our products to our customers. We cannot ensure that alternate production capacity would be availableif a major disruption were to occur or that, if it were available, it could beobtained on favorable terms.  Suchdisruption could result in cancellation of orders or loss of customers, whichwould have a material adverse effect on our operating results, financialcondition and cash flows.

 

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

 

Weare subject to federal, state and local regulations, such as regulationsrelated to the environment, land use, public utility utilization and the firecode, in connection with the storage, handling, discharge and disposal ofsubstances that we use in our manufacturing process and on our facilities.  We believe that our activities comply withcurrent government regulations that are applicable to our operations andcurrent facilities. We may be required to purchase additional capital equipmentor other requirements for our processes to comply with these governmentregulations in the future if they change. Further, these government regulationsmay restrict us from expanding our operations. Adopting measures to comply withchanges in the government regulations, our failure to comply with environmentaland land use regulations, or restrictions on our ability to discharge hazardoussubstances, could subject us to future liability or cause our manufacturingoperations to be reduced or stopped.

 

**Our products are subject to potential product liabilityclaims if personal injury or death result.**

 

Weare exposed to significant risks for product liability claims if personalinjury or death results from the use of our products. We may experiencematerial product liability losses in the future. We maintain insurance againstproduct liability claims. However, our insurance coverage may not continue

 

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to be available on terms that we accept.This insurance coverage also may not adequately cover liabilities that weincur. Further, if our products are defective, we may be required to recall orredesign these products. A successful claim against us that exceeds ourinsurance coverage level, or any claim or product recall that results inadverse publicity against us, could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

**The price of our common stock hasfluctuated and may continue to fluctuate widely.**

 

Theprice of our common stock has fluctuated in the past. The market price of ourcommon stock will continue to be subject to significant fluctuations in thefuture in response to a variety of factors, including the risk factorscontained in this report.

 

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

 

•                  the cyclicalnature of the semiconductor industry;

•                  actual oranticipated fluctuations in our operating results;

•                  conditions andtrends in the light source device and other technology industries;

•                  announcements ofinnovations in technology;

•                  new productsoffered by us or our competitors;

•                  developments ofpatents or proprietary rights;

•                  changes infinancial estimates by securities analysts;

•                  general worldwidepolitical, economic, and market conditions;

•                  United Statespolitical, economic, and market conditions; and

•                  failure toproperly manage any single or combination of risk factors listed in thissection.

 

Inaddition, the stock market has experienced extreme price and volumefluctuations that have particularly affected the market price for many hightechnology companies. Such fluctuations have in some cases been unrelated tothe operating performance of these companies. Severe price fluctuations in acompany’s stock have frequently been followed by securities litigation.  Any such litigation can result insubstantial costs and a diversion of management’s attention and resources andtherefore could have a material adverse effect on Cymer’s business, financialcondition and results of operations.

 

**We have implemented steps to protect our company from hostiletakeovers.**

 

Nevada law and our articles of incorporationcontain provisions that discourage a proxy contest and provisions that make anacquisition of a substantial block of our common stock more difficult. Inaddition, our board of directors is authorized to issue, without stockholderapproval, shares of preferred stock. Such shares of preferred stock may havevoting, conversion and other rights and preferences that may be superior tothose of the common stock and this could adversely affect the voting power orother rights of holders of common stock. Our board can use the issuance of thepreferred stock or rights to purchase the preferred stock to discourage anyunsolicited acquisition proposal or attempt.

 

#### **Item 7A.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

# **Foreign Currency Risk**

 

Cymerconducts business in several international currencies through its globaloperations. Due to the large volume of Cymer’s business that is conducted inJapan, the Japanese operation poses the greatest foreign currency risk.  Cymer uses financial instruments,principally foreign currency forward exchange contracts, in Japan to manage itsforeign currency exposures. Cymer enters into foreign currency forward exchangecontracts in order to reduce the impact of currency fluctuations related topurchases of Cymer’s inventories by Cymer Japan in U.S. dollars for resaleunder firm third-party sales commitments denominated in Japanese yen.  Cymer does not enter into foreign currencyforward exchange contracts for trading purposes.

 

42

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Asof December 31, 2003, Cymer had outstanding foreign currency forward exchangecontracts to buy U.S. $81.0 million for 9.3 billion yen under foreign currencyexchange facilities with contract rates ranging from 107.09 yen to 120.6****yen per U.S. dollar.  These contracts expire on various datesthrough February 2005.

 

Cymer’s foreign currency forward exchange contractsqualify for hedge accounting treatment per the provisions of Statement ofFinancial Accounting Standards No. 133, “Accounting for Derivative Instrumentsand Hedging Activities”.  As a result,Cymer defers changes in the fair value of these contracts and records theamount in other comprehensive income (loss) and subsequently reclassifies thegain or loss to cost of product sales in the same period that the related saleis made to the third party. The unrealized loss or fair value of thesecontracts and the deferred loss totaled $6.4 million and $2.7 million,respectively, as of December 31, 2003. The fair value of these foreign currency forward exchange contracts asof December 31, 2003 would have changed by $8.1 million if the foreign currencyexchange rate for the Japanese yen to the U.S. dollar on these forwardcontracts had changed by 10%.

 

# **Investment and Debt Risk**

 

Cymermaintains an investment portfolio consisting primarily of government andcorporate fixed income securities, certificates of deposit and commercialpaper.  While it is Cymer’s generalintent to hold such securities until maturity, Cymer will occasionally sellcertain securities for cash flow purposes. Therefore, Cymer’s investments areclassified as available-for-sale and are carried on the balance sheet at fairvalue.  Due to the conservative natureof the investment portfolio, a sudden change in interest rates would not have amaterial effect on the value of the portfolio.

 

InFebruary 2002, Cymer issued $250.0 million principal amount of unsecured fixedrate 31⁄2% Convertible Subordinated Notes due February 15, 2009.  Interest on these 2002 Notes is payable onFebruary 15 and August 15 of each year, commencing August 15, 2002.  The 2002 Notes are convertible into sharesof Cymer’s common stock at a conversion rate of 20 shares per $1,000 principalamount subject to adjustment under certain conditions. Cymer may redeem the2002 Notes on or after February 20, 2005, or earlier if the price of its commonstock reaches certain levels.  The 2002Notes are subordinated to Cymer’s existing and future senior indebtedness andeffectively subordinated to all indebtedness and other liabilities of Cymer’ssubsidiaries.  Because the interest rateis fixed, we believe there is no risk of increased interest expense.  These 2002 Notes are recorded at face valueon the consolidated balance sheets.  Thefair value of such debt based on quoted market prices on December 31, 2003 was$276.0 million.

 

#### **Item 8.  Financial Statements and Supplementary Data**

 

Theinformation required by this Item is included in Part IV Items 15(a)(1) and (2)of this Annual Report on Form 10-K.

 

**Item 9.  Changes inand Disagreements with Accountants on Accounting and Financial Disclosure**

 

None.

 

#### **Item9A.  Controls and Procedures**

 

*Evaluation of disclosure controls and procedures*.  Cymer’s chief executive officer and itschief financial officer, after evaluating the effectiveness of Cymer’sdisclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)and 15d-15(e)) as of December 31, 2003, have concluded that as of such date,Cymer’s disclosure controls and procedures were adequate and sufficient toensure that information required to be disclosed by Cymer in the reports thatit files under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time period specified in the Commission’srules and forms.

 

43

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*Changes in internal controls*. There has beenno change in Cymer’s internal control over financial reporting during thefiscal quarter ended December 31, 2003 that has materially affected, or isreasonably likely to materially affect, Cymer’s internal control over financialreporting.

 

##### ***PART III***

 

**Item 10.  Directors and Executive Officers of the Registrant.**

 

Theinformation regarding the identification and business experience of Cymer’sdirectors under the caption “Proposal 1 - Election of Directors” in Cymer’sProxy Statement for the annual meeting of stockholders to be held on May 20,2004 to be filed with the Securities and Exchange Commission within 120 daysafter the end of Cymer’s fiscal year ended December 31, 2003, is incorporatedherein by reference.  For informationregarding the identification and business experience of Cymer’s executive officers,see “Executive Officers” at the end of Item 1 in Part I of this Annual Reporton Form 10-K. Information concerning filing requirements applicable to Cymer’sexecutive officers and directors under the caption “Section 16(a) BeneficialOwnership Reporting Compliance” in Cymer’s Proxy Statement is incorporatedherein by reference.

 

In2003, Cymer adopted a code of ethics that applies to its principal executiveofficer, principal financial officer, principal accounting officer orcontroller, or persons performing similar functions.  Within the next two months Cymer will post the text of the codeof ethics on its website which can be accessed at http://www.cymer.com under“Investor relations.”  In addition,Cymer will promptly disclose on its website (1) the nature of any amendment tothe code of ethics that applies to its principal executive officer, principalfinancial officer, principal accounting officer or controller, or personsperforming similar functions and (2) the nature of any waiver, including animplicit waiver, from a provision of the code of ethics that is granted to oneof these specified officers, and the name of such person who is granted thewaiver on Cymer’s website in the future.

 

**Item 11.  Executive Compensation**

 

Theinformation under the caption “Executive Compensation” in Cymer’s ProxyStatement is incorporated herein by reference.

 

**Item 12.  Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters**

 

Theinformation under the caption “Security Ownership of Certain Beneficial Ownersand Management”  in Cymer’s ProxyStatement is incorporated herein by this reference.  The remaining information called for by this item relating to“Securities Authorized for Issuance under Equity Compensation Plans” isincorporated herein by reference to Cymer’s Proxy Statement.

 

### **Item 13.  Certain Relationshipsand Related Transactions**

 

Theinformation under the caption “Certain Transactions” in Cymer’s Proxy Statementis incorporated herein by reference.

 

Withthe exception of the information specifically incorporated by reference fromCymer’s Proxy Statement in this Annual Report on Form 10-K, Cymer’s ProxyStatement shall not be deemed to be filed as part of this Report.  Without limiting the foregoing, theinformation under the captions “Report of the Audit Committee of the Board ofDirectors,”  “Report of the CompensationCommittee of the Board of Directors” and “Performance Measurement Comparison”in Cymer’s Proxy Statement is not incorporated by reference in this AnnualReport on Form 10-K.

 

44

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#### **Item 14.  Principal Accounting Fees and Services**

 

Theinformation under the caption “Principal Accounting Fees and Services” inCymer’s Proxy Statement is incorporated herein by reference.

 

PARTIV

 

### **Item 15.  Exhibits**, Financial Statement Schedules, and Reports onForm 8-K

 

(a)                                  The followingdocuments are filed as part of, or incorporated by reference into, this AnnualReport on Form 10-K:

 

(1)(2)                    FinancialStatements and Financial Statement Schedule. The following Consolidated FinancialStatements of Cymer, Inc., Financial Statement Schedules and IndependentAuditors’ Report are included in a separate section of this Annual Report onForm 10-K beginning on page F-1:

 
| **Description**                                                                                             |   |
|-------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                        |   |
| Independent Auditors’  Report                                                                          |   |
| Consolidated Balance Sheets  as of December 31, 2002 and 2003                                               |   |
| Consolidated  Statements of Operations for the Years Ended December 31, 2001, 2002 and 2003                 |   |
| Consolidated  Statements of Stockholders’ Equity for the Years Ended December 31, 2001,  2002 and 2003 |   |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2001, 2002 and 2003                 |   |
| Notes to  Consolidated Financial Statements                                                                 |   |
| Financial  Statement Schedule:                                                                              |   |
| Schedule  II – Valuation and Qualifying Accounts and Reserves                                          |   |

 

All other financial statement schedules have beenomitted because the required information is not applicable or not present inamounts sufficient to require submission of the schedule, or because theinformation required is included in the consolidated financial statements orthe notes thereto.

 

(3)                                  Exhibits.  The exhibits listed under Item 15(c) hereofare filed with, or incorporated by reference into, this Annual Report on Form10-K.  Each management contract orcompensatory plan or arrangement is identified separately in item 15(c) hereof.

 

(b)                                 Reports on Form8-K.  On October 21, 2003, Cymer filed a Form 8-Kannouncing its third quarter 2003 financial results.

 

(c)                                  Exhibits.  The following exhibits are filed as part of,or incorporated by reference into, this Annual Report on Form 10-K:

 
| 3.1    |   | Amended  and Restated Articles of Incorporation of Cymer, Inc. (incorporated herein by  reference to Exhibit 3.1 to Cymer’s Registration Statement on Form S-1, Reg.  No. 333-08383).                                 |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                       |
| 3.2    |   | Certificate  of Designations of Rights, Preferences and Privileges of Series A  Participating Preferred Stock of Cymer (incorporated herein by reference to  Exhibit 1 to Cymer’s Form 8-A, dated February 20, 1998). |
|   |   |                                                                                                                                                                                                                       |
| 3.3    |   | Certificate  of Amendment of Articles of Incorporation of Cymer, Inc.                                                                                                                                                      |

 

45

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|   |   | (incorporated  herein by reference to Exhibit 3.1 to Cymer’s Quarterly Report on Form 10-Q  for the quarter ended June 30, 2002).                                                                                                                                                                                  |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 3.4    |   | Bylaws  of Cymer, as amended and restated (incorporated herein by reference to Exhibit  3.3 to Cymer’s Annual Report on Form 10-K for the year ended December 31,  2000).                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 3.5    |   | Amendment  to Bylaws of Cymer, Inc. (incorporated herein by reference to Exhibit 3.4 to  Cymer’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003).                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 4.1    |   | Preferred  Shares Rights Agreement, dated as of February 13, 1998 between Cymer and  ChaseMellon Shareholder Services, L.L.C. (now Mellon Investor Services  L.L.C.) (incorporated herein by reference to Exhibit 1 to Cymer’s Form 8-A,  dated February 20, 1998).                                                |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 4.2    |   | Agreement  of Substitution and Amendment of Preferred Share Rights Agreement, dated  January 13, 2003, between Cymer and American Stock Transfer and Trust Company  (incorporated herein by reference to Exhibit 4.2 to Cymer’s Annual Report on  Form 10-K filed for the year ended December 31, 2002).           |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 4.3    |   | Purchase  Agreement, dated as of February 12, 2002, among Cymer, Credit Suisse First  Boston Corporation and Merrill Lynch Pierce Fenner and Smith Incorporated  (incorporated herein by reference to Exhibit 4.1 to Cymer’s Quarterly Report  on Form 10-Q for the quarter ended March 31, 2002).                 |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 4.4    |   | Indenture,  dated as of February 15, 2002, between Cymer and State Street Bank and Trust  Company of California, N.A., as Trustee (incorporated herein by reference to  Exhibit 4.2 to Cymer’s Quarterly Report on Form 10-Q for the quarter ended  March 31, 2002).                                               |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 4.5    |   | Registration  Rights Agreement, dated as of February 15, 2002, among Cymer, Credit Suisse  First Boston Corporation and Merrill Lynch Pierce Fenner and Smith  Incorporated (incorporated herein by reference to Exhibit 4.3 to Cymer’s  Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).      |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.1   | #      | Form  of Indemnification Agreement with Directors and Officers.                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.2   |   | Standard Industrial Lease - Multi-Tenant, dated August  19, 1991, by and between Lepercq Corporate Income Fund L.P. and  Cymer****(originally between  Frankris****Corporation and Cymer)  (incorporated herein by reference to Exhibit 10.15 to Cymer’s Registration  Statement on Form S-1, Reg. No. 333-08383). |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.3   |   | Single-Tenant  Industrial Lease, dated December 19, 1996, by and between AEW/LBA Acquisition  Co. II, LLC and Cymer (incorporated herein by reference to Exhibit 10.20 to  Cymer’s Annual Report on Form 10-K filed for the year ended December 31,  1996).                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 10.4   |   | Standard  Form of Agreement between owner (Cymer, Inc.) and contractor (Hensel-Phelps  Construction Company) dated July 22, 2002 (incorporated                                                                                                                                                                          |

 

46

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|   |   | herein  by reference to Exhibit 10.1 to Cymer’s Quarterly Report on Form 10-Q for the  quarter ended September 30, 2002).                                                                                                                                                                 |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.5   |   | Contract  Manufacturing Agreement - Lithography Laser, dated August 28, 1992, by and  between Cymer and Seiko Instruments Inc. (the “Seiko Agreement”)  (incorporated herein by reference to Exhibit 10.16 to Cymer’s Registration  Statement on Form S-1, Reg. No. 333-08383). |
|   |   |                                                                                                                                                                                                                                                                                           |
|   |   | Addendum  No. 2 to the Seiko Agreement, dated February 21, 2000 (incorporated herein by  reference to Exhibit 10.5 to Cymer’s Annual Report on Form 10-K for the year  ended December 31, 1999).                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                           |
|   |   | Termination  of Seiko Contract Manufacturing Agreement - Lithography Laser, dated March  31, 2003 (incorporated herein by reference to Exhibit 10.5 to Cymer’s Annual  Report on Form 10-K for the year ended December 31, 2002).                                                         |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.6   | #      | 1996  Stock Option Plan, as amended (incorporated herein by reference to Exhibit  99.1 to Cymer’s Registration Statement on Form S-8, Registration No.  333-69736).                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.7   | #      | Form of Stock Option Agreement used in connection  with the 1996 Stock Option Plan, as amended (incorporated herein by reference  to Exhibit 4.1 to Cymer’s Registration Statement on Form S-8, Registration  No. 333-48242).                                                             |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.8   | #      | 1996  Employee Stock Purchase Plan, as amended (incorporated herein by reference to  Exhibit 99.3 to Cymer’s Registration Statement on Form S-8, Registration No.  333-69736).                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.9   | #      | 1996  Director Option Plan (incorporated herein by reference to Exhibit 10.5 to  Cymer’s Registration Statement on Form S-1, Reg. No. 333-08383).                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.10  | #      | 2000  Equity Incentive Plan (formerly known as the 2000 Nonstatutory Stock Option  Plan and incorporated herein by reference to Exhibit 99.4 to Cymer’s  Registration Statement on Form S-8, Registration No. 333-69736).                                                                 |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.11  | #      | Form of Stock Option Agreement used in connection  with the 2000 Equity Incentive Plan (incorporated herein by reference to  Exhibit 99.5 to Cymer’s Registration Statement on Form S-8, Registration No.  333-69736).                                                                    |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.12  | #      | Employment  Agreement, effective as of April 1, 2002, by and between Robert P. Akins and  Cymer (incorporated herein by reference to Exhibit 10.1 to Cymer’s Quarterly  report on Form 10-Q for the quarter ended March 31, 2002).                                                        |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.13  | #      | Employment  Agreement, effective as of March 1, 2004, by and between Nancy J. Baker and  Cymer.                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.14  | #      | Employment  Agreement, effective as of June 1, 2003, by and between Pascal Didier and  Cymer (incorporated herein by reference to Exhibit 10.1 to Cymer’s Quarterly  report on Form 10-Q for the quarter ended June 30, 2003).                                                            |

 

47

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| 10.15  | #      | Employment  Agreement, effective as of May 1, 2003, by and between Edward P. Holtaway and  Cymer (incorporated herein by reference to Exhibit 10.4 to Cymer’s Quarterly  report on Form 10-Q for the quarter ended June 30, 2003).                                                    |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.16  | #      | Employment  Agreement, effective as of May 1, 2003, by and between Brian C. Klene and  Cymer (incorporated herein by reference to Exhibit 10.5 to Cymer’s Quarterly  report on Form 10-Q for the quarter ended June 30, 2003).                                                        |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.17  | #      | Employment  Agreement, effective as of May 1, 2003, by and between Jung Ho (John) Shin  and Cymer (incorporated herein by reference to Exhibit 10.6 to Cymer’s  Quarterly report on Form 10-Q for the quarter ended June 30, 2003).                                                   |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.18  | #      | Employment  Agreement, effective as of June 1, 2003, by and between Hugh R. Grinolds and  Cymer (incorporated herein by reference to Exhibit 10.3 to Cymer’s Quarterly  report on Form 10-Q for the quarter ended June 30, 2003).                                                     |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.19  | #      | Employment  Agreement, effective as of May 1, 2003, by and between Rae Ann Werner and  Cymer (incorporated herein by reference to Exhibit 10.7 to Cymer’s Quarterly  report on Form 10-Q for the quarter ended June 30, 2003).                                                        |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.20  | #      | Employment  Agreement, effective as of October 1, 2003, by and between James M. Caltrider  and Cymer (incorporated herein by reference to Exhibit 10.1 to Cymer’s  Quarterly report on Form 10-Q for the quarter ended September 30, 2003).                                           |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.21  | #      | Employment  Agreement, effective September 29, 2003, by and between Anthony Yen and  Cymer.                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.22  | #      | Description  of Cymer Incentive Bonus Program.                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.23  | #      | Cymer  Deferred Compensation Plan, as amended and restated (incorporated herein by  reference to Exhibit 10.1 to Cymer’s Quarterly Report on Form 10-Q for the  quarter ended March 31, 2000).                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.24  |   | Credit  Agreement, dated as of June 28, 2001, by and between Cymer, Inc. and Wells  Fargo HSBC Trade Bank (incorporated herein by reference to Exhibit 10.1 to  Cymer’s Quarterly Report on Form 10-Q for the quarter ended September 30,  2001).                                     |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.25  |   | Amendment  No. 1, dated June 7, 2002, by and between Cymer, Inc. and Wells Fargo HSBC  Bank, N.A. (incorporated herein by reference to Exhibit 10.19 to Cymer’s  Annual Report on Form 10-K for the year ended December 31, 2002).                                                    |
|   |   |                                                                                                                                                                                                                                                                                       |
| 10.26  | *      | Patent  License Agreement, dated May 14, 2001, by and among Cymer, Inc., Linda B.  Jacob, Joseph A. Mangano, and Science Research Laboratory, Inc. (incorporated  herein by reference to Exhibit 10.2 to Cymer’s Quarterly Report on Form 10-Q  for the quarter ended June 30, 2001). |
|   |   |                                                                                                                                                                                                                                                                                       |
|   |   | Patent  Sublicense Agreement, dated May 14, 2001, by and between Science Research  Laboratory, Inc. and Cymer, Inc. (incorporated herein by                                                                                                                                                |

 

48

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|   |   | reference  to Exhibit 10.2 to Cymer’s Quarterly Report on Form 10-Q for the quarter  ended June 30, 2001).                                                                                                                                                                                   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                              |
| 10.27  |   | Patent  Sublicense Agreement, dated November 7, 2003, by and between SRL-EUV, LLC and  Cymer, Inc.                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10.28  |   | Patent  Sublicense Agreement, dated November 7, 2003, by and between Science Research  Laboratory, Inc. and Cymer, Inc.                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10.29  | #      | Reduction  in Force Benefits Plan, as amended (incorporated herein by reference to  Exhibit 10.1 to Cymer’s Quarterly Report on Form 10-Q for the quarter ended  March 31, 2003).                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10.30  | #      | Executive  Option and Group Health Coverage Extension Program (incorporated herein by  reference to Exhibit 10.22 to Cymer’s Annual Report on Form 10-K for the year  ended December 31, 2001).                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10.31  |   | Credit  Agreement, dated October 30, 2001, by and between Cymer Japan, Inc. and Wells  Fargo HSBC Trade Bank, N.A. (incorporated herein by reference to Exhibit  10.25 to Cymer’s Annual Report on Form 10-K for the year ended December 31,  2002).                                         |
|   |   |                                                                                                                                                                                                                                                                                              |
|   |   | Parent  Guarantee, dated October 30, 2001, by Cymer, Inc. with respect toCredit Agreement  between Wells Fargo HSBC Trade Bank, N.A. and Cymer Japan, Inc.  (incorporated herein by reference to Exhibit 10.25 to Cymer’s Annual Report  on Form 10-K for the year ended December 31, 2002). |
|   |   |                                                                                                                                                                                                                                                                                              |
|   |   | Amendment  No. 1, dated June 7, 2002, by and between Cymer Japan, Inc. and Wells Fargo  HSBC Bank, N.A. (incorporated herein by reference to Exhibit 10.25 to Cymer’s  Annual Report on Form 10-K for the year ended December 31, 2002).                                                     |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10.32  | #      | Description  of President/COO Bonus Plan (incorporated herein by reference to Exhibit  10.26 to Cymer’s Annual Report on Form 10-K for the year ended December 31,  2002).                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                              |
| 14.1   |   | Code  of Ethics for Chief Executive, Chief Financial and Chief Accounting Officers                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                              |
| 21.1   |   | Subsidiaries  of Cymer                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                              |
| 23.1   |   | Consent  of KPMG LLP, Independent Auditors                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                              |
| 31.1   |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                              |
| 31.2   |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                              |
| 32.1   |   | Certification  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                              |
| 32.2   |   | Certification  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act                                                                                                                                                                                                       |

 

49

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----

#  Indicates management contract orcompensatory plan or arrangement.

 

* Confidential treatment was requested with respect to certain portions ofthis exhibit. Omitted portions were filed separately with the Securities andExchange Commission.

 

(d)                                                         FinancialStatement Schedules.  See item15, paragraph (a) (2), above.

 

50

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SIGNATURES

 
|                  |   | CYMER,  INC.                                         |
|-----------------------|--------|------------------------------------------------------|
|                  |   |
|                  |   |
| Dated:  March 9, 2004 | By:    | /s/                                                  | ROBERT  P. AKINS |   |
|                  |   | Robert  P. Akins,                                    |
|                  |   | Chief  Executive Officer,  and Chairman of the Board |
|                       |        |                                                      |  |  |  |

 

 

KNOW ALL PERSONS BY THESE PRESENTS, that eachperson whose signature appears below constitutes and appoints Nancy J. Bakerand Rae Ann Werner, and each of them, as his true and lawful attorneys-in-factand agents, with full power of substitution and resubstitution, for him and inhis name, place, and stead, in any and all capacities, to sign any and allamendments to this Report, and to file the same, with all exhibits thereto, andother documents in connection therewith, with the Securities and ExchangeCommission, granting unto said attorneys-in-fact and agents, and each of them,full power and authority to do and perform each and every act and thingrequisite and necessary to be done in connection therewith, as fully to allintents and purposes as he might or could do in person, hereby ratifying andconfirming that all said attorneys-in-fact and agents, or any of them or theiror his substitute or substituted, may lawfully do or cause to be done by virtuehereof.

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the dateindicated.

 
|   | /s/   ROBERT P. AKINS   |   | Chief  Executive Officer,  and Chairman of the Board  (*Principal Executive Officer*)       | March  9, 2004 |
|--------|------------------------------|--------|---------------------------------------------------------------------------------------------|----------------|
|   | Robert P. Akins              |   |
|   |                         |   |
|   |                         |   |                                                                                        |
|   | /s/  NANCY  J. BAKER    |   | Senior  Vice President  and Chief Financial Officer  (*Principal Financial Officer*)        | March  9, 2004 |
|   | Nancy J. Baker               |   |
|   |                         |   |
|   |                         |   |                                                                                        |
|   | /s/  RAE  ANN WERNER    |   | Vice  President, Controller  and Chief Accounting Officer  (*Principal Accounting Officer*) | March  9, 2004 |
|   | Rae Ann Werner               |   |
|   |                         |   |
|   |                         |   |                                                                                        |
|   | /s/   CHARLES J. ABBE   |   | Director                                                                                    | March  9, 2004 |
|   | Charles J. Abbe              |   |                                                                                        |
|   |                         |   |                                                                                        |
|   | /s/   EDWARD H. BRAUN   |   | Director                                                                                    | March  9, 2004 |
|   | Edward H. Braun              |   |                                                                                        |
|   |                         |   |                                                                                        |
|   | /s/   MICHAEL R. GAULKE |   | Director                                                                                    | March  9, 2004 |
|   | Michael R. Gaulke            |   |                                                                                        |
|   |                         |   |                                                                                        |
|   | /s/   WILLIAM G. OLDHAM |   | Director                                                                                    | March  9, 2004 |
|   | William G. Oldham            |   |                                                                                        |
|   |                         |   |                                                                                        |
|   | /s/  PETER  J. SIMONE   |   | Director                                                                                    | March  9, 2004 |
|   | Peter J. Simone              |   |                                                                                        |
|   |                         |   |                                                                                        |
|   | /s/  YOUNG  K. SOHN     |   | Director                                                                                    | March  9, 2004 |
|   | Young K. Sohn                |   |                                                                                        |
|   |                         |   |                                                                                        |
|   | /s/  JON  D. TOMPKINS   |   | Director                                                                                    | March  9, 2004 |
|   | Jon D. Tompkins              |   |                                                                                        |

 

51

----

 

**Independent Auditors’ Report**

 

TheBoard of DirectorsCymer, Inc.:

 

Wehave audited the accompanying consolidated balance sheets of Cymer, Inc. andsubsidiaries as of December 31, 2002 and 2003, and the related consolidatedstatements of operations, stockholders’ equity and cash flows for each of theyears in the three-year period ended December 31, 2003. In connection with ouraudits of the consolidated financial statements, we also have audited financialstatement Schedule II. These consolidated financial statements and financialstatement schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements and financial statement schedule based on our audits.

 

Weconducted our audits in accordance with auditing standards generally acceptedin the United States of America. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Cymer, Inc. andsubsidiaries as of December 31, 2002 and 2003, and the results of theiroperations and their cash flows for each of the years in the three-year periodended December 31, 2003, in conformity with accounting principles generallyaccepted in the United States of America. Also, in our opinion, the related financial statement Schedule II, whenconsidered in relation to the basic consolidated financial statements taken asa whole, presents fairly, in all material respects, the information set forththerein.

 

Asdiscussed in Note 1 to the consolidated financial statements, the Companyadopted SFAS No. 142, *Goodwill and OtherIntangible Assets,* and, accordingly, changed its method ofaccounting for goodwill in 2002.

 

 

SanDiego, CaliforniaJanuary 23, 2004, except for note 17,     which is as of February 4, 2004

 

F-1

----

 

**CYMER, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(In thousands, except share data)**

 
|                                                                                                                                                                      |   | **December  31,  2002** |    | **December  31,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|-------------------------|--------|
| **ASSETS**                                                                                                                                                                |   |                    |    |                    |   |
|                                                                                                                                                                      |   |                    |    |                    |   |
| CURRENT ASSETS:                                                                                                                                                           |   |                    |    |                    |   |
| Cash and cash equivalents                                                                                                                                                 |   | $                       | 196,643 |                    | $      | 230,657 |   |
| Short-term investments                                                                                                                                                    |   | 71,249                  |    | 93,474                  |   |
| Accounts receivable – net                                                                                                                                            |   | 52,341                  |    | 62,819                  |   |
| Inventories                                                                                                                                                               |   | 100,119                 |    | 93,012                  |   |
| Deferred income taxes                                                                                                                                                     |   | 20,041                  |    | 1,407                   |   |
| Prepaid expenses and other assets                                                                                                                                         |   | 6,029                   |    | 5,513                   |   |
| Total current assets                                                                                                                                                      |   | 446,422                 |    | 486,882                 |   |
|                                                                                                                                                                      |   |                    |    |                    |   |
| PROPERTY AND EQUIPMENT – NET                                                                                                                                         |   | 112,209                 |    | 128,849                 |   |
| LONG-TERM INVESTMENTS                                                                                                                                                     |   | 159,029                 |    | 77,509                  |   |
| DEFERRED INCOME TAXES                                                                                                                                                     |   | 20,553                  |    | 80,711                  |   |
| GOODWILL – NET                                                                                                                                                       |   | 10,597                  |    | 7,647                   |   |
| INTANGIBLE ASSETS – NET                                                                                                                                              |   | 8,565                   |    | 12,925                  |   |
| OTHER ASSETS                                                                                                                                                              |   | 9,512                   |    | 8,698                   |   |
|                                                                                                                                                                      |   |                    |    |                    |   |
| TOTAL ASSETS                                                                                                                                                              |   | $                       | 766,887 |                    | $      | 803,221 |   |
|                                                                                                                                                                      |   |                    |    |                    |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                             |   |                    |    |                    |   |
|                                                                                                                                                                      |   |                    |    |                    |   |
| CURRENT LIABILITIES:                                                                                                                                                      |   |                    |    |                    |   |
| Accounts payable                                                                                                                                                          |   | $                       | 26,344  |                    | $      | 19,099 |   |
| Accounts payable – related party                                                                                                                                     |   | 155                     |    | —                  |   |
| Accrued warranty and installation                                                                                                                                         |   | 30,078                  |    | 26,486                  |   |
| Accrued payroll and benefits                                                                                                                                              |   | 7,334                   |    | 7,196                   |   |
| Accrued patents, royalties and other fees                                                                                                                                 |   | 6,806                   |    | 8,436                   |   |
| Foreign currency forward exchange contracts                                                                                                                               |   | 907                     |    | 6,401                   |   |
| Income taxes payable                                                                                                                                                      |   | 11,321                  |    | 16,473                  |   |
| Revolving loan                                                                                                                                                            |   | 6,667                   |    | —                  |   |
| Accrued and other current liabilities                                                                                                                                     |   | 5,683                   |    | 4,945                   |   |
| Total current liabilities                                                                                                                                                 |   | 95,295                  |    | 89,036                  |   |
|                                                                                                                                                                      |   |                    |    |                    |   |
| CONVERTIBLE SUBORDINATED NOTES                                                                                                                                            |   | 250,000                 |    | 250,000                 |   |
| OTHER LIABILITIES                                                                                                                                                         |   | 5,154                   |    | 5,660                   |   |
| MINORITY INTEREST                                                                                                                                                         |   | 4,104                   |    | 5,195                   |   |
|                                                                                                                                                                      |   |                    |    |                    |   |
| COMMITMENTS AND CONTINGENCIES (Note 12)                                                                                                                                   |   |                    |    |                    |   |
|                                                                                                                                                                      |   |                    |    |                    |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                |   |                    |    |                    |   |
| Preferred stock – authorized 5,000,000  shares; $.001 par value,  no shares issued or outstanding                                                                    |   | —                  |    | —                  |   |
| Common stock – $.001 par value per share;  100,000,000 shares authorized;  34,227,000 and 36,345,000 shares outstanding at December 31, 2002 and 2003,  respectively |   | 34                      |    | 36                      |   |
| Additional paid-in capital                                                                                                                                                |   | 302,501                 |    | 358,988                 |   |
| Unearned compensation                                                                                                                                                     |   | (2,358                  | )       | (146                    | )      |
| Accumulated other comprehensive loss                                                                                                                                      |   | (3,429                  | )       | (5,734                  | )      |
| Retained earnings                                                                                                                                                         |   | 115,586                 |    | 100,186                 |   |
| Total stockholders’ equity                                                                                                                                           |   | 412,334                 |    | 453,330                 |   |
|                                                                                                                                                                      |   |                    |    |                    |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                           |   | $                       | 766,887 |                    | $      | 803,221 |   |

 

See Notes to Consolidated Financial Statements.

 

F-2

----

 

**CYMER, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands, except per sharedata)**

 
|                                                                       |   | **Years  ended December 31,** |    |
|----------------------------------------------------------------------------|--------|-------------------------------|---------|
|                                                                       |   | **2001**                      |    | **2002** |   | **2003** |   |
|                                                                       |   |                          |    |   |   |   |   |
| REVENUES:                                                                  |   |                          |    |   |   |   |   |
| Product sales                                                              |   | $                             | 267,003 |   | $ | 287,995 |   | $ | 265,816 |   |
| Other                                                                      |   | 2,441                         |    | 2,165 |   | 1,680 |   |
| Total revenues                                                             |   | 269,444                       |    | 290,160 |   | 267,496 |   |
|                                                                       |   |                          |    |   |   |   |   |
| COSTS AND EXPENSES:                                                        |   |                          |    |   |   |   |   |
| Cost of product sales                                                      |   | 151,340                       |    | 162,095 |   | 187,679 |   |
| Research and development                                                   |   | 58,368                        |    | 73,714 |   | 58,231 |   |
| Sales and marketing                                                        |   | 19,617                        |    | 17,153 |   | 16,966 |   |
| General and administrative                                                 |   | 18,990                        |    | 18,212 |   | 39,094 |   |
| Amortization of goodwill and intangible  assets                            |   | 3,148                         |    | 160 |   | 160 |   |
| Purchased in-process research and  development                             |   | 5,050                         |    | — |   | — |   |
| (Gain) loss on debt extinguishment                                         |   | (610                          | )       | 163 |   | — |   |
|                                                                       |   |                          |    |   |   |   |   |
| Total costs and expenses                                                   |   | 255,903                       |    | 271,497 |   | 302,130 |   |
|                                                                       |   |                          |    |   |   |   |   |
| OPERATING INCOME (LOSS)                                                    |   | 13,541                        |    | 18,663 |   | (34,634 | ) |
|                                                                       |   |                          |    |   |   |   |   |
| OTHER INCOME (EXPENSE):                                                    |   |                          |    |   |   |   |   |
| Foreign currency exchange gain (loss) – net                           |   | 877                           |    | (723 | ) | 436 |   |
| Interest and other income                                                  |   | 8,290                         |    | 10,055 |   | 8,928 |   |
| Interest and other expense                                                 |   | (10,614                       | )       | (11,246 | ) | (10,503 | ) |
|                                                                       |   |                          |    |   |   |   |   |
| Total other expense – net                                             |   | (1,447                        | )       | (1,914 | ) | (1,139 | ) |
|                                                                       |   |                          |    |   |   |   |   |
| INCOME (LOSS) BEFORE INCOME TAX PROVISION  (BENEFIT) AND MINORITY INTEREST |   | 12,094                        |    | 16,749 |   | (35,773 | ) |
|                                                                       |   |                          |    |   |   |   |   |
| INCOME TAX PROVISION (BENEFIT)                                             |   | 2,871                         |    | 2,706 |   | (21,464 | ) |
| MINORITY INTEREST                                                          |   | (368                          | )       | (447 | ) | (1,091 | ) |
|                                                                       |   |                          |    |   |   |   |   |
| INCOME (LOSS) BEFORE CUMULATIVE CHANGE IN  ACCOUNTING PRINCIPLE            |   | 8,855                         |    | 13,596 |   | (15,400 | ) |
|                                                                       |   |                          |    |   |   |   |   |
| Cumulative change in accounting principle,  net of taxes                   |   | (370                          | )       | — |   | — |   |
|                                                                       |   |                          |    |   |   |   |   |
| NET INCOME (LOSS)                                                          |   | $                             | 8,485   |   | $ | 13,596 |   | $ | (15,400 | ) |
|                                                                       |   |                          |    |   |   |   |   |
| EARNINGS (LOSS) PER SHARE:                                                 |   |                          |    |   |   |   |   |
| Basic earnings (loss) per share:                                           |   |                          |    |   |   |   |   |
| Before cumulative change in accounting  principle                          |   | $                             | 0.29    |   | $ | 0.41 |   | $ | (0.44 | ) |
| Cumulative change in accounting principle                                  |   | (0.01                         | )       | — |   | — |   |
| Basic earnings (loss) per share                                            |   | $                             | 0.28    |   | $ | 0.41 |   | $ | (0.44 | ) |
| Weighted average common shares outstanding                                 |   | 30,474                        |    | 33,317 |   | 35,065 |   |
|                                                                       |   |                          |    |   |   |   |   |
| Diluted earnings (loss) per share:                                         |   |                          |    |   |   |   |   |
| Before cumulative change in accounting  principle                          |   | $                             | 0.28    |   | $ | 0.39 |   | $ | (0.44 | ) |
| Cumulative change in accounting principle                                  |   | (0.01                         | )       | — |   | — |   |
| Diluted earnings (loss) per share                                          |   | $                             | 0.27    |   | $ | 0.39 |   | $ | (0.44 | ) |
| Weighted average common and dilutive  potential common shares outstanding  |   | 31,108                        |    | 34,712 |   | 35,065 |   |

 

See Notes to Consolidated Financial Statements.

 

F-3

----

 

**CYMER, INC.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**(In thousands)**

 
|                                                              |   |              |       |       |       | **Additional  Paid-in  Capital** |       | **Treasury  Stock** |       | **Unearned  Compensation** |       | **Accumulated  Other  Comprehensive  (loss)** |       | **Retained  Earnings** |       | **Total  Stockholders’  Equity** |       | **Total  Comprehensive  Income (loss)** |       |
|-------------------------------------------------------------------|--------|-------------------|------------|------------|------------|----------------------------------|------------|---------------------|------------|----------------------------|------------|-----------------------------------------------|------------|------------------------|------------|---------------------------------------|------------|-----------------------------------------|------------|
|                                                              |   |              |       |       |       |                             |       |                |       |                       |       |                                          |
|                                                              |   | **Common  Stock** |       |       |       |                             |       |                |       |                       |
|                                                              |   | **Shares**        |       | **Amount** |       |                             |       |                |       |                       |       |                                          |
|                                                              |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       |                                    |       |
| **BALANCE, JANUARY 1, 2001**                                      |   | **29,496**        | ** ** | **$**      | **29**     | ** **                       | **$**      | **145,996**         | ** ** | **(24,871**                | **)**      | **$**                                         | **—** | ** **             | **$**      | **(1,691**                            | **)**      | **$**                                   | **93,505** | ** ** | **$** | **212,968** | ** ** |   | ** ** |
|                                                              |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       |                                    |       |
| Exercise of common stock options and warrants                     |   | 550               |       | 1          |       | 9,631                            |       |                |       |                       |       |                                          |       |                   |       | 9,632                                 |       |                                    |       |
| Issuance of employee stock purchase plan shares                   |   | 113               |       |       |       | 2,148                            |       |                |       |                       |       |                                          |       |                   |       | 2,148                                 |       |                                    |       |
| Issuance of shares in acquisition of ACX                          |   | 689               |       | 1          |       | 14,981                           |       |                |       |                       |       |                                          |       |                   |       | 14,982                                |       |                                    |       |
| Issuance of options in acquisition of ACX                         |   |              |       |       |       | 5,889                            |       |                |       | (4,439                     | )          |                                          |       |                   |       | 1,450                                 |       |                                    |       |
| Issuance of warrants under SRL license agreement                  |   |              |       |       |       | 4,322                            |       |                |       |                       |       |                                          |       |                   |       | 4,322                                 |       |                                    |       |
| Amortization of unearned compensation                             |   |              |       |       |       |                             |       |                |       | 971                        |       |                                          |       |                   |       | 971                                   |       |                                    |       |
| Income tax benefit from stock options exercised                   |   |              |       |       |       | 1,827                            |       |                |       |                       |       |                                          |       |                   |       | 1,827                                 |       |                                    |       |
| Net income                                                        |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       | 8,485                  |       | 8,485                                 |       | $                                       | 8,485      |   |
| Other comprehensive income:                                       |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       |                                    |       |
| Translation adjustment, net of tax                                |   |              |       |       |       |                             |       |                |       |                       |       | (3,610                                        | )          |                   |       | (3,610                                | )          | (3,610                                  | )          |
| Net unrealized gain on available-for-sale investments, net of tax |   |              |       |       |       |                             |       |                |       |                       |       | 270                                           |       |                   |       | 270                                   |       | 270                                     |       |
| Net unrealized gain on derivatives, net of tax                    |   |              |       |       |       |                             |       |                |       |                       |       | 1,369                                         |       |                   |       | 1,369                                 |       | 1,369                                   |       |
| Total comprehensive income                                        |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       | $                                       | 6,514      |   |
|                                                              |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       |                                    |       |
| **BALANCE, DECEMBER 31, 2001**                                    |   | **30,848**        | ** ** | **31**     | ** ** | **184,794**                      | ** ** | **(24,871**         | **)**      | **(3,468**                 | **)**      | **(3,662**                                    | **)**      | **101,990**            | ** ** | **254,814**                           | ** ** |                                    | ** ** |
|                                                              |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       |                                    |       |
| Exercise of common stock options and warrants                     |   | 900               |       | 1          |       | 19,748                           |       |                |       |                       |       |                                          |       |                   |       | 19,749                                |       |                                    |       |
| Issuance of employee stock purchase plan shares                   |   | 154               |       |       |       | 2,798                            |       |                |       |                       |       |                                          |       |                   |       | 2,798                                 |       |                                    |       |
| Amortization of unearned compensation                             |   |              |       |       |       |                             |       |                |       | 1,110                      |       |                                          |       |                   |       | 1,110                                 |       |                                    |       |
| Conversion of 1997 Notes to common stock                          |   | 2,325             |       | 2          |       | 88,125                           |       | 24,871              |       |                       |       |                                          |       |                   |       | 112,998                               |       |                                    |       |
| Non-employee stock options granted                                |   |              |       |       |       | 75                               |       |                |       |                       |       |                                          |       |                   |       | 75                                    |       |                                    |       |
| Employee stock options – change in status                    |   |              |       |       |       | 86                               |       |                |       |                       |       |                                          |       |                   |       | 86                                    |       |                                    |       |
| Employee stock awards                                             |   |              |       |       |       | 22                               |       |                |       |                       |       |                                          |       |                   |       | 22                                    |       |                                    |       |
| Income tax benefit from stock options exercised                   |   |              |       |       |       | 6,853                            |       |                |       |                       |       |                                          |       |                   |       | 6,853                                 |       |                                    |       |
| Net income                                                        |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       | 13,596                 |       | 13,596                                |       | $                                       | 13,596     |   |
| Other comprehensive income:                                       |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       |                                    |       |
| Translation adjustment, net of tax                                |   |              |       |       |       |                             |       |                |       |                       |       | 135                                           |       |                   |       | 135                                   |       | 135                                     |       |
| Net unrealized gain on available-for-sale investments, net of tax |   |              |       |       |       |                             |       |                |       |                       |       | 1,966                                         |       |                   |       | 1,966                                 |       | 1,966                                   |       |
| Net unrealized loss on derivatives, net of tax                    |   |              |       |       |       |                             |       |                |       |                       |       | (1,868                                        | )          |                   |       | (1,868                                | )          | (1,868                                  | )          |
| Total comprehensive income                                        |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       | $                                       | 13,829     |   |
|                                                              |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       |                                    |       |
| **BALANCE, DECEMBER 31, 2002**                                    |   | **34,227**        | ** ** | **34**     | ** ** | **302,501**                      | ** ** | **—**          | ** ** | **(2,358**                 | **)**      | **(3,429**                                    | **)**      | **115,586**            | ** ** | **412,334**                           | ** ** |                                    | ** ** |
|                                                              |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       |                                    |       |
| Exercise of common stock options and warrants                     |   | 1,899             |       | 2          |       | 44,083                           |       |                |       |                       |       |                                          |       |                   |       | 44,085                                |       |                                    |       |
| Issuance of employee stock purchase plan shares                   |   | 217               |       |       |       | 4,072                            |       |                |       |                       |       |                                          |       |                   |       | 4,072                                 |       |                                    |       |
| Amortization of unearned compensation                             |   |              |       |       |       |                             |       |                |       | 737                        |       |                                          |       |                   |       | 737                                   |       |                                    |       |
| Reversal of unearned compensation                                 |   |              |       |       |       | (1,475                           | )          |                |       | 1,475                      |       |                                          |       |                   |       | **—**                            |       |                                    |       |
| Non-employee stock options granted                                |   |              |       |       |       | 235                              |       |                |       |                       |       |                                          |       |                   |       | 235                                   |       |                                    |       |
| Employee stock options – change in status                    |   |              |       |       |       | 1,102                            |       |                |       |                       |       |                                          |       |                   |       | 1,102                                 |       |                                    |       |
| Employee stock awards                                             |   | 2                 |       |       |       | 22                               |       |                |       |                       |       |                                          |       |                   |       | 22                                    |       |                                    |       |
| Income tax benefit from stock options exercised                   |   |              |       |       |       | 8,448                            |       |                |       |                       |       |                                          |       |                   |       | 8,448                                 |       |                                    |       |
| Net loss                                                          |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       | (15,400                | )          | (15,400                               | )          | $                                       | (15,400    | ) |
| Other comprehensive income:                                       |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       |                                    |       |
| Translation adjustment, net of tax                                |   |              |       |       |       |                             |       |                |       |                       |       | 799                                           |       |                   |       | 799                                   |       | 799                                     |       |
| Net unrealized loss on available for-sale investments, net of tax |   |              |       |       |       |                             |       |                |       |                       |       | (894)                                         |       |                   |       | (894)                                 |       | (894)                                   |       |
| Net unrealized loss on derivatives, net of tax                    |   |              |       |       |       |                             |       |                |       |                       |       | (2,210                                        | )          |                   |       | (2,210                                | )          | (2,210                                  | )          |
| Total comprehensive loss                                          |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       | $                                       | (17,705    | ) |
|                                                              |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       |                                    |       |
| **BALANCE, DECEMBER 31, 2003**                                    |   | **36,345**        | ** ** | **$**      | **36**     | ** **                       | **$**      | **358,988**         | ** ** | **$**                      | **—** | ** **                                    | **$**      | **(146**               | **)**      | **$**                                 | **(5,734** | **)**                                   | **$**      | **100,186** | ** ** | **$** | **453,330** | ** ** |   | ** ** |
|                                                                   |        |                   |            |            |            |                                  |            |                     |            |                            |            |                                               |            |                        |            |                                       |            |                                         |            |  |  |  |  |  |  |  |  |

 

SeeNotes to Consolidated Financial Statements.

 

F-4

----

 

**CYMER, INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(In thousands)**

 
|                                                                                                |   | **Years ended  December 31,** |    |
|-----------------------------------------------------------------------------------------------------|--------|-------------------------------|---------|
|                                                                                                |   | **2001**                      |    | **2002** |   | **2003** |   |
|                                                                                                |   |                          |    |   |   |   |   |
| OPERATING ACTIVITIES:                                                                               |   |                          |    |   |   |   |   |
| Net income (loss)                                                                                   |   | $                             | 8,485   |   | $ | 13,596 |   | $ | (15,400 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |   |                          |    |   |   |   |   |
| Cumulative change in accounting principle                                                           |   | 370                           |    | — |   | — |   |
| (Gain) loss on debt extinguishment                                                                  |   | (610                          | )       | 163 |   | — |   |
| Depreciation and amortization                                                                       |   | 25,699                        |    | 25,492 |   | 30,938 |   |
| Non-cash stock-based compensation                                                                   |   | —                        |    | 183 |   | 1,359 |   |
| Amortization of unearned compensation                                                               |   | 971                           |    | 1,110 |   | 737 |   |
| Minority interest                                                                                   |   | 368                           |    | 447 |   | 1,091 |   |
| Purchased in-process research and  development                                                      |   | 5,050                         |    | — |   | — |   |
| Provision for deferred income taxes                                                                 |   | (386                          | )       | (31 | ) | (1,305 | ) |
| Loss on disposal and impairment of property  and equipment                                          |   | 505                           |    | 675 |   | 18,106 |   |
| Change in assets and liabilities – net of  acquisition in 2001:                                |   |                          |    |   |   |   |   |
| Accounts receivable – net                                                                      |   | 35,969                        |    | (2,285 | ) | (10,478 | ) |
| Income taxes receivable                                                                             |   | (3,039                        | )       | 3,153 |   | — |   |
| Foreign currency forward exchange contracts                                                         |   | 1,417                         |    | 939 |   | 1,749 |   |
| Inventories                                                                                         |   | 15,179                        |    | (38,335 | ) | 7,107 |   |
| Prepaid expenses and other assets                                                                   |   | 615                           |    | (2,538 | ) | 59 |   |
| Accounts payable                                                                                    |   | (8,146                        | )       | 10,770 |   | (7,400 | ) |
| Accrued expenses and other liabilities                                                              |   | (16,322                       | )       | 5,813 |   | (8,092 | ) |
| Income taxes payable                                                                                |   | (7,741                        | )       | 6,651 |   | (22,066 | ) |
|                                                                                                |   |                          |    |   |   |   |   |
| Net cash provided by (used in) operating  activities                                                |   | 58,384                        |    | 25,803 |   | (3,595 | ) |
|                                                                                                |   |                          |    |   |   |   |   |
| INVESTING ACTIVITIES:                                                                               |   |                          |    |   |   |   |   |
| Acquisition of property and equipment                                                               |   | (20,405                       | )       | (45,217 | ) | (62,783 | ) |
| Purchases of investments                                                                            |   | (164,302                      | )       | (284,352 | ) | (107,749 | ) |
| Proceeds from sold or matured investments                                                           |   | 184,759                       |    | 163,410 |   | 165,527 |   |
| Acquisition of Active Control eXperts,  Inc., net of cash acquired                                  |   | (279                          | )       | — |   | — |   |
| Acquisition of patents                                                                              |   | (6,000                        | )       | — |   | — |   |
| Acquisition of minority interest                                                                    |   | —                        |    | (360 | ) | (180 | ) |
|                                                                                                |   |                          |    |   |   |   |   |
| Net cash used in investing activities                                                               |   | (6,227                        | )       | (166,519 | ) | (5,185 | ) |
|                                                                                                |   |                          |    |   |   |   |   |
| FINANCING ACTIVITIES:                                                                               |   |                          |    |   |   |   |   |
| Net repayments under revolving loan and  security agreements                                        |   | (1,093                        | )       | (1,672 | ) | (6,667 | ) |
| Proceeds from issuance of common stock                                                              |   | 11,781                        |    | 22,547 |   | 48,157 |   |
| Redemption of convertible subordinated  notes                                                       |   | (24,930                       | )       | (39,598 | ) | — |   |
| Issuance of convertible subordinated notes                                                          |   | —                        |    | 250,000 |   | — |   |
| Issuance of convertible subordinated notes  offering costs                                          |   | —                        |    | (7,873 | ) | — |   |
| Minority interest investments in subsidiary                                                         |   | —                        |    | 1,900 |   | — |   |
| Payments on capital lease obligations                                                               |   | (281                          | )       | (56 | ) | (50 | ) |
|                                                                                                |   |                          |    |   |   |   |   |
| Net cash (used in) provided by financing  activities                                                |   | (14,523                       | )       | 225,248 |   | 41,440 |   |
|                                                                                                |   |                          |    |   |   |   |   |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND  CASH EQUIVALENTS                                       |   | (6,117                        | )       | 916 |   | 1,354 |   |
|                                                                                                |   |                          |    |   |   |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                                           |   | 31,517                        |    | 85,448 |   | 34,014 |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF  THE YEAR                                                 |   | 79,678                        |    | 111,195 |   | 196,643 |   |
|                                                                                                |   |                          |    |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT END OF THE  YEAR                                                       |   | $                             | 111,195 |   | $ | 196,643 |   | $ | 230,657 |   |

 

F-5

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|                                                                                                            |   | **Years  ended December 31,** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                                                            |   | **2001**                      |   | **2002** |   | **2003** |   |
|                                                                                                            |   |                          |   |   |   |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION:                                                              |   |                          |   |   |   |   |   |
| Interest paid                                                                                                   |   | $                             | 7,778  |   | $ | 10,473 |   | $ | 9,004 |   |
| Income taxes paid (refunded), net                                                                               |   | $                             | 13,982 |   | $ | (7,821 | ) | $ | 1,325 |   |
|                                                                                                            |   |                          |   |   |   |   |   |
| SUPPLEMENTAL DISCLOSURE OF NON-CASH  INVESTING AND FINANCING ACTIVITIES:                                        |   |                          |   |   |   |   |   |
| Warrants issued for acquisition of patents                                                                      |   | $                             | 4,322  |   | $ | — |   | $ | — |   |
| Stock and stock options issued in  acquisition of Active Control eXperts, Inc.                                  |   | $                             | 20,871 |   | $ | — |   | $ | — |   |
| Conversion of subordinated notes to equity                                                                      |   | $                             | — |   | $ | 112,998 |   | $ | — |   |
| Reversal of unearned compensation related  to cancelled stock options previously issued for the ACX acquisition |   | $                             | — |   | $ | — |   | $ | 1,475 |   |
| Intangible assets included in accrued  liabilities                                                              |   | $                             | — |   | $ | — |   | $ | 5,990 |   |
| Reversal of deferred tax asset valuation  allowance against goodwill                                            |   | $                             | — |   | $ | — |   | $ | 2,950 |   |

 

SeeNotes to Consolidated Financial Statements.

 

F-6

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**CYMER, INC.**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****                     ****SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

***Nature ofOperations*** –Cymer, Inc. and its wholly-owned and majority-owned subsidiaries (collectively,“Cymer” or the Company), are engaged primarily in the development,manufacturing and marketing of excimer light sources for sale to manufacturersof photolithography tools in the semiconductor equipment industry.  Cymer sells its product to customersprimarily in Japan, Asia, Europe and the United States.

 

***Principles ofConsolidation*****– The consolidated financial statementsinclude the accounts of Cymer, Inc., its wholly-owned subsidiaries – CymerJapan, Inc. (“Cymer Japan”), Cymer Singapore Pte Ltd. (“Cymer Singapore”),Cymer B.V. in the Netherlands (“Cymer B.V.”), Cymer Southeast Asia, Ltd, inTaiwan (“Cymer SEA”),  CymerSemiconductor Equipment Shanghai Co., Ltd, in the People’s Republic of China(“Cymer PRC”), and its majority-owned subsidiary, Cymer Korea, Inc. (“CymerKorea”).  Cymer, Inc. owns 75% of CymerKorea.  During 2002, Active ControleXperts, Inc. or ACX was a wholly-owned subsidiary of Cymer, Inc.  Effective January 1, 2003, ACX was mergedwith and into Cymer, Inc.  Cymer sellsits excimer light sources in Japan primarily through Cymer Japan. Cymer SEA,Cymer PRC, Cymer Singapore and Cymer B.V. are field service offices forcustomers in those respective regions. Cymer Korea provides manufacturing, refurbishment, field service, andadministrative activities for that region. All significant intercompanybalances have been eliminated in consolidation.

 

***AccountingEstimates*** – Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults may differ from those estimates.

 

***Cash Equivalents***– Cashequivalents consist of money market instruments, commercial paper and otherhighly liquid investments purchased with an original maturity of three monthsor less.

 

***Investments***– Cymer maintains an investmentportfolio consisting primarily of government and corporate fixed incomesecurities, certificates of deposit and commercial paper.  While it is Cymer’s general intent to holdsuch securities until maturity, Cymer will occasionally sell certain securitiesfor cash flow purposes. Therefore, Cymer’s investments are classified asavailable-for-sale and are carried onthe balance sheet at fair value, with unrealized gains and losses reported instockholders’ equity.  Unrealized lossesat December 31, 2003 were $9,000.  Wehave concluded that this unrealized loss is a temporary impairment, as itrepresents an excess of book value over market value on a single U.S.government agency bond, held for only 8 days and due to mature in less than 90days as of December 31, 2003.  Due tothe conservative nature of the investment portfolio, a sudden change ininterest rates would not have a material effect on the value of the portfolio.

 

***Inventories*** – Inventories are carried at the lowerof standard cost, which approximates first-in, the first-out method, ormarket.  Cost includes material, laborand manufacturing overhead costs. Cymer reviews the components of its inventoryon a regular basis for excess or obsolete inventory and makes appropriateallowances and dispositions in the period that such inventory is identified.

 

***Property and Equipment*** – Property and equipment are stated at cost lessaccumulated depreciation.  Equipment acquired under capital leases isstated at the present value of the future minimum lease payments. Additions andimprovements are capitalized and maintenance and repairs are expensed whenincurred.  Depreciation isprovided using the straight-line method over the

 

F-7

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estimated useful lives ofthe assets (generally one to five years). The Cymer owned buildings are depreciated over a useful life of twentyyears. Leasehold improvements and equipment held under capital leases areamortized using the straight-line method over the shorter of the life of theasset or the remaining lease term. Amortization of equipment obtained undercapital leases is included in depreciation expense in the accompanyingconsolidated financial statements. Light source systems built for internal use are capitalized anddepreciated using the straight-line method over three years.

 

***Goodwill****/**IntangibleAssets** –*Cymer adopted Statement of Financial AccountingStandards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets*”*on January 1, 2002. SFAS 142superceded Accounting Principles Board Opinion No. 17, “IntangibleAssets”, and discontinued the amortization of goodwill and intangible assetswith indefinite useful lives associated with purchase business combinations. Inaddition, SFAS 142 includes provisions regarding the reclassificationbetween goodwill and identifiable intangible assets in accordance with the newdefinition of intangible assets set forth in Statement of Financial AccountingStandards No. 141 (“SFAS 141”), “Business Combinations”, thereassessment of the useful lives of existing intangible assets, and the annualtesting for impairment of existing goodwill and other intangible assets withindefinite lives. In accordance with the adoption of SFAS 142 onJanuary 1, 2002, Cymer ceased the amortization of goodwill and intangibleassets with indefinite lives, and completed the required transitionalimpairment test, which resulted in no indication of impairment. Cymer alsore-evaluated the classifications of its existing intangible assets and goodwillin accordance with SFAS No. 141.  As aresult, Cymer reclassified assembled workforce net of amortization of $617,000from intangible assets to goodwill, as assembled workforce no longer meets thedefinition of an identifiable intangible asset under the provisions of SFAS No.141. In accordance with SFAS 142,Cymer conducts an annual impairment test of goodwill.  This test is conducted in the fourth quarter of each fiscal year,or whenever events or circumstances occur indicating potential impairment.

 

Intangible assets consistprimarily of acquired patents and purchased technology. Intangible assets withdefinite lives are recorded at cost and are amortized using the straight-linemethod over their expected useful lives from four to eight years. Cymer reviewsthe carrying value and remaining useful life of intangibles for impairmentwhenever events or circumstances indicate that the carrying amount may not berecoverable. The amount of impairment, if any, is measured based on theprojected discounted future operating cash flows using a discount ratereflecting Cymer’s average cost of funds. The assessment of the recoverability of intangible assets will beimpacted if estimated future operating cash flows are not achieved.

 

***Impairment ofLong-Lived Assets and Long-Lived Assets to Be Disposed Of –*** On January 1, 2002, Cymer adopted Statement of Financial AccountingStandards No. 144 (“SFAS 144”), “Accountingfor the Impairment or Disposal of Long-Lived Assets”, which addressesfinancial accounting and reporting for the impairment or disposal of long-livedassets.  While SFAS 144 supersedes SFAS121, it retains many of the fundamental provisions of SFAS 121, including therecognition and measurement of the impairment of long-lived assets to be heldand used, and the measurement of long-lived assets to be disposed of by sale. Long-lived assets and certain identifiableintangibles are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of the assets to future net cash flows(undiscounted and without interest) expected to be generated by the asset.  If such assets are considered to be impaired,the impairment to be recognized is measured by the amount by which the carryingamount of the assets exceeds the fair value of the assets.  Assets to be disposed of are reported at thelower of the carrying amount or fair value less costs to sell.

 

***Fair Value ofFinancial Instruments*** – The following methods and assumptions were used to estimate the fairvalue of each class of financial instruments for which it is practicable toestimate that value:

 

Cash and cash equivalents, accounts receivable,accounts payable, accounts payable – related party, accrued warranty andinstallation, accrued payroll and benefits, accrued patents, royalties

 

F-8

----

 

and other fees, income tax payable and accrued andother current liabilities – The carrying amount reported in the consolidatedbalance sheets for cash and cash equivalents, accounts receivable, income taxesreceivable, accounts payable, accounts payable – related party, accruedwarranty and installation, accrued payroll and benefits, accrued patents,royalties and other fees, accrued interest, income tax payable and accrued andother current liabilities approximates fair value because of the short maturityof these instruments.

 

Investments – Investments are carried at fair valuewhich is based on quoted market prices for such securities.

 

Foreign Currency Forward Exchange Contracts – Thefair value of foreign currency forward exchange contracts is determined usingthe quoted exchange rate (see “Derivative Instruments” below).

 

Convertible Subordinated Notes – ConvertibleSubordinated Notes are recorded at face value of $250.0 million at December 31,2002 and 2003. The fair value of such debt, based on quoted market prices atDecember 31, 2002 and 2003 was $245.9 million and $276.0 million, respectively.

 

Revolving Loan – The carrying amount reported forCymer’s revolving loan approximates its fair value because the underlyinginstrument bears interest at rates comparable to current rates offered to Cymerfor instruments of similar terms and risk.

 

***Guarantees***–******Cymer adopted thedisclosure provisions of Financial Accounting Standards Board InterpretationNo. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness to Others”, duringthe quarter ended December 31, 2002 and has adopted the recognition andmeasurement provisions as required after December 31, 2002.  FIN 45 provides expanded accounting guidancesurrounding liability recognition and disclosure requirements related toguarantees, as defined by this interpretation.

 

In theordinary course of business, Cymer is not subject to potential obligationsunder guarantees that fall within the scope of FIN 45, except for standardwarranty provisions associated with product sales, indemnification provisionsrelated to intellectual property that are contained within many of its customeragreements, and third-party bank guarantees for subsidiary office lines ofcredit.  All of these provisions giverise only to the disclosure requirements prescribed by FIN 45.

 

Product Warranties – Warranty provisions contained withinCymer’s customer agreements are generally consistent with those prevalent inthe semiconductor equipment industry. The warranty period and terms varyby light source model.  In general, thelight source system warranty period ranges from 17 to 26 months aftershipment.  Cymer also warrantsconsumables and spare parts sold to its customers and the coverage periodvaries by spare part type as some types include time-based warranty periods andothers include usage-based warranty periods. On average, the warranty periodfor consumables and spare parts is approximately 6 months from the date ofshipment.  Cymer records a provision forwarranty for all products, which is included in cost of product sales in theconsolidated statements of operations and is recorded at the time that therelated revenue is recognized. The warranty provision for light source systemsis reviewed monthly and determined using a financial model, which considersactual historical expenses, and potential risks associated with Cymer’sdifferent light source system models. This financial model is then used tocalculate the future probable expenses related to warranty and the requiredlevel of the warranty provision.  Therisk levels used within this model are reviewed and updated as risk levelschange by model over its product life cycle. The warranty provision forconsumables and spares is determined using actual historical data. For bothlight source systems and consumables, if actual warranty expenditures differsubstantially from Cymer’s estimates, revisions to the warranty provision wouldbe required.  Actual warrantyexpenditures are recorded against the warranty provision as they are incurred.

 

F-9

----

 

Thefollowing table summarizes information related to Cymer’s warranty provisionfor the year ended December 31, 2002 and 2003 (in thousands):

 
|                                                                                               |   | **2002** |   | **2003** |   |
|----------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                                                               |   |     |   |     |   |
| Balance, January 1                                                                                 |   | $        | 26,750 |     | $      | 29,600 |   |
| Liabilities accrued for warranties issued during the  year, net of adjustments and expirations (1) |   | 17,125   |   | 15,505   |   |
| Warranty expenditures incurred during the year                                                     |   | (14,275  | )      | (18,905  | )      |
| Balance, December 31                                                                               |   | $        | 29,600 |     | $      | 26,200 |   |

 

----

(1)  Included in this amount are adjustments toexisting warranty reserves as a result of normal recurring updates made to therisk factors used in the warranty model.

 

IntellectualProperty Indemnifications – Cymer includes intellectual property indemnificationclauses within its general terms and conditions with its customers and thegeneral purchase agreements with its three major customers, ASM Lithography,Canon, and Nikon.  In general, theseindemnification provisions provide that Cymer will defend its customers againstany infringement claims that arise related to Cymer’s products.  Under the indemnification clauses, Cymerwill pay all costs and damages, including attorney’s fees, associated with suchsettlements or defenses, provided that the customer follows specific proceduresfor notifying Cymer of such claims and allows Cymer to manage the settlementproceedings. Due to the nature of these indemnification provisions, they areindefinite and extend beyond the term of the actual customer agreements.

 

An indemnification provision is also included in the contractmanufacturing agreement with Seiko, which was terminated effective March 31,2003.  As with Cymer’s indemnificationprovisions on intellectual property, Cymer will continue to honor this indemnificationclause within the agreement even after its termination. Seiko and at least oneJapanese customer have been notified that Cymer’s light source systems in Japanmay infringe certain Japanese patents.  Cymerbelieves, based upon the advice of counsel, that Cymer’s products do notinfringe any valid claim of the asserted patents or that it is entitled toprior use claims in Japan.

 

Guarantees on Subsidiary Debt – During the first quarter of 2003 andpart of the second quarter of 2003, Cymer was party to a Parent Guaranteeassociated with a revolving Loan Agreement held by Cymer Japan. This guaranteewas between a commercial bank in the United States and Cymer.  The Parent Guarantee was entered into in2001 in order to establish a banking relationship between this commercial bankand Cymer Japan.  Per the terms of theParent Guarantee, Cymer guaranteed payment of any obligations under therevolving loan agreement in the event that Cymer Japan could not make suchpayments due or defaults on the loan. Cymer Japan made all payments per the terms of the Loan Agreement andthus, Cymer did not incur any guarantor obligations under the ParentGuarantee.  Since Cymer Japan is awholly-owned subsidiary of Cymer and Cymer Japan records the revolving loan outstandingbalance as a liability on its financial statements, the carrying amount of theliability was included in the consolidated balance sheets.  The Loan Agreement expired on June 16, 2003and was paid in full by Cymer Japan. The Loan Agreement was not renewed on thisexpiration date.

 

***Comprehensive Income –***Comprehensive income(loss) includes net income (loss), effective unrealized gains and losses onforeign currency forward exchange contracts, foreign currency translationadjustments, and unrealized gains and losses on available-for-sale securities,which are recorded as short-term and long-term investments in the accompanyingconsolidated balance sheets.

 

***RevenueRecognition*** – Cymerrecognizes revenue when all four revenue recognition criteria have beenmet.  These four criteria are asfollows: persuasive evidence of an arrangement exists; delivery has occurred orservices have been rendered; seller’s price to buyer is fixed or determinable;and collectibility is reasonably assured. Cymer’s revenue is generated fromproduct sales, which includes

 

F-10

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lightsource systems, consumables and spare parts, upgrades, service, servicecontracts and training.  In addition,Cymer generates other revenue which primarily represents revenue earned fromfunded development activities and license fees.

 

Cymer’srevenue recognition policy results in revenue being recognized as follows forproduct sales 1) For light source systems that have proven to meetspecifications prior to shipment and do not have acceptance provisions, therevenue is recognized once legal title passes to the customer.  The systems are tested by Cymer inenvironments similar to those used by the customers prior to shipment to ensurethat they meet the customer’s specifications and will interface with thecustomer’s software.  As the shippingterms vary by customer, title will transfer based upon the shipping termsspecific to that customer.  2)  For light source systems which are shippedto customers requiring acceptance provisions, the revenue is recognized at suchtime that the acceptance conditions are satisfied.  3)  For consumables andspare parts sales, revenue is recognized at the point that legal title passesto the customer.  For consumables andspare parts sales, legal title generally passes to the customer upon shipmentfrom the Cymer facility.  4)  For service and training sales which aregenerated from a billable service call or a training class, revenue isrecognized when the services or training have been rendered to the customer. 5)For service contract sales, revenue is generally recognized ratably over thelife of the contract or per the specific terms of the agreement.

 

Revenue classified as “other revenue” in Cymer’sstatements of operations is recorded as revenue on a basis consistent with theperformance requirement of the funded development or license agreement. Revenuefrom funded development contracts is generally recognized on thepercentage-of-completion method based on the relationship of costs incurred tototal estimated costs.  Revenuesgenerated from funded development contracts are derived from cost sharingcontracts between Cymer and certain customers. The costs associated with these contracts are included in research and developmentexpenses in the period incurred and are not listed separately as other cost orexpenses in the consolidated statements of operations.  If milestones on funded developmentcontracts require that specific results be achieved or reported by Cymer,revenue is not recognized until that milestone is completed.  Payments received in advance of performanceare recorded as deferred revenue.

 

***Warranty Expense***–Cymer warrants its new light source products against defects in design, *** ***materials, and workmanship. The warranty period andterms vary by light source model.  Ingeneral, the light source system warranty period ranges from 17 to 26 monthsafter shipment and the spare part warranty period on average is approximately 6months from the date of shipment. Cymer records a provision for warranty forall products when the related product revenue is recognized.  Warranty provisions are included in cost ofproduct sales in the accompanying consolidated statements of operations.  In general, the warranty provision for bothlight source systems and spare parts is based upon actual historical expensesand potential risks associated with Cymer’s different light source systemmodels. Actual warranty expenditures are recorded against the warrantyprovision as they are incurred.

 

***Research and Development*****– Research and development costs areexpensed in the period incurred and include costs associated with fundeddevelopment contracts.  The fundeddevelopment contracts are generally cost sharing contracts between Cymer and acustomer where each party pays near equivalent portions of the totaldevelopment costs.  As a result, costsfor the funded development contracts approximate the revenue recorded for thesecontracts in other revenue in the accompanying statements of operations. Theservices performed under the funded development contracts are provided on abest efforts basis.

 

***Income Taxes*** – Income taxes are accounted for under theasset and liability method.  Deferredtax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities aremeasured using enacted tax rates

 

F-11

----

 

expected to be recovered or settled.  The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date.

 

***Stock-BasedCompensation*** – Cymer applies the intrinsic value-based method ofaccounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”,and related interpretations including FASB Interpretation No. 44, “Accounting for Certain Transactionsinvolving Stock Compensation an interpretation of APB Opinion No. 25”**toaccount for its stock option plans. Under this method, employee-based stock compensation expense is measuredon the date of grant only if the then current market price of the underlyingstock exceeded the exercise price and is recorded on a straight-line basis overthe applicable vesting period. Statement of Financial Accounting Standards Board No. 123 (“SFAS No. 123”) “Accounting for Stock-Based Compensation”,established accounting and disclosure requirements using a fair value-basedmethod of accounting for stock-based employee compensation plans.  As allowed by SFAS No. 123, Cymer haselected to continue to apply the intrinsic value-based method of accounting describedabove, and has adopted the disclosure requirements of SFAS No. 123, asamended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transitionand Disclosure”*.*

 

All options granted underthe plans had an exercise price equal to the market value of the underlyingcommon stock on the date of grant.

 

Cymer accounts for optionsgranted to non-employees under SFAS No. 123 and EITF Issue No. 96-18,“Accounting for Equity Instruments that are Issued to other than Employees forAcquiring or in Conjunction with Selling Goods or Services”.  Cymer measures the fair value of suchoptions using the Black-Scholes option-pricing model at each financialreporting date.  Cymer accounts forchanges in fair values between reporting dates in accordance with FinancialAccounting Interpretation 28. Stock-based compensation expense for options granted to non-employeesand for those related to employees who changed status for the years endedDecember 31, 2002 and 2003 was $161,000 and $1.3 million, respectively.  There was no stock-based compensationexpense recorded for non-employees for the year ended December 31, 2001.

 

Under SFAS 123, theweighted average per share fair value of the options granted for the yearsended 2001, 2002, and 2003 was $14.36, $17.45 and $19.20 , respectively, on thedate of grant.  Fair value under SFAS123 is determined using the Black-Scholes option-pricing model with theassumptions noted below.  For risk freeinterest, Cymer uses the then currently available rate on zero coupon U.S.Government issues with a remaining life of five years for valuing options andone year for ESPP.

 
|                                  |   | **2001** |   | **2002** |   | **2003** |   |
|---------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                  |   |     |   |     |   |     |   |
| Dividend yield                        |   | None     |   | None     |   | None     |   |
| Volatility rate                       |   | 84       | %      | 83       | %      | 79       | %      |
| Weighted average risk free  interest: |   |     |   |     |   |     |   |
| Options                               |   | 4.42     | %      | 3.34     | %      | 3.16     | %      |
| ESPP                                  |   | 3.06     | %      | 1.88     | %      | 1.26     | %      |
| Assumed forfeiture rate               |   | 5        | %      | 5        | %      | 5        | %      |
| Expected life:                        |   |     |   |     |   |     |   |
| Options                               |   | 6 years  |   | 6 years  |   | 6 years  |   |
| ESPP                                  |   | .5 years |   | .5 years |   | .5 years |   |

 

F-12

----

 

The following table compares net income (loss) pershare as reported by Cymer to the pro forma amounts that would be reported hadcompensation expense been recognized for Cymer’s stock-based compensation plansin accordance with SFAS No. 123, (in thousands, except per share amounts):

 
|                                                                                                                                              |   | **Years ended December 31,** |    |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                                                                                              |   | **2001**                     |    | **2002** |   | **2003** |   |
|                                                                                                                                              |   |                         |    |   |   |   |   |
| Net income (loss), as  reported                                                                                                                   |   | $                            | 8,485   |   | $ | 13,596 |   | $ | (15,400 | ) |
| Deduct: Total stock-based  employee compensation expense determined under the fair value based method  for all awards, net of related tax effects |   | (32,139                      | )       | (33,585 | ) | $ | (10,389 | ) |
|                                                                                                                                              |   |                         |    |   |   |   |   |
| Pro forma net loss                                                                                                                                |   | $                            | (23,654 | ) | $ | (19,989 | ) | $ | (25,789 | ) |
|                                                                                                                                              |   |                         |    |   |   |   |   |
| Earnings (loss) per share:                                                                                                                        |   |                         |    |   |   |   |   |
| Basic – as reported                                                                                                                          |   | $                            | 0.28    |   | $ | 0.41 |   | $ | (0.44 | ) |
| Basic – pro forma                                                                                                                            |   | $                            | (0.78   | ) | $ | (0.60 | ) | $ | (0.74 | ) |
|                                                                                                                                              |   |                         |    |   |   |   |   |
| Diluted – as reported                                                                                                                        |   | $                            | 0.27    |   | $ | 0.39 |   | $ | (0.44 | ) |
| Diluted – pro forma                                                                                                                          |   | $                            | (0.78   | ) | $ | (0.60 | ) | $ | (0.74 | ) |

 

***Foreign CurrencyTranslation*** – The financial statements of Cymer’s foreignsubsidiaries where the functional currency has been determined to be the localcurrency are translated into United States dollars using current rates ofexchange for assets and liabilities and rates of exchange that approximate therates in effect at the transaction date for revenues, expenses, gains andlosses. Gains and losses resulting from foreign currency translation areaccumulated as a separate component of consolidated stockholders’ equity asaccumulated other comprehensive income (loss). Gains and losses resulting fromforeign currency transactions are included in the consolidated statements ofoperations.

 

***DerivativeInstruments*****– Cymer conducts business in severalinternational currencies through its global operations. Due to the large volumeof Cymer’s business that is conducted in Japan, the Japanese operation posesthe greatest foreign currency risk. Cymer uses financial instruments, principally foreign currency forwardexchange contracts, to manage its foreign currency exposures in Japan. Cymerenters into foreign currency forward exchange contracts in order to reduce theimpact of currency fluctuations related to purchases of Cymer’s inventories byCymer Japan in US dollars for resale under firm third-party sales commitmentsdenominated in Japanese Yen.  Cymer doesnot enter into foreign currency forward exchange contracts for tradingpurposes.

 

Cymer’s foreign currency forward exchange contractsqualify for hedge accounting treatment per the provisions of Statement ofFinancial Accounting Standards No. 133, “Accounting for Derivative Instrumentsand Hedging Activities”.  As a result,Cymer defers changes in the fair value of these contracts and records theamount in other comprehensive income (loss) and subsequently reclassifies thegain or loss to cost of product sales in the same period that the related saleis made to the third party.

 

Cymer’s derivative instruments are designated as cashflow hedging instruments. Cymer adopted SFAS 133 onJanuary 1, 2001 but did not qualify for cash flow hedgeaccounting treatment until July 1, 2001 due to the extensivedocumentation and administrative requirements. Accordingly, for contracts whichCymer entered into from January 1, 2001 to June 30, 2001,Cymer recorded changes in the fair value of these foreign currency forwardexchange contracts directly through earnings in other income (expense) in theperiod that such changes occurred.  Forthose contracts that have been entered into on or after July 1, 2001,Cymer defers effective changes in the fair value of its foreign currencyforward exchange contracts into other comprehensive income and subsequentlyreclassifies the effective changes to cost of product sales in the same periodthat the related sale is made to the third party.  Prior to the adoption of SFAS 133, Cymer accounted for all suchgains and losses through cost of product sales in the same period as therelated sale was made to the third party. Upon adoption of SFAS 133 on January 1, 2001, Cymer recorded aloss to cumulative change in accounting principle of $370,000 and a gain of$2.4 million to accumulated other comprehensive income per SFAS 133 transitionguidelines. 

F-13

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At December 31, 2003, Cymer had outstanding foreigncurrency forward exchange contracts to buy US $81.0 million for 9.3 billion yenunder foreign currency exchange facilities with contract rates ranging from107.09 yen to 120.6****yen per US dollar.  These contracts expire on various expirationdates through February 2005.  Cymerrecognized a net gain through cost of product sales from the foreign currencyexchange contracts of $2,320,000 for the year ended December 31, 2001, and anet loss of $992,000 and $2,484,000 for the years ended December 31, 2002 and2003, respectively.

 

***Concentration ofCredit Risk*** – Financial instruments, which potentially subjectCymer to concentrations of credit risk, consist principally of cash andaccounts receivable.

 

*Cash andcash equivalents* –Cymer invests its excess cash in an effort to preserve capital, provideliquidity, maintain diversification and generate returns relative to Cymer’scorporate investment policy and prevailing market conditions.  Cymer has not experienced any materiallosses on its cash and investment accounts. At times, cash balances held infinancial institutions are in excess of federally insured limits. Cymerperforms periodic evaluations of the relative credit standing of financialinstitutions and limits the amount of risk by selecting financial institutionswith a strong relative credit standing. At December 31, 2002 and 2003, Cymer had $196.6 million and $230.4million respectively, in deposits with major financial institutions thatexceeded the federally insured limit of $100,000.

 

*Accountsreceivable* – Cymermaintains an allowance for doubtful accounts for estimated losses resultingfrom the inability of its customers to make required payments, which results inbad debt expense.  Managementperiodically determines the adequacy of this allowance by continuallyevaluating individual customer receivables considering the customer’s financialcondition, security deposits, and current economic conditions.  Credit losses to date have been minimal.

 

***Major Customers***– Revenues from major customers are detailedas follows:

 
|            |   | **Years ended December 31,** |       |
|-----------------|--------|------------------------------|------------|
|            |   | **2001**                     |       | **2002** |   | **2003** |   |
|            |   | **(in thousands)**           | ** ** |
| **Customer**    |   |                         |       |   |   |   |   |
| ASM Lithography |   | $                            | 85,758     |   | $ | 92,286 |   | $ | 63,793 |   |
| Canon           |   | 41,698                       |       | 61,709 |   | 64,459 |   |
| Nikon           |   | 77,490                       |       | 68,358 |   | 55,107 |   |
|                 |        |                              |            |  |  |  |  |  |  |  |

 

Accounts receivable balances for these same majorcustomers are detailed as follows:

 
|            |   | **December 31,**   |   |
|-----------------|--------|--------------------|--------|
|            |   | **2002**           |   | **2003** |   |
|            |   | **(in thousands)** |   |
| **Customer**    |   |               |   |   |   |
| ASM Lithography |   | $                  | 20,729 |   | $ | 22,033 |   |
| Canon           |   | 6,290              |   | 8,041 |   |
| Nikon           |   | 9,262              |   | 10,550 |   |
|                 |        |                    |        |  |  |  |  |

 

Revenues from Japanese customers, generated primarilyby Cymer Japan, accounted for 41%, 43% and 44% of revenues for the years endedDecember 31, 2001, 2002, and 2003, respectively. Revenues from ASMLithography in the Netherlands accounted for 32%, 32% and 24% of revenues forthe years ended December 31, 2001, 2002, and 2003, respectively.

 

The loss of business of any of these major customerswould have a material adverse effect on our operating results, financialcondition, and cash flows.

 

***Earnings (Loss)Per Share*****– Basic earnings (loss) per share (“EPS”)excludes dilution and is computed by dividing net income or loss attributableto common stockholders by the weighted-average of common shares outstanding forthe period.  Diluted EPS reflects thepotential dilution that

 

F-14

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could occur if securities or other contractsto issue common stock (convertible subordinated notes, warrants to purchasecommon stock and common stock options using the treasury stock method) wereexercised or converted into common stock. Potential dilutive securities are excluded from the diluted EPScomputation in loss periods as their effect would be anti-dilutive.

 

The following table sets forth the computation ofdiluted weighted average common and potential common shares outstanding for theyears ended December 31, 2001, 2002 and 2003, respectively:

 
|                                                                     |   | **Years ended December 31,** |   |
|--------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                     |   | **2001**                     |   | **2002** |   | **2003** |   |
|                                                                     |   | **(in thousands)**           |   |
| Basic weighted average  common shares outstanding                        |   | 30,474                       |   | 33,317 |   | 35,065 |   |
|                                                                     |   |                         |   |   |   |   |   |
| Effect of dilutive  securities:                                          |   |                         |   |   |   |   |   |
| Warrants                                                                 |   | —                       |   | 19 |   | — |   |
| Options                                                                  |   | 634                          |   | 1,376 |   | — |   |
|                                                                     |   |                         |   |   |   |   |   |
| Diluted weighted average  common and potential common shares outstanding |   | 31,108                       |   | 34,712 |   | 35,065 |   |

 

For the years ended December31, 2001, 2002, and 2003, weighted average options and warrants to purchase3,614,000, 2,489,000 and 3,943,000 shares of common stock, respectively, wereoutstanding but not included in the computation of diluted earnings per shareas their effect was anti-dilutive.  Inaddition, for the years ended December 31, 2001, 2002, and 2003, weightedaverage common shares attributable to convertible subordinated notes of3,387,000, 5,077,000 and 5,000,000, respectively, were not included in thecomputation of diluted earnings per share as their effect was alsoanti-dilutive.

 

***Reclassifications****–*Certainamounts in the prior year consolidated financial statements have beenreclassified to conform to current period presentation.

 

***AccountingPronouncements Adopted***

 

Cymer adopted the provisions of Statement ofFinancial Accounting Standards No. 143 (“SFAS No. 143”), “Accounting for AssetRetirement Obligations” on January 1, 2003. SFAS No. 143 addresses financial accounting and reporting forobligations associated with the retirement of tangible long-lived assets andthe associated asset retirement costs. SFAS No. 143 applies to tangiblelong-lived assets that have a legal obligation associated with their retirementthat results from the acquisition, construction or development or normal use ofthe asset. The adoption of this statement did not have an impact on Cymer’sfinancial condition or results of operations.

 

Cymer adopted the provisions of Statement ofFinancial Accounting Standards No. 145 (“SFAS No. 145”), “Rescission of FASBStatements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections” on January 1, 2003.  SFASNo. 145 provides guidance on the classification of gains and losses from theextinguishment of debt and on the accounting for certain specified leasetransactions. Cymer reclassified the 2001 gain and the 2002 loss onextinguishment of debt from an extraordinary gain (loss) on debt extinguishmentto operating expenses in the consolidated statements of operations.

 

Cymeradopted the provisions of Statement of Financial Accounting Standards No. 146(“SFAS No. 146”),  “Accounting for CostsAssociated with Exit or Disposal Activities”, on January 1, 2003.  SFAS No. 146 revises the accounting forspecified employee and contract terminations that are part of restructuringactivities and allows recognition of a liability for the cost associated withan exit or disposal activity only when the liability is incurred and can bemeasured at fair value. This statement applies on a prospective basis to exitor disposal activities that are initiated after December 31, 2002.

 

F-15

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Theadoption of this statement did not have an impact on Cymer’s financialcondition or results of operation.

 

Cymeradopted the initial recognition and measurement provisions of FIN 45 on January1, 2003, which apply on a prospective basis to guarantees issued or modifiedafter December 31, 2002.  Cymer adoptedthe disclosure provisions of FIN 45 during the quarter ended December 31, 2002.In the ordinary course of business, Cymer is not subject to potentialobligations under guarantees that fall within the scope of FIN 45 except forwarranty provisions, intellectual property indemnification clauses that arecontained within many of Cymer’s customer agreements and third-party bankguarantees that Cymer had with one of our subsidiaries until June 2003.  These provisions fall within the disclosurerequirements prescribed by FIN 45.

 

In November 2002, the Emerging Issues TaskForce (“EITF”) issued EITF Issue No. 00-21, “Accounting for RevenueArrangements with Multiple Deliverables.” EITF Issue No. 00-21 addresseshow to determine whether a revenue arrangement involving multiple deliverablescontains more than one unit of accounting for the purposes of revenuerecognition and how the revenue arrangement consideration should be measuredand allocated to the separate units of accounting. EITF Issue No. 00-21applies to revenue arrangements entered into after June 15, 2003.  The adoption of this statement did not havea material impact on Cymer’s financial condition or results of operations.

 

In April 2003, the FASBissued Statement of Financial Accounting Standards No. 149 (“SFAS No. 149”),“Amendment of Statement 133 on Derivative Instruments and HedgingActivities”.  SFAS No. 149 amends andclarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts and forhedging activities under FASB Statement No. 133.  This statement is effective for contracts entered into ormodified after June 30, 2003 and for hedging relationships designated afterJune 30, 2003.  The adoption of this statement did not havea material impact on Cymer’s financial condition or results of operations.

 

In May 2003, the FASBissued Statement of Financial Accounting Standards No.150 (“SFAS No. 150”),“Accounting for Certain Instruments with Characteristics of Both Liabilitiesand Equity”. The standard establishes how an issuer classifies and measurescertain freestanding financial instruments with characteristics of liabilitiesand equity and requires that such instruments be classified as liabilities. Thestandard is effective for financial instruments entered into or modified afterMay 31, 2003 and is otherwise effective at the beginning of the first interimperiod beginning after June 15, 2003. The adoption of the statement did not have a material impact on Cymer’sconsolidated financial statements.

 

**2.****                     ****ACQUISITION OF ACTIVE CONTROL EXPERTS, INC.**

 

On February 13, 2001, Cymer acquired the Cambridge,Massachusetts based company, Active Control Experts, Inc. (“ACX”) in anall-stock transaction including 689,000 shares of Cymer stock and 336,000 stockoptions. ACX was a leading developer, manufacturer and marketer of hardware,software and firmware solutions for vibrations and nano-motion.  The ACX technology can be physicallyembedded, creating adaptive “smart structures” to intrinsically improve thestability and precision of nano-motion control in next-generation semiconductorcapital equipment. The acquisition was accounted for using the purchase methodof accounting, and the results of operations of ACX are included in Cymer’sconsolidated financial statements from the acquisition date. The totalconsideration for the purchase was approximately $24.8 million which includedcommon stock of $15.0 million, $3.0 million liabilities assumed, $5.9 millionemployee stock options assumed, and $0.9 million capitalized transaction costs.Cymer valued the 689,000 shares of common stock issued to acquire ACX at $21.75per share, which was the average closing price for Cymer’s common stock for theperiod of ten trading days commencing five trading days immediately precedingthe announcement of the transaction on November 20, 2000. ** **Atotal of $12.3 million was recorded as goodwill based on the totalconsideration of $24.8 million less $1.5 million of acquired tangible assets,$1.4 million of acquired identifiable intangible assets, a $5.1 million inprocess research and

 

F-16

----

 

development charge, and $4.5 million of unearnedcompensation recorded related to the assumed stock options.  Had this company been acquired on January 1,2001, Cymer’s net income would have been as follows (in thousands, except pershare data):

 
|                                           |   | **Year ended  December 31, 2001** |       |
|------------------------------------------------|--------|-----------------------------------|------------|
|                                           |   |                              | ** ** |
| Reported net income                            |   | $                                 | 8,485      |   |
|                                           |   |                              |       |
| Adjustments:                                   |   |                              |       |
| Amortization of goodwill and intangible assets |   | (429                              | )          |
| Incremental net loss                           |   | (475                              | )          |
| Tax effect                                     |   | 226                               |       |
| Total                                          |   | (678                              | )          |
|                                           |   |                              |       |
| Adjusted net income                            |   | $                                 | 7,807      |   |
|                                           |   |                              |       |
| Basic earnings per share:                      |   |                              |       |
|                                           |   |                              |       |
| As reported                                    |   | $                                 | .28        |   |
| As adjusted                                    |   | $                                 | .26        |   |
|                                           |   |                              |       |
| Diluted earnings per share:                    |   |                              |       |
|                                           |   |                              |       |
| As reported                                    |   | $                                 | .27        |   |
| As adjusted                                    |   | $                                 | .25        |   |

 

The purchased in-process research and development(“IPR&D”) totaling $5.1 million, which related to one vibration controldevelopment project, was expensed upon acquisition because the application ofACX’s technology to semiconductor manufacturing required further research anddevelopment before reaching technological feasibility and commercial viability.  In valuing the ACX IPR&D, considerationwas given to key characteristics of the product under development, as well asthe technology’s life cycle, and the project’s stage of development.  A discounted cash flow model was used tovalue the ACX IPR&D which included key assumptions related to ACX’s revenuegrowth, cost of goods levels, selling, general, and administrative expenses,research and development expenses, and income tax rates, all over a four yearprojection period from 2001 through 2004. The estimated cash flows attributable to the technology were convertedto present value equivalents using a 20% discount rate.  The value of the ACX IPR&D was thencalculated by summing the net present value amounts over the four yearprojection period, adding the tax amortization benefit, and applying a 70%percentage of completion factor for the project.

 

Cymer continued to conduct research and developmenton the vibration control project that related to this IPR&D chargefollowing the acquisition in February 2001. The core technology was pursued as both a stand-alone product and onethat could be embedded into Cymer’s future light source system products.  Development of this technology as astand-alone product was conducted through the end of the third quarter2001.  At that time, Cymer and apotential customer for the stand-alone product decided not to pursue thisproduct further.  During the sameperiod, Cymer further developed this same core technology so that it could beembedded in certain core modules of its light source system products.  This ACX technology was successfullyembedded in the NanoLith 7000 light source system, which was introduced in thethird quarter of 2001.  The projectcompletion date was consistent with the Company’s original estimate at the timeof the acquisition.  This technology isalso embedded in several of the core modules of Cymer’s newest light sourcesystem products, the ELS-7000 and the XLA 100 light sources, which werereleased in early 2002 and 2003, respectively. During the period that the core technology was being completed as anapplication in the semiconductor industry, Cymer incurred and expensedadditional costs of approximately $2.5 million, which were consistent with thecosts originally anticipated to complete the project.  The technology as embedded in Cymer’s existing light systemsprojects has been consistent with the sales

 

F-17

----

 

projections used in determining the value of theIPR&D.  As with Cymer’s other coretechnologies, Cymer intends to continue to develop ACX vibration controltechnology so that it can expand the technology’s application further withinCymer’s existing light source system products and include it in newly developedproducts.

 

Given the successful completion of the aboveresearch program and performance of the associated product, Cymer believes theassumptions used to determine the IPR&D charge are reasonable.

 

**3.****                      BALANCESHEET DETAILS**

 

The consolidated balance sheets detail is asfollows as of December 31, 2002 and 2003 (in thousands):

 
|                                           |   | **December 31,** |    |
|------------------------------------------------|--------|------------------|---------|
|                                           |   | **2002**         |    | **2003** |   |
| ACCOUNTS RECEIVABLE:                           |   |             |    |   |   |
| Trade                                          |   | $                | 46,283  |   | $ | 58,514 |   |
| Notes and other                                |   | 7,814            |    | 6,269 |   |
|                                           |   | 54,097           |    | 64,783 |   |
| Less allowance for doubtful accounts and notes |   | (1,756           | )       | (1,964 | ) |
| Total                                          |   | $                | 52,341  |   | $ | 62,819 |   |
|                                           |   |             |    |   |   |
| INVENTORIES:                                   |   |             |    |   |   |
| Raw materials                                  |   | $                | 44,252  |   | $ | 37,393 |   |
| Work-in-progress                               |   | 32,718           |    | 26,949 |   |
| Finished goods                                 |   | 37,849           |    | 40,698 |   |
| Allowance for excess and obsolete inventory    |   | (14,700          | )       | (12,028 | ) |
| Total                                          |   | $                | 100,119 |   | $ | 93,012 |   |
|                                           |   |             |    |   |   |
| PROPERTY AND EQUIPMENT:                        |   |             |    |   |   |
| Land                                           |   | $                | 9,080   |   | $ | 9,080 |   |
| Building                                       |   | 31,178           |    | 88,547 |   |
| Building improvements                          |   | 2,451            |    | 4,280 |   |
| Furniture and equipment                        |   | 77,434           |    | 72,287 |   |
| Capitalized light sources                      |   | 40,850           |    | 33,069 |   |
| Leasehold improvements                         |   | 27,412           |    | 2,860 |   |
| Construction in process                        |   | 17,641           |    | 1,521 |   |
|                                           |   | 206,046          |    | 211,644 |   |
| Less accumulated depreciation and amortization |   | (93,837          | )       | (82,795 | ) |
| Total                                          |   | $                | 112,209 |   | $ | 128,849 |   |

 

**4.****                     ****INVESTMENTS**

 

Investments at December 31,2002 consist of the following (in thousands):

 
|                      |   | **Amortized  Cost** |    | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Market  Value** |   |
|---------------------------|--------|---------------------|---------|------------------------------|--------|-------------------------------|--------|-------------------|--------|
| Short-term:               |   |                |    |                         |   |                          |   |              |   |
| Corporate debt securities |   | $                   | 35,762  |                         | $      | 275                           |   | $                 | (135   | ) | $ | 35,902 |   |
| Commercial paper          |   | 13,988              |    | 3                            |   | —                        |   | 13,991            |   |
| U.S. government agencies  |   | 14,994              |    | 98                           |   | —                        |   | 15,092            |   |
| Other                     |   | 6,218               |    | 46                           |   | —                        |   | 6,264             |   |
| Total                     |   | $                   | 70,962  |                         | $      | 422                           |   | $                 | (135   | ) | $ | 71,249 |   |
|                      |   |                |    |                         |   |                          |   |              |   |
| Long-term:                |   |                |    |                         |   |                          |   |              |   |
| Corporate debt securities |   | $                   | 136,247 |                         | $      | 3,200                         |   | $                 | (38    | ) | $ | 139,409 |   |
| U.S. government agencies  |   | 19,259              |    | 361                          |   | —                        |   | 19,620            |   |
| Total                     |   | $                   | 155,506 |                         | $      | 3,561                         |   | $                 | (38    | ) | $ | 159,029 |   |

 

F-18

----

 

Investments at December 31,2003 consist of the following (in thousands):

 
|                      |   | **Amortized  Cost** |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |       | **Market  Value** |       |
|---------------------------|--------|---------------------|--------|------------------------------|--------|-------------------------------|------------|-------------------|------------|
|                      |   |                |   |                         |   |                          | ** ** |              | ** ** |
| Short-term:               |   |                |   |                         |   |                          |       |              |       |
| Corporate debt securities |   | $                   | 66,526 |                         | $      | 454                           |       | $                 | —     |   | $ | 66,980 |   |
| Commercial paper          |   | 8,438               |   | —                       |   | —                        |       | 8,438             |       |
| U.S. government agencies  |   | 16,000              |   | 59                           |   | 9                             |       | 16,050            |       |
| Other                     |   | 2,003               |   | 3                            |   | —                        |       | 2,006             |       |
| Total                     |   | $                   | 92,967 |                         | $      | 516                           |       | $                 | 9          |   | $ | 93,474 |   |
|                      |   |                |   |                         |   |                          |       |              |       |
| Long-term:                |   |                |   |                         |   |                          |       |              |       |
| Corporate debt securities |   | 65,337              |   | 1,488                        |   | —                        |       | 66,825            |       |
| U.S. government agencies  |   | 3,154               |   | 89                           |   | —                        |       | 3,243             |       |
| Other                     |   | 7,234               |   | 207                          |   | —                        |       | 7,441             |       |
| Total                     |   | $                   | 75,725 |                         | $      | 1,784                         |       | $                 | —     |   | $ | 77,509 |   |

 

As of December 31, 2003, thecontractual maturities of debt securities were as follows (in thousands):

 
|        |   | **Less than  One Year** |   | **One to  Three Years** |       | **Total** |       |
|-------------|--------|-------------------------|--------|-------------------------|------------|-----------|------------|
|        |   |                    |   |                    | ** ** |      | ** ** |
| Short-term: |   | 93,474                  |   | —                  |       | 93,474    |       |
| Long-term:  |   | —                  |   | 77,509                  |       | 77,509    |       |
|        |   |                    |   |                    |       |      |       |
| Total       |   | 93,474                  |   | 77,509                  |       | 170,983   |       |

 

**5.****                      REPORTINGCOMPREHENSIVE INCOME**

 

Comprehensive income (loss) includes net income(loss), effective unrealized gains and losses on foreign currency forwardexchange contracts, foreign currency translation adjustments, and unrealizedgains and losses on available-for-sale securities, which are recorded asshort-term and long-term investments in the accompanying consolidated balancesheets.

 

The following tablesummarizes the change in each component of accumulated other comprehensiveincome (loss) for the year ended December 31, 2003 (in thousands):

 
|              |   |               |   | **Translation  adjustment,  net of tax** |   | **Total unrealized  gains on  available-for-sale  investments,  net of tax** |   | **Total unrealized  gains (losses on)  foreign currency  forward exchange  contracts, net of tax** |   | **Accumulated  other  comprehensive  loss** |   |
|-------------------|--------|--------------------|--------|------------------------------------------|--------|------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|
|              |   |               |   |                                     |   |                                                                         |   |                                                                                               |   |                                        |   |
| January 1, 2001   |   | Balance            |   | $                                        | (1,797 | )                                                                            | $      | 106                                                                                                |   | $                                           | — |   | $ | (1,691 | ) |
|              |   | Period net change  |   | (3,610                                   | )      | 270                                                                          |   | 1,369                                                                                              |   | (1,971                                      | )      |
| December 31, 2001 |   | Balance            |   | (5,407                                   | )      | 376                                                                          |   | 1,369                                                                                              |   | (3,662                                      | )      |
|              |   | Period  net change |   | 135                                      |   | 1,966                                                                        |   | (1,868                                                                                             | )      | 233                                         |   |
| December 31, 2002 |   | Balance            |   | (5,272                                   | )      | 2,342                                                                        |   | (499                                                                                               | )      | (3,429                                      | )      |
|              |   | Period  net change |   | 799                                      |   | (894                                                                         | )      | (2,210                                                                                             | )      | (2,305                                      | )      |
| December 31, 2003 |   | Balance            |   | $                                        | (4,473 | )                                                                            | $      | 1,448                                                                                              |   | $                                           | (2,709 | ) | $ | (5,734 | ) |

 

F-19

----

 

**6.****                      GOODWILLAND INTANGIBLE ASSETS**

 

As of the date of adoption of SFAS No. 142, onJanuary 1, 2002, Cymer had unamortized goodwill in the amount of $9.8 millionand unamortized identifiable intangible assets, excluding acquired patents, inthe amount of $1.1 million, all of which were subject to the transitionprovisions of SFAS No. 142.

 

Duringthe fourth quarter of 2003, Cymer completed its annual impairment test ofgoodwill and intangible assets, and concluded that no impairment of goodwillexisted.

 

Alsoincluded in intangible assets – net on the accompanying balance sheets areamounts associated with patents which were acquired in 2001 and 2003 (see Note13).  As of December 31, 2002 andDecember 31, 2003, the net carrying amount of these patents was $8.2 millionand $12.7 million, respectively.

 

Aggregateamortization expense was $3,148,000, $160,000 and $160,000 for the years endedDecember 31, 2001, 2002, and 2003, respectively.  As of December 31, 2003, future estimated amortization expense isexpected to be as follows (in thousands):

 

|                         |   | **Future  Amortization** |       |
|------------------------------|--------|--------------------------|------------|
|                         |   |                     | ** ** |
| Year ended December 31, 2004 |   | $                        | 160        |   |
| Year ended December 31, 2005 |   | $                        | 20         |   |

 

Thefollowing table summarizes the activity in the carrying amount of goodwill forthe years ended December 31, 2002 and 2003 (in thousands):

 
| Goodwill as of December 31, 2001                                          |   | $      | 9,791  |   |
|---------------------------------------------------------------------------|--------|--------|--------|--------|
| Goodwill acquired for acquisition of 5% minority  interest of Cymer Korea |   | 189    |   |
| Reclassification of assembled workforce to goodwill                       |   | 617    |   |
| Goodwill as of December 31, 2002                                          |   | 10,597 |   |
| Reversal of deferred tax asset valuation allowance  against goodwill      |   | (2,950 | )      |
| Goodwill as of December 31, 2003                                          |   | $      | 7,647  |   |

 

Incomebefore cumulative change in accounting principle, net income and earnings(loss) per share on a pro forma basis, excluding goodwill and intangible assetamortization expense related to intangibles no longer amortized, would havebeen as follows if SFAS 142 had been adopted on January 1, 2001 (in thousands,except per share data):

 
|                                                                     |   | **Year ended  December 31,** |   |
|--------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                     |   | **2001**                     |   | **2002** |   | **2003** |   |
|                                                                     |   |                         |   |   |   |   |   |
| Reported  income (loss) before cumulative change in accounting principle |   | $                            | 8,855  |   | $ | 13,596 |   | $ | (15,400 | ) |
|                                                                     |   |                         |   |   |   |   |   |
| Reported  net income (loss)                                              |   | $                            | 8,485  |   | $ | 13,596 |   | $ | (15,400 | ) |
|                                                                     |   |                         |   |   |   |   |   |
| Adjustments:                                                             |   |                         |   |   |   |   |   |
| Amortization of goodwill and intangible assets                           |   | 3,008                        |   | — |   | — |   |
| Tax effect                                                               |   | (752                         | )      | — |   | — |   |
|                                                                     |   | 2,256                        |   | — |   | — |   |
| Adjusted income (loss) before cumulative change in  accounting principle |   | $                            | 11,111 |   | $ | 13,596 |   | $ | (15,400 | ) |

 

F-20

----

 
|                                                                 |   | **Year ended  December 31,** |   |
|----------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                 |   | **2001**                     |   | **2002** |   | **2003** |   |
|                                                                 |   |                         |   |   |   |   |   |
| Adjusted net income (loss)                                           |   | $                            | 10,741 |   | $ | 13,596 |   | $ | (15,400 | ) |
|                                                                 |   |                         |   |   |   |   |   |
| Basic earnings (loss) per share:                                     |   |                         |   |   |   |   |   |
| As reported – before cumulative change in accounting  principle |   | $                            | 0.29   |   | $ | 0.41 |   | $ | (0.44 | ) |
| As adjusted – before cumulative change in accounting  principle |   | $                            | 0.36   |   | $ | 0.41 |   | $ | (0.44 | ) |
|                                                                 |   |                         |   |   |   |   |   |
| As reported – net income (loss)                                 |   | $                            | 0.28   |   | $ | 0.41 |   | $ | (0.44 | ) |
| As adjusted – net income (loss)                                 |   | $                            | 0.35   |   | $ | 0.41 |   | $ | (0.44 | ) |
|                                                                 |   |                         |   |   |   |   |   |
| Diluted earnings (loss) per share:                                   |   |                         |   |   |   |   |   |
| As reported – before cumulative change in accounting  principle |   | $                            | 0.28   |   | $ | 0.39 |   | $ | (0.44 | ) |
| As adjusted – before cumulative change in accounting  principle |   | $                            | 0.36   |   | $ | 0.39 |   | $ | (0.44 | ) |
|                                                                 |   |                         |   |   |   |   |   |
| As reported – net income (loss)                                 |   | $                            | 0.27   |   | $ | 0.39 |   | $ | (0.44 | ) |
| As adjusted – net income (loss)                                 |   | $                            | 0.35   |   | $ | 0.39 |   | $ | (0.44 | ) |

 

**7.****                     ****CREDIT FACILITIES**

 

***Revolving LoanAgreements*** – During 2002 and2003, Cymer had certain loan agreements with a commercial bank which providedfor unsecured revolving loan facilities allowing for borrowings of $10.0million and $20.0 million under a U.S. line of credit and Japanese line ofcredit, respectively.  Under the loanagreements, Cymer was able to borrow in U.S. dollars or Japanese yen, andinterest accrued on outstanding borrowings at LIBOR plus 1.75% on U.S.dollar-denominated borrowings and at the yen Cost of Funds rate plus 1.5% onyen-denominated borrowings. The loan agreements required Cymer to maintaincompliance with certain financial and other covenants, including tangible networth, quick ratio and profitability requirements.  The loan agreements expired on June 16, 2003 and were not renewed.

 

As of December 31, 2002there was $6.7 million outstanding at an annual interest rate of 1.60% underthe aforementioned loan agreements.

 

***Foreign ExchangeFacilities*** –During 2002 and 2003, Cymer maintained foreign exchange facilities with threedifferent banks in the United States and Japan.  See also “Derivative Instruments” in Note 1.  The foreign exchange facilities provided upto $100 million in 2000 and 2001 to be utilized for spot and futures foreignexchange contracts for periods of up to one year. As of December 31, 2002 and2003, $63.8 million and $81.0 million was utilized under the foreign exchangefacilities, respectively. One of these facilities is associated with theRevolving Loan Agreements discussed above and was subject to the samecovenants.

 

**8.****                     ****IMPAIRMENT OR DISPOSAL OF LONG-LIVEDASSETS**

 

The total amount ofimpairment losses incurred in the years ended December 31, 2001, 2002, and 2003was approximately $510,000, $574,000, and $17.7 million , respectively.  For the year ended December 31, 2001, the impairmentloss of $510,000 included write-offs associated with tenant improvements inCymer’s San Diego facility, obsolete software used in the customer service andsupport organization and obsolete lasers used within research anddevelopment.  The loss of $510,000 wasrecorded in the research and development, sales and marketing, and general andadministrative expenses, as appropriate, in the accompanying consolidatedstatements of operations. For the year ended December 31, 2002, theimpairment loss of $574,000 included write-offs associated with tenantimprovements in Cymer’s San Diego facility and test equipment used withinresearch and development.  The loss of$574,000 was recorded in the research and development and general and administrativeexpenses, as appropriate, in the accompanying 

 

F-21

----

 

consolidated statements of operations.  For the year ended December 31, 2003 theimpairment loss of $17.7 million included write-offs associated with tenantimprovements, $15.6 million of which resulted from the two leased facilities inSan Diego which were vacated in the third quarter of 2003.  In addition, there were impairment lossesassociated with test equipment used within manufacturing and research anddevelopment.  The loss of $17.7 millionwas recorded in general and administrative, cost of product sales and researchand development expenses, as appropriate, in the accompanying consolidatedstatements of operations.

 

**9.****                     ****CONVERTIBLE SUBORDINATEDNOTES**

 

In August 1997, Cymer issued$172.5 million in aggregate principal amount in a private placement of notes.These 31⁄2% / 71⁄4% Step-UpConvertible Subordinated Notes were due onAugust 6, 2004 and were convertible at the option of the holder into shares ofcommon stock of Cymer. The conversion rate on the 1997 Notes was 21.2766 sharesper $1,000 principal amount or an effective conversion price of $47.00 pershare.  In 2001, Cymer repurchased atotal of $24.9 million of the 1997 notes then outstanding.  The redemption resulted in a gain on debtextinguishment of $610,000.  The 1997Notes were called for redemption on March 25, 2002.  Immediately prior to the March 25, 2002 redemption date, holdersof $113.0 million of the outstanding principal amount converted their 1997Notes into shares of Cymer’s common stock. As a result of these conversions, 2,325,542 shares of Cymer common stockwere issued to the note holders and the remaining $38.0 million of theoutstanding principal amount of the 1997 Notes was redeemed.    Cymer used its 2,000,000 shares oftreasury stock as part of the total 2,325,542 shares issued in theconversion.  The redemption resulted ina loss on debt extinguishment of $163,000.

 

In February 2002, Cymer issued$250.0 million in aggregate principal amount in a private placement ofnotes.  The 2002 Notes are due onFebruary 15, 2009 with interest payable semi-annually on February 15 and August15 of each year at 31⁄2% per annum.  These2002 Notes are convertible into shares of Cymer common stock at a conversionrate of 20 shares per $1,000 principal amount or an effective conversion priceof $50.00 per share.  Cymer used aportion of the net proceeds from this private placement to redeem the 1997Notes.  Cymer may redeem the 2002Notes on or after February 20, 2005, or earlier if the price of its commonstock reaches certain levels.  The 2002Notes are subordinated to Cymer’s existing and future senior indebtedness andeffectively subordinated to all indebtedness and other liabilities of Cymer’ssubsidiaries.  The remaining proceeds are to beused for Cymer’s future operating, investing and financing activities.

 

**10.****              ****STOCKHOLDERS’ EQUITY**

 

***Common StockWarrants*** – During fiscal 2001, Cymer issued warrants topurchase 200,000 shares of its common stock at a weighted average purchaseprice of $31.43 per share in conjunction with the acquisition of certainpatents (See Note 13).  During fiscal 2002 and 2003, no warrants weregranted and no warrants were exercised. The warrants expire in May 2006.

 

***Stock Option and Purchase Plans***- Cymer has the following stock option and stock purchase plans:

 

*1996 Stock Option Plan (the “1996Plan”)* – The 1996 Planprovides for the grant of incentive stock options to employees and nonqualifiedstock options to employees, directors and consultants of Cymer.  The exercise price of stock options grantedunder the 1996 Plan must be at least equal to the fair market value of Cymer’scommon stock on the date of grant. Options issued under the 1996 Plan expirefive to ten years after the options are granted and generally vest and becomeexercisable ratably over a four-year period following the date of grant.  A total of 7,900,000 shares of common stockwere reserved for issuance under the 1996 Stock Plan.  Of these shares, options to purchase 4,476,736 shares areoutstanding and 238,946 shares remain available for grants as of December 31,2003.

 

*1996 Employee Stock Purchase Plan(the “ESPP”)*– TheESPP is intended to qualify under Section 423 of the Code.  Under the ESPP, eligible employees maypurchase shares of common 

 

F-22

----

 

stock from Cymer through payroll deductions of up to15% of his or her compensation (as defined in the plan), at a price per shareequal to 85% of the lower of (i) the fair market value of Cymer’s common stockas of the first day of each offering period under the ESPP or (ii) the fairmarket value of the common stock at the end of the purchase period.  This plan was amended in 2001 by theshareholders to establish two year offering periods with six month purchaseperiods and to increase the plan shares issuable from 500,000 to 800,000.  This plan was amended in 2003 to increasethe plan shares issuable to 1.0 million shares.  The amount of shares issuable under this plan as of December 31, 2003was 154,338, and 845,662 shares have been previously issued.

 

*2000 Equity Incentive Plan (the“2000 Plan”)* – OnAugust 16, 2000, Cymer adopted the 2000 Plan which provides for the grant ofoptions to employees or consultants who are neither directors nor officers. Theexercise price of the options granted under the 2000 Plan will equal the quotedmarket value of the common stock at the date of grant.  Options issued under the 2000 Plan expireten years after the options are granted and generally vest and becomeexercisable ratably over a four year period following the date of grant.  This plan was amended in 2002 to increasethe shares reserved for issuance under the plan from 1,850,000 to 4,950,000.  Of these shares, options to purchase2,686,970 shares are outstanding and 1,354,594 shares remain available forgrants as of December 31, 2003.

 

*ACX 1993 Stock Option Plan (the “ACX Plan”)*– Cymer assumed the ACX Stock Option Plan uponcompletion of the acquisition of ACX in February 2001.  Outstanding options may be exercised solelyfor shares of Cymer common stock, according to the conversion ratio establishedin the terms of the acquisition.  Theoutstanding ACX options were converted to options to purchase 336,109 Cymershares, at exercise prices ranging from $2.08 to $38.71 per share.  The ACX Plan provides for the grant ofincentive and nonstatutory options to purchase shares of common stock toemployees, directors and consultants at prices not less than 100% of the fairmarket value of common stock on the date the options are granted.  Options issued under the ACX Plan expirefive to ten years after the options were granted and generally vest and becomeexercisable ratably over a four-year period following the date of grant.  No further options will be issued under theACX Stock Option Plan.  As of December31, 2003, 42,069 shares are outstanding under the ACX Stock Option Plan.

 

In1996, Cymer adopted a *1996 Director Option Plan (the “Director OptionPlan”)* whereby 200,000 shares were reserved for Board of Directoroption grants.  There were 80,000options issued under the Director Option Plan in 1997.  The Director Option Plan was dissolved inOctober 1997; however, 20,000 of these options remain outstanding as ofDecember 31, 2003.

 

*1987 Stock Option Plan (the “1987Plan”)* – The 1987Plan provided for the grant of incentive and nonstatutory options to purchaseshares of common stock to employees and consultants at prices that are not lessthan 100% (85% for nonstatutory options) of the fair market value of Cymer’scommon stock on the date the options are granted.  The 1987 Plan also provided for various restrictions regardingoption terms, prices, transferability and other matters.  Options issued under the 1987 Plan expiredfive to ten years after the options were granted and generally vest and becameexercisable ratably over a four-year period following the date of grant.  This plan expired in 1997, and there are noshares outstanding under this plan as of December 31, 2003.

 

F-23

----

 

Stock option transactions are summarized as follows(in thousands, except per share data):

 
|                               |   | **Number of****Shares** |       | **Weighted  Average  Exercise Price****Per Share** |       |
|------------------------------------|--------|-------------------------|------------|----------------------------------------------------|------------|
|                               |   |                    | ** ** |                                               | ** ** |
| Outstanding,  January 1, 2001 |   | 5,737                   |       | $                                                  | 29.56      |   |
| Granted                            |   | 2,601                   |       | 23.98                                              |       |
| Assumed in acquisition of  ACX     |   | 336                     |       | 10.97                                              |       |
| Exercised                          |   | (550                    | )          | 17.45                                              |       |
| Cancelled                          |   | (579                    | )          | 28.60                                              |       |
|                               |   |                    |       |                                               |       |
| Outstanding, December 31,  2001    |   | 7,545                   |       | 27.75                                              |       |
| Granted                            |   | 1,803                   |       | 28.20                                              |       |
| Exercised                          |   | (900                    | )          | 21.94                                              |       |
| Cancelled                          |   | (326                    | )          | 34.81                                              |       |
|                               |   |                    |       |                                               |       |
| Outstanding, December 31,  2002    |   | 8,122                   |       | 28.20                                              |       |
| Granted                            |   | 1,496                   |       | 32.01                                              |       |
| Exercised                          |   | (1,899                  | )          | 23.22                                              |       |
| Cancelled                          |   | (493                    | )          | 27.38                                              |       |
|                               |   |                    |       |                                               |       |
| Outstanding, December 31,  2003    |   | 7,226                   |       | $                                                  | 30.36      |   |
|                               |   |                    |       |                                               |       |
| Exercisable, December 31,  2003    |   | 4,618                   |       | $                                                  | 30.78      |   |
|                                    |        |                         |            |                                                    |            |  |  |

 

The following table summarizes information as ofDecember 31, 2003 concerning currently outstanding and exercisable options(number of shares in thousands):

 
| **Options Outstanding**                |   | **Options Exercisable** |   |
|----------------------------------------|--------|-------------------------|--------|
| **Range of  Exercise Prices**          |   | **Number  Outstanding** |   | **Weighted Average  Remaining  Contractual Life  (years)** |   | **Weighted  AverageExercise Price** |   | **Number  Exercisable** |   | **Weighted  Average  Exercise Price** |   |
|                                   |   |                    |   |   |   |   |   |   |   |   | ** ** |
| $   2.08 - $  2.08 |   | 4                       |   | 2.18 |   | $ | 2.08 |   | 3 |   | $ | 2.08 |   |
| $ 10.41 - $14.91                       |   | 53                      |   | 3.37 |   | $ | 12.29 |   | 42 |   | $ | 12.47 |   |
| $ 16.32 - $23.76                       |   | 2,257                   |   | 6.98 |   | $ | 20.53 |   | 1,378 |   | $ | 20.04 |   |
| $ 23.87 - $30.69                       |   | 1,214                   |   | 7.68 |   | $ | 26.84 |   | 867 |   | $ | 26.59 |   |
| $ 30.97 - $39.81                       |   | 2,998                   |   | 7.31 |   | $ | 35.63 |   | 1,791 |   | $ | 36.47 |   |
| $ 40.19 - $60.00                       |   | 700                     |   | 7.54 |   | $ | 47.05 |   | 537 |   | $ | 47.70 |   |
| $   2.08 - $60.00            |   | 7,226                   |   | 7.26 |   | $ | 30.36 |   | 4,618 |   | $ | 30.78 |   |

 

***Stockholder Rights Plan***-  In the event of hostile takeover attempts, including the accumulation ofshares in the open market or through private transactions, the rights planenhances the ability of Cymer’s board of directors to negotiate with apotential acquirer for a fair price to all of the stockholders. Under therights plan, rights were distributed as a dividend at the rate of one right (a“Cymer right”) for each share of common stock held by stockholders of record asof the close of business on March 2, 1998. After March 2, 1998, each holder ofshares of common stock is entitled to a Cymer right in respect of each shareheld by the stockholder. The Cymer rights will expire on February 13, 2008.Under the rights plan, each Cymer right initially entitles stockholders to buyone one-thousandth of a share of preferred stock for $100, subject tosubsequent adjustment. The Cymer rights will be exercisable only if a person orgroup acquires beneficial ownership of 15% or more of Cymer common stock orcommences a tender or exchange offer upon consummation of which the person orgroup would beneficially own 15% or more of Cymer’s common stock.

 

F-24

----

 

If any person becomes thebeneficial owner of 15% or more of Cymer’s common stock, other than pursuant toa tender offer for all outstanding shares approved by a majority of Cymer’sdirectors not affiliated with the person, then each Cymer right not owned bythe acquiring person or related parties will entitle its holder to purchase, atthe Cymer right’s then current exercise price, shares of Cymer’s common stockhaving a value of twice the Cymer right’s then current exercise price (or, incertain circumstances as determined by Cymer’s board of directors, cash, otherproperty or other securities in lieu of purchasing preferred shares). If afterany person has become a 15% stockholder, Cymer is involved in a merger or otherbusiness combination transaction with another person in which Cymer is not thesurviving entity or in which Cymer’s common stock is changed or exchanged, orif Cymer sells 50% or more of its assets or earning power to another person,each Cymer right will entitle its holder to purchase, at the Cymer right’s thencurrent exercise price, shares of common stock of the other person having avalue of twice the Cymer right’s then current exercise price.

 

Prior to their expiration, Cymer is generallyentitled to redeem the Cymer rights at $0.01 per Cymer right at any time priorto a public announcement that a 15% position has been acquired.

 

**11.****              ****INCOME TAXES**

 

Total income taxes forthe years ended December 31, 2001, 2002 and 2003 were allocated as follows (inthousands):

 
|                                       |   | **Years  ended December 31,** |   |     |
|--------------------------------------------|--------|-------------------------------|--------|----------|
|                                       |   | **2001**                      |   | **2002** |   | **2003** |   |   |
|                                       |   |                          |   |     |   |   |   |   |
| To income on  continuing operations        |   | $                             | 2,871  |     | $ | 2,706 |   | $ | (21,464 | ) |
| To stockholder’s  equity and goodwill |   | 532                           |   | (6,683   | ) | (13,005 | ) |   |
| Total income  taxes                        |   | $                             | 3,403  |     | $ | (3,977 | ) | $ | (34,469 | ) |
|                                            |        |                               |        |          |  |  |  |  |  |  |  |  |  |  |  |  |

 

The components of theprovision (benefit) for income taxes are summarized as follows:

 
|                           |   | **Years ended December 31,** |   |
|--------------------------------|--------|------------------------------|--------|
|                           |   | **2001**                     |   | **2002** |   | **2003** |   |
|                           |   | **(in thousands)**           |   |
| Current income taxes:          |   |                         |   |   |   |   |   |
| Federal                        |   | $                            | 1,560  |   | $ | 8,320 |   | $ | (4,082 | ) |
| State                          |   | (3,432                       | )      | 371 |   | (714 | ) |
| Foreign                        |   | 3,017                        |   | 4,262 |   | 3,989 |   |
|                           |   |                         |   |   |   |   |   |
| Total                          |   | 1,145                        |   | 12,953 |   | (807 | ) |
|                           |   |                         |   |   |   |   |   |
| Deferred income taxes:         |   |                         |   |   |   |   |   |
| Federal                        |   | (118                         | )      | (6,874 | ) | (14,904 | ) |
| State                          |   | 1,844                        |   | (3,373 | ) | (4,418 | ) |
| Foreign                        |   | —                       |   | — |   | (1,335 | ) |
|                           |   |                         |   |   |   |   |   |
| Total                          |   | 1,726                        |   | (10,247 | ) | (20,657 | ) |
|                           |   |                         |   |   |   |   |   |
| Income tax provision (benefit) |   | $                            | 2,871  |   | $ | 2,706 |   | $ | (21,464 | ) |

 

F-25

----

 

The income tax provision (benefit) is different fromthat which would be obtained by applying the statutory Federal income tax rate(35%) to income before income tax expense. The items causing this difference for the period are as follows:

 
|                                                                             |   | **Years ended December 31,** |   |
|----------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                             |   | **2001**                     |   | **2002** |   | **2003** |   |
|                                                                             |   | **(in thousands)**           |   |
|                                                                             |   |                         |   |   |   |   |   |
| Provision at statutory rate                                                      |   | $                            | 4,020  |   | $ | 5,919 |   | $ | (12,520 | ) |
| Foreign provision in excess  of federal statutory rate                           |   | 412                          |   | 1,756 |   | 312 |   |
| State income taxes, net of  federal benefit                                      |   | (1,032                       | )      | (730 | ) | (2,903 | ) |
| EIE benefit                                                                      |   | (787                         | )      | (2,848 | ) | (4,108 | ) |
| Federal tax credits                                                              |   | (2,509                       | )      | (1,990 | ) | (2,123 | ) |
| Tax exempt interest, net of  disallowed expenses                                 |   | (38                          | )      | — |   | — |   |
| Non-deductible amortization  of goodwill and in-process research and development |   | 2,869                        |   | 56 |   | 56 |   |
| Other                                                                            |   | (64                          | )      | 543 |   | (178 | ) |
|                                                                             |   |                         |   |   |   |   |   |
| Provision (benefit) at  effective tax rate                                       |   | $                            | 2,871  |   | $ | 2,706 |   | $ | (21,464 | ) |

 

Deferred income taxes reflect the net tax effects oftemporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for income taxpurposes.  Significant components ofCymer’s net deferred tax assets are as follows:

 
|                                                                           |   | **December 31,**   |   |
|--------------------------------------------------------------------------------|--------|--------------------|--------|
|                                                                           |   | **2002**           |   | **2003** |   |
|                                                                           |   | **(in thousands)** |   |
|                                                                           |   |               |   |   |   |
| Deferred tax assets:                                                           |   |               |   |   |   |
| Reserves and accruals not  currently deductible                                |   | $                  | 16,084 |   | $ | 15,250 |   |
| Difference between book and  tax basis of inventory and property and equipment |   | 6,156              |   | 4,606 |   |
| Tax carryforwards                                                              |   | 15,089             |   | 59,049 |   |
| Tax effect of foreign  transactions                                            |   | 6,726              |   | 7,169 |   |
| Foreign deferred tax assets                                                    |   | 732                |   | 2,067 |   |
| Total gross deferred tax  assets                                               |   | 44,787             |   | 88,141 |   |
| Valuation allowance                                                            |   | (2,951             | )      | — |   |
| Net deferred tax assets                                                        |   | 41,836             |   | 88,141 |   |
| Deferred tax liabilities                                                       |   | (1,242             | )      | (6,023 | ) |
| Net deferred tax assets                                                        |   | $                  | 40,594 |   | $ | 82,118 |   |

 

Inassessing the realizability of deferred tax assets, management considerswhether it is more likely than not that some portion or all of the deferred taxassets will not be realized. Based upon the level of historical taxable incomeand projections for future taxable income, management provided a valuationallowance of $3 million for the year ended December 31, 2002 related to theacquisition of ACX net operating loss and credit carryforwards.  The valuation allowance was released in 2003due to the merger of ACX into Cymer. The release of the valuation allowance generated a benefit to goodwilland had no impact on the tax rate.  Management believes that it is more likelythan not that the results of future operations will generate sufficient taxableincome to realize the deferred tax assets for which a valuation allowance hasnot been provided.

 

AtDecember 31, 2003, Cymer had federal and state tax loss carryforwards of $106.6million and $25.5 million, respectively, which begin to expire in 2018 and2014, respectively.  At December 31,

 

F-26

----

 

2003,Cymer had federal and state tax credit carryforwards of $12.2 million and $10.3million, respectively, which begin to expire in 2018 and 2010, respectively.

 

It is Cymer’s intention to reinvest undistributedearnings of its foreign subsidiaries and thereby indefinitely postpone theirremittance.  Accordingly, no provisionhas been made for foreign withholding taxes or United States income taxes whichmay become payable if undistributed earnings of foreign subsidiaries were paidas dividends to Cymer.

 

Cymer benefits from a tax holiday in Korea where itmanufactures certain products.  The taxholiday is scheduled to expire in nine years. The effect of the tax holiday has not had a material impact on theCompany’s net income and net income per share over the past year.

 

**12.****              ****CONTINGENCIES AND COMMITMENTS**

 

***Leases*** – Cymer leases certain facilities undernon-cancelable operating leases.  Thelease terms on these facilities are through January 1, 2010 and provide forcertain rent abatements and minimum annual increases and options to extend theterms.  In addition, Cymer has a landlease in Korea with a lease term through December 2020.  This land lease is currently exempt fromlease payments because the building meets certain investment and operationalcriteria of the Korean government. Cymer also leases certain equipment under capital and short-termoperating lease agreements.  The capitalleases expire on various dates through 2004.

 

Rent expense under operating leases is recognized ona straight-line basis over the life of the related leases and totaledapproximately $5,052,000, $4,545,000 and $4,773,000 for the years endedDecember 31, 2001, 2002 and 2003, respectively.

 

The net book value of assetsunder capital leases at December 31, 2002 and 2003 was approximately$112,000 and $61,000, which are net of accumulated amortization ofapproximately $187,000 and $86,000, respectively.

 

Total future minimum leasecommitments under operating and capital leases are as follows (in thousands):

 
| **Years  ending December 31,**              |   | **Operating** |   | **Capital** |   |
|---------------------------------------------|--------|---------------|--------|-------------|--------|
|                                        |   |          |   |        |   |
| 2004                                        |   | $             | 4,507  |        | $      | 45 |   |
| 2005                                        |   | 3,809         |   | —      |   |
| 2006                                        |   | 3,787         |   | —      |   |
| 2007                                        |   | 3,782         |   | —      |   |
| 2008                                        |   | 3,236         |   | —      |   |
| Thereafter                                  |   | 3,329         |   | —      |   |
| Total                                       |   | $             | 22,450 |        | 45     |   |
|                                        |   |          |   |        |   |
| Less amount representing  interest          |   |          |   | —      |   |
|                                        |   |          |   |        |   |
| Present value of minimum  lease payments    |   |          |   | 45          |   |
| Less current portion                        |   |          |   | (45         | )      |
|                                        |   |          |   |        |   |
| Long term obligations under  capital leases |   |          |   | $           | — |   |

 

***Patent LicenseAgreement*** – Cymerhas a patent license agreement for a non-exclusive worldwide license to certainpatented light source technology.  Underthe terms of the agreement, Cymer is required to pay royalties ranging from0.25% to 5.0% of gross sales and leases as defined depending on the totalamounts attained subject to an annual maximum of $100,000.  Royalty fees totaled $100,000 in each of theyears ended December 31, 2001, 2002 and 2003.

 

F-27

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***Employee SavingsPlan*** – Cymer has a401(k) plan that allows participating employees to contribute a percentage oftheir salary, subject to annual limits. The Plan is available to substantially all full-time United Statesemployees.  Effective January 1, 1997through December 31, 1999, Cymer matched 100% of each eligible employee’scontributions, up to $500 per year.  ThePlan was amended effective January 1, 2000 to include a matching contributionof up to 4% of each participating employee’s compensation, not to exceed $4,000per year.  Under the Plan, Cymercontributed $1,504,000, $1,438,000, and $1,558,000 for the years ended December31, 2001, 2002, and 2003, respectively. Effective January 1, 2004, the 401(k) plan was amended to increase theemployer matching contribution of up to 5% of each participating employee’scompensation, not to exceed $5,000 per year.

 

***Executive DeferredCompensation Plan***– Cymer has an executive deferred compensation plan for certain officers andkey executives.  Beginning in 2001,Cymer used corporate owned life insurance to finance the plan.  Compensation expense under this plan totaled$684,000, $367,000 and $391,000 for the years ended December 31, 2001, 2002 and2003, respectively.  Cymer’s liabilityfor deferred compensation totaled $1,691,000 and $2,250,000 as of December 31,2002 and December 31, 2003, respectively, and is included in other liabilities.  The cash surrender value of the lifeinsurance policies totaled $487,000 and $869,000 as of December 31, 2002 and2003, respectively, and is included in other assets.

 

***Executive Optionand Group Health Coverage Extension Program*** – Cymer has an executive option and healthcoverage extension program for eligible executives who meet certain minimumservice and age requirements.  Thisprogram is designed to provide extended benefits to eligible executives whoretire and cease to serve Cymer on a full-time basis.  Under the terms of the plan, the executive acts as a consultantto Cymer for a term of four years.  Inreturn for these services, the program allows the executive to continue vestingin his or her stock options after the retirement separation date.  The program also provides the executiveswith specified health insurance continuation benefits.  As of December 31, 2002, there were noexecutives active in this program.  In2003 one former executive was participating in this program.  The cost for this program was not materialin 2003.

 

***Retirement Plan*** – Cymer Japan has a retirement benefit planfor all Cymer Japan employees and Japanese directors.  The plan consists of a multi-employer retirement plan coveringall employees and life insurance policies covering all employees and Japanesedirectors. The multi-employer retirement plan was established under the Smalland Medium-Size Enterprise Retirement Benefits Cooperative Law.  Cymer Japan also has a Retirement Allowanceand Pension Plan.  Expense under theseplans totaled $492,000, $247,000, and $526,000 for the years endedDecember 31, 2001, 2002 and 2003, respectively.

 

***Korea CustomsInvestigation*****–**The****customs agency in Korea has asserted thatparts being imported into Korea from Cymer’s corporate office in San Diego wereclassified improperly and some used items which were returned to San Diego werevalued improperly during the period from 1997 through July 2003.  Although Cymer does not agree with theseassertions, Korean customs has begun to assess and require payment from Cymeron additional duties related to shipments during this time period.  As a result of these assertions anddiscussions that Cymer has had to date with the customs agencies in Korea,Cymer accrued a liability of $4.7 million of which $2.5 million was paid toKorean customs through December 31, 2003. The remaining accrual is included in accrued patents, royalties andother fees in the accompanying consolidated balance sheets.  The expense resulting from this recordedliability was included in cost of product sales in the accompanyingconsolidated statements of operations as they pertain to potential costsassociated with the shipment of Cymer’s product.

 

***Contingencies****–* Cymer is party to legal actions in thenormal course of business.  Based inpart on the advice of legal counsel, management does not expect the outcome oflegal action in the normal course of business to have a material impact on thefinancial position or results of operations of Cymer.

 

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Cymer’s former Japanese manufacturing partner,Seiko, and one of Cymer’s Japanese customers have been notified that Cymer’slight source systems in Japan may infringe certain Japanese patents held byanother Japanese company.  Cymer has agreedto indemnify its former Japanese manufacturing partner and its customersagainst patent infringement claims under certain circumstances, even after thetermination date of the contract manufacturing agreement.  Cymer believes, based upon the advice ofcounsel, that Cymer’s products do not infringe any valid claim of the assertedpatents or that Cymer is entitled to prior user rights in Japan.

 

**13.****              ****PATENT LICENSE AGREEMENTS**

 

In May2001, Cymer acquired certain patents for use in its DUV light sourceapplications.  The total considerationfor this transaction was $10.3 million, which included a $6.0 million cashpayment and the issuance of 200,000 warrants valued at $4.3 million. Thewarrants were valued on the date of issuance using the Black-Scholes pricingmodel using the following assumptions: 87% volatility, 5.0% risk-free interestrate and 4.6 years expected life.  Thetotal value of these patents are being amortized over eight years whichrepresents the remaining life of the patents purchased under theagreement.  The amortization of thesepatents is included in cost of product sales on the accompanying statements ofoperations since they are used in products which are currently being shipped tocustomers.

 

InNovember 2003, Cymer acquired the rights to the same list of patents as in theMay 2001 agreement but for a different field of use, for a total amount of $6.0million in cash.  Instead of DUV lightsource applications for the patents, this license agreement allows Cymer to usethe patents for EUV and other future applications.  The total value of these patents are being amortized over aperiod of 5.5 years which represents the remaining life of the patentspurchased under the agreement. The amortization of these patents is included inresearch and development expenses on the accompanying statements of operationssince the field of use involves applications which are still in the researchand development stages.  As of December31, 2002 and December 31, 2003, the net carrying amount of these patents was$8.2 million and $12.7 million, respectively.

 

F-29

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**14.****              ****RELATED PARTY TRANSACTIONS**

 

***CollaborativeArrangement*** –Cymer has a collaborative arrangement with a Japanese company that was also astockholder of Cymer until 2000.  Thearrangement, entered into in August 1992, includes a product license agreementand contract manufacturing agreement. The general provisions of these agreements are as follows:

 

*Product License Agreement*– Cymer granted to the stockholder the exclusive right in Japan and thenon-exclusive right outside Japan to manufacture and sell one of Cymer’sproducts and subsequent enhancements thereto. Cymer also granted thestockholder the right of first refusal to license and fund the development ofnew technologies not developed with funding from other parties.  In exchange for these rights, Cymer receivedup-front license fees and was entitled to royalties of 5% on related productsales through September 1999, after which the royalty rate was subject torenegotiation.  The license agreementalso provides that product sales between Cymer and the stockholder will be at a15% discount from the respective companies’ list price. The agreementterminates in August 2012.  There was noactivity under this agreement in 2001, 2002 and 2003.

 

*Contract Manufacturing Agreement*– The stockholder agreed to manufacture for Cymer certain products and Cymerwas required to purchase a specified percentage of its total annual product, asdefined, from the stockholder.  Cymerand this stockholder mutually agreed to the termination of this contracteffective March 31, 2003.

 

Cymer made $3.1 million, $2.0 million and $351,000 inpurchases under this agreement in 2001, 2002 and 2003, respectively.  In addition, Cymer had payables due underthis agreement of $155,000 at December 31, 2002 and no payables due at December31, 2003.

 

**15.****              ****SEGMENT INFORMATION**

 

Cymer designs, manufactures and sells excimer lightsource systems, replacement parts, and support services for use inphotolithography systems used in the manufacture of semiconductors withcritical features sizes.  In accordancewith Statement of Financial Accounting Standards No. 131, “Disclosure aboutSegments of an Enterprise and Related Information”,  Cymer currently considers its business to consist of onereportable operating segment.

 

**GeographicInformation**

 

Presented below is information regarding sales tounaffiliated customers, operating income (loss) from operations, long-livedassets, all other identifiable assets and total identifiable assets, classifiedby operations located in the United States, Japan, Korea, Taiwan, Singapore,the People’s Republic of China (“China”), and the Netherlands.  Long-lived assets includes net property,plant and equipment by geographic area. Cymer sells its excimer light sources in Japan through Cymer Japan.  Intercompany sales to the subsidiaries aregenerally priced between 90% to 95% of the price of products sold to outsidecustomers.  All significant intercompanybalances are eliminated in consolidation. The majority of corporate costs and expenses are incurred in the UnitedStates and are reflected in the operating loss from the United Statesoperations.

 

F-30

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|                            |   | **Year ended December 31, 2001** |    |
|---------------------------------|--------|----------------------------------|---------|
|                            |   | **(in thousands)**               |    |
|                            |   | **United States**                |    | **Japan** |   | **Korea, Taiwan,  Singapore, China,  and the Netherlands** |   | **Consolidated** |   |
|                            |   |                             |    |   |   |   |   |   |   |
| Sales to unaffiliated customers |   | $                                | 124,325 |   | $ | 111,407 |   | $ | 33,712 |   | $ | 269,444 |   |
|                            |   |                             |    |   |   |   |   |   |   |
| Operating income (loss)         |   | (57,531                          | )       | 57,545 |   | 13,527 |   | 13,541 |   |
|                            |   |                             |    |   |   |   |   |   |   |
| Long-lived assets               |   | 85,707                           |    | 2,939 |   | 1,773 |   | 90,419 |   |
| All other identifiable assets   |   | 333,793                          |    | 29,866 |   | 29,268 |   | 392,927 |   |
|                            |   |                             |    |   |   |   |   |   |   |
| Total identifiable assets       |   | $                                | 419,500 |   | $ | 32,805 |   | $ | 31,041 |   | $ | 483,346 |   |

 
|                            |   | **Year ended December 31, 2002** |    |
|---------------------------------|--------|----------------------------------|---------|
|                            |   | **(in thousands)**               |    |
|                            |   | **United States**                |    | **Japan** |   | **Korea, Taiwan,  Singapore, China,  and the Netherlands** |   | **Consolidated** |   |
|                            |   |                             |    |   |   |   |   |   |   |
| Sales to unaffiliated customers |   | $                                | 119,708 |   | $ | 122,917 |   | $ | 47,535 |   | $ | 290,160 |   |
|                            |   |                             |    |   |   |   |   |   |   |
| Operating income (loss)         |   | (62,033                          | )       | 61,990 |   | 18,706 |   | 18,663 |   |
|                            |   |                             |    |   |   |   |   |   |   |
| Long-lived assets               |   | 102,695                          |    | 3,231 |   | 6,283 |   | 112,209 |   |
| All other identifiable assets   |   | 585,539                          |    | 36,312 |   | 32,827 |   | 654,678 |   |
|                            |   |                             |    |   |   |   |   |   |   |
| Total identifiable assets       |   | $                                | 688,234 |   | $ | 39,543 |   | $ | 39,110 |   | $ | 766,887 |   |

 
|                            |   | **Year ended December 31, 2003** |    |
|---------------------------------|--------|----------------------------------|---------|
|                            |   | **(in thousands)**               |    |
|                            |   | **United States**                |    | **Japan** |   | **Korea, Taiwan,  Singapore, China,  and the Netherlands** |   | **Consolidated** |   |
|                            |   |                             |    |   |   |   |   |   |   |
| Sales to unaffiliated customers |   | $                                | 92,608  |   | $ | 116,531 |   | $ | 58,357 |   | $ | 267,496 |   |
|                            |   |                             |    |   |   |   |   |   |   |
| Operating income (loss)         |   | (109,800                         | )       | 46,831 |   | 28,335 |   | (34,634 | ) |
|                            |   |                             |    |   |   |   |   |   |   |
| Long-lived assets               |   | 120,452                          |    | 1,918 |   | 6,479 |   | 128,849 |   |
| All other identifiable assets   |   | 581,929                          |    | 46,650 |   | 45,793 |   | 674,372 |   |
|                            |   |                             |    |   |   |   |   |   |   |
| Total identifiable assets       |   | $                                | 702,381 |   | $ | 48,568 |   | $ | 52,272 |   | $ | 803,221 |   |

 

F-31

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**16.****              ****SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)**

 
|                              |   | **QUARTERLY RESULTS OF OPERATIONS**           |   |
|-----------------------------------|--------|-----------------------------------------------|--------|
|                              |   | **(in thousands, except for per share data)** |   |
|                              |   | **Years ended December 31, 2002**             |   |
|                              |   | **1st**                                       |   | **2nd** |   | **3rd** |   | **4th** |   |
|                              |   |                                          |   |   |   |   |   |   |   |
| Revenues                          |   | $                                             | 61,983 |   | $ | 73,669 |   | $ | 84,484 |   | $ | 70,024 |   |
|                              |   |                                          |   |   |   |   |   |   |   |
| Operating income (loss)           |   | $                                             | 6,944  |   | $ | 9,265 |   | $ | 6,571 |   | $ | (4,117 | ) |
|                              |   |                                          |   |   |   |   |   |   |   |
| Net income (loss)                 |   | $                                             | 4,088  |   | $ | 6,550 |   | $ | 6,855 |   | $ | (3,897 | ) |
|                              |   |                                          |   |   |   |   |   |   |   |
| Basic earnings (loss) per share   |   | $                                             | 0.13   |   | $ | 0.19 |   | $ | 0.20 |   | $ | (0.11 | ) |
|                              |   |                                          |   |   |   |   |   |   |   |
| Diluted earnings (loss) per share |   | $                                             | 0.12   |   | $ | 0.18 |   | $ | 0.20 |   | $ | (0.11 | ) |

 
|                              |   | **Years ended December 31, 2003** |   |
|-----------------------------------|--------|-----------------------------------|--------|
|                              |   | **1st**                           |   | **2nd** |   | **3rd** |   | **4th** |   |
|                              |   |                              |   |   |   |   |   |   |   |
| Revenues                          |   | $                                 | 67,599 |   | $ | 62,416 |   | $ | 64,437 |   | $ | 73,044 |   |
|                              |   |                              |   |   |   |   |   |   |   |
| Operating income (loss)           |   | $                                 | (2,702 | ) | $ | (16,974 | ) | $ | (20,160 | ) | $ | 5,202 |   |
|                              |   |                              |   |   |   |   |   |   |   |
| Net income (loss)                 |   | $                                 | (3,362 | ) | $ | (5,193 | ) | $ | (8,519 | ) | $ | 1,674 |   |
|                              |   |                              |   |   |   |   |   |   |   |
| Basic earnings (loss) per share   |   | $                                 | (0.10  | ) | $ | (0.15 | ) | $ | (0.24 | ) | $ | 0.05 |   |
|                              |   |                              |   |   |   |   |   |   |   |
| Diluted earnings (loss) per share |   | $                                 | (0.10  | ) | $ | (0.15 | ) | $ | (0.24 | ) | $ | 0.04 |   |

 

**17.****              ****SUBSEQUENT EVENTS**

 

On January 26, 2004, Cymer signed a research anddevelopment agreement with Intel Corporation (“Intel”).  Total funding under the agreement is $20.0million and will provide Cymer with funding over the next three years toaccelerate the development of production-worthy EUV lithography lightsources.  The funding to be received fromIntel under this agreement is milestone based and will be netted againstCymer’s total research and development expenses in the period that themilestone is completed.

 

Aspart of the research and development agreement signed with Intel, Cymer alsoagreed to provide Intel with indemnity against any infringement of theintellectual property rights of any third party arising from Intel’s purchaseand/or use of EUV source systems, such indemnity to be negotiated as part ofthe purchase agreement.

 

On February 2, 2004, Cymer acquired 6% of theremaining 25% minority interest in its majority-owned subsidiary, CymerKorea.  Cymer paid a total of $2.0million for this 6% interest and recorded $1.3 million of the $2.0 million asan additional investment in Cymer Korea and the remaining $711,000 asgoodwill.  This transaction increasedCymer’s total interest in Cymer Korea from 75% to 81%.

 

On February 4, 2004, Cymer signed an intellectualproperty license agreement with Intel for the use of certain Intel patents andtrade secrets related to the EUV technology. Under the terms of this agreement, Cymer will pay license fees to Intelif Cymer is successful in commercializing an EUV 

 

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lithography light source capable of high volumemanufacturing by the end of the second quarter of 2008.  The license payments under this agreementare triggered in the quarter in which Cymer successfully ships the firstcomplete high volume manufacturing EUV source system.  Upon shipment of this first unit, Cymer is to pay Intel $1.25million in license fees per quarter for a period of sixteen quarters.  The quarterly license amounts paid to Intelwill be related to Cymer’s sale of EUV light source systems and, as a result,will be recorded as cost of sales in the period that the payment is made toIntel.

 

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**CYMER, INC.**

**SCHEDULE II**

**VALUATIONAND QUALIFYING ACCOUNTS**

**Years EndedDecember 31, 2001, 2002 and 2003**

**(inthousands)**

 
|                                |   | **Balance at  Beginning of Year** |   | **Additions (net)****(1)** |   | **Deductions** |   | **Balance at  End of Year** |   |
|-------------------------------------|--------|-----------------------------------|--------|----------------------------|--------|----------------|--------|-----------------------------|--------|
|                                |   |                              |   |                       |   |           |   |                        |   |
| **Allowance for Doubtful Accounts** |   |                              |   |                       |   |           |   |                        |   |
|                                |   |                              |   |                       |   |           |   |                        |   |
| Year ended December 31, 2001        |   | $                                 | 2,078  |                       | $      | 182            |   | $                           | (63    | ) | $ | 2,197 |   |
| Year ended December 31, 2002        |   | $                                 | 2,197  |                       | $      | (399           | )      | $                           | (42    | ) | $ | 1,756 |   |
| Year ended December 31, 2003        |   | $                                 | 1,756  |                       | $      | 250            |   | $                           | (42    | ) | $ | 1,964 |   |
|                                |   |                              |   |                       |   |           |   |                        |   |
| **Inventory Allowance**             |   |                              |   |                       |   |           |   |                        |   |
|                                |   |                              |   |                       |   |           |   |                        |   |
| Year ended December 31, 2001        |   | $                                 | 15,000 |                       | $      | 6,047          |   | $                           | (7,519 | ) | $ | 13,528 |   |
| Year ended December 31, 2002        |   | $                                 | 13,528 |                       | $      | 6,658          |   | $                           | (5,486 | ) | $ | 14,700 |   |
| Year ended December 31, 2003        |   | $                                 | 14,700 |                       | $      | 4,324          |   | $                           | (6,996 | ) | $ | 12,028 |   |

 

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(1)                                  Includes reversals of allowance amounts asdeemed necessary.

 

 

See accompanying independent auditors’ report.

 

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