Cymer (CYMI) 10-K/A 2003 FY Annual report (amended)

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K / A

Amendment No. 1

(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 registrant as 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 reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ý  No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant’s knowledge, in definitive proxy or information statements 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 held by non-affiliates of the registrant, based upon the closing price of $32.07 for shares of the registrant’s Common Stock on June 30, 2003 as reported on the Nasdaq National Market, was approximately $1,106,405,764.  In calculating such aggregate market value, shares of Common Stock owned of record or beneficially by officers or directors, and persons known to the registrant to own more than ten percent of the registrant’s voting securities were excluded because such persons may be deemed to be affiliates.  The registrant disclaims the existence of control 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 this Annual Report on Form 10-K: portions of registrant’s proxy statement for its annual meeting of stockholders to be held on May 20, 2004.

EXPLANATORY NOTE

This Amendment No. 1 to Cymer, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003 is being filed to add the conformed signature of KPMG, LLP to the Independent Auditor’s Report. The conformed signature was inadvertently omitted from the Independent Auditor’s Report filed with the original Form Annual Report on 10-K filed on March 11, 2003.  There have been no changes to the balance of the Form 10-K from the original filing.

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PART IV

Item 15.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)  Documents included in this report.

(1)(2)  Financial Statements and Financial Statement Schedule.

Independent Auditors’ Report

The Board of Directors
Cymer, Inc.:

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

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cymer, Inc. and subsidiaries as of December 31, 2002 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, the related financial statement Schedule II, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, and, accordingly, changed its method of accounting for goodwill in 2002.

/s/ KPMG LLP

San Diego, California
January 23, 2004, except for note 17,
     which is as of February 4, 2004

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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.

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CYMER, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	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.

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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

See Notes to Consolidated Financial Statements.

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CYMER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(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

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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

See Notes to Consolidated Financial Statements.

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CYMER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations – 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 manufacturers of photolithography tools in the semiconductor equipment industry.  Cymer sells its product to customers primarily in Japan, Asia, Europe and the United States.

Principles of Consolidation– The consolidated financial statements include the accounts of Cymer, Inc., its wholly-owned subsidiaries – Cymer Japan, Inc. (“Cymer Japan”), Cymer Singapore Pte Ltd. (“Cymer Singapore”), Cymer B.V. in the Netherlands (“Cymer B.V.”), Cymer Southeast Asia, Ltd, in Taiwan (“Cymer SEA”),  Cymer Semiconductor Equipment Shanghai Co., Ltd, in the People’s Republic of China (“Cymer PRC”), and its majority-owned subsidiary, Cymer Korea, Inc. (“Cymer Korea”).  Cymer, Inc. owns 75% of Cymer Korea.  During 2002, Active Control eXperts, Inc. or ACX was a wholly-owned subsidiary of Cymer, Inc.  Effective January 1, 2003, ACX was merged with and into Cymer, Inc.  Cymer sells its excimer light sources in Japan primarily through Cymer Japan. Cymer SEA, Cymer PRC, Cymer Singapore and Cymer B.V. are field service offices for customers in those respective regions.  Cymer Korea provides manufacturing, refurbishment, field service, and administrative activities for that region. All significant intercompany balances have been eliminated in consolidation.

Accounting Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results may differ from those estimates.

Cash Equivalents – Cash equivalents consist of money market instruments, commercial paper and other highly liquid investments purchased with an original maturity of three months or less.

Investments – Cymer maintains an investment portfolio consisting primarily of government and corporate fixed income securities, certificates of deposit and commercial paper.  While it is Cymer’s general intent to hold such securities until maturity, Cymer will occasionally sell certain securities for cash flow purposes. Therefore, Cymer’s investments are classified as available-for-sale and are carried on the balance sheet at fair value, with unrealized gains and losses reported in stockholders’ equity.  Unrealized losses at December 31, 2003 were $9,000.  We have concluded that this unrealized loss is a temporary impairment, as it represents 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 90 days as of December 31, 2003.  Due to the conservative nature of the investment portfolio, a sudden change in interest rates would not have a material effect on the value of the portfolio.

Inventories – Inventories are carried at the lower of standard cost, which approximates first-in, the first-out method, or market.  Cost includes material, labor and manufacturing overhead costs. Cymer reviews the components of its inventory on a regular basis for excess or obsolete inventory and makes appropriate allowances and dispositions in the period that such inventory is identified.

Property and Equipment – Property and equipment are stated at cost less accumulated depreciation.  Equipment acquired under capital leases is stated at the present value of the future minimum lease payments. Additions and improvements are capitalized and maintenance and repairs are expensed when incurred.  Depreciation is provided using the straight-line method over the

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

Goodwill/Intangible Assets – Cymer adopted Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets” on January 1, 2002. SFAS 142 superceded Accounting Principles Board Opinion No. 17, “Intangible Assets”, and discontinued the amortization of goodwill and intangible assets with indefinite useful lives associated with purchase business combinations. In addition, SFAS 142 includes provisions regarding the reclassification between goodwill and identifiable intangible assets in accordance with the new definition of intangible assets set forth in Statement of Financial Accounting Standards No. 141 (“SFAS 141”), “Business Combinations”, the reassessment of the useful lives of existing intangible assets, and the annual testing for impairment of existing goodwill and other intangible assets with indefinite lives. In accordance with the adoption of SFAS 142 on January 1, 2002, Cymer ceased the amortization of goodwill and intangible assets with indefinite lives, and completed the required transitional impairment test, which resulted in no indication of impairment. Cymer also re-evaluated the classifications of its existing intangible assets and goodwill in accordance with SFAS No. 141.  As a result, Cymer reclassified assembled workforce net of amortization of $617,000 from intangible assets to goodwill, as assembled workforce no longer meets the definition 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 consist primarily of acquired patents and purchased technology. Intangible assets with definite lives are recorded at cost and are amortized using the straight-line method over their expected useful lives from four to eight years. Cymer reviews the carrying value and remaining useful life of intangibles for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. The amount of impairment, if any, is measured based on the projected discounted future operating cash flows using a discount rate reflecting Cymer’s average cost of funds.  The assessment of the recoverability of intangible assets will be impacted if estimated future operating cash flows are not achieved.

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of – On January 1, 2002, Cymer adopted Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets”, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets.  While SFAS 144 supersedes SFAS 121, it retains many of the fundamental provisions of SFAS 121, including the recognition and measurement of the impairment of long-lived assets to be held and used, and the measurement of long-lived assets to be disposed of by sale. Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison 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 carrying amount of the assets exceeds the fair value of the assets.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

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

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

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

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

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

Convertible Subordinated Notes – Convertible Subordinated 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 at December 31, 2002 and 2003 was $245.9 million and $276.0 million, respectively.

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

Guarantees –Cymer adopted the disclosure provisions of Financial Accounting Standards Board Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others”, during the quarter ended December 31, 2002 and has adopted the recognition and measurement provisions as required after December 31, 2002.  FIN 45 provides expanded accounting guidance surrounding liability recognition and disclosure requirements related to guarantees, as defined by this interpretation.

In the ordinary course of business, Cymer is not subject to potential obligations under guarantees that fall within the scope of FIN 45, except for standard warranty provisions associated with product sales, indemnification provisions related to intellectual property that are contained within many of its customer agreements, and third-party bank guarantees for subsidiary office lines of credit.  All of these provisions give rise only to the disclosure requirements prescribed by FIN 45.

Product Warranties – Warranty provisions contained within Cymer’s customer agreements are generally consistent with those prevalent in the semiconductor equipment industry. The warranty period and terms vary by light source model.  In general, the light source system warranty period ranges from 17 to 26 months after shipment.  Cymer also warrants consumables and spare parts sold to its customers and the coverage period varies by spare part type as some types include time-based warranty periods and others include usage-based warranty periods. On average, the warranty period for consumables and spare parts is approximately 6 months from the date of shipment.  Cymer records a provision for warranty for all products, which is included in cost of product sales in the consolidated statements of operations and is recorded at the time that the related revenue is recognized. The warranty provision for light source systems is reviewed monthly and determined using a financial model, which considers actual historical expenses, and potential risks associated with Cymer’s different light source system models. This financial model is then used to calculate the future probable expenses related to warranty and the required level of the warranty provision.  The risk levels used within this model are reviewed and updated as risk levels change by model over its product life cycle. The warranty provision for consumables and spares is determined using actual historical data. For both light source systems and consumables, if actual warranty expenditures differ substantially from Cymer’s estimates, revisions to the warranty provision would be required.  Actual warranty expenditures are recorded against the warranty provision as they are incurred.

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The following table summarizes information related to Cymer’s warranty provision for 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 to existing warranty reserves as a result of normal recurring updates made to the risk factors used in the warranty model.

Intellectual Property Indemnifications – Cymer includes intellectual property indemnification clauses within its general terms and conditions with its customers and the general purchase agreements with its three major customers, ASM Lithography, Canon, and Nikon.  In general, these indemnification provisions provide that Cymer will defend its customers against any infringement claims that arise related to Cymer’s products.  Under the indemnification clauses, Cymer will pay all costs and damages, including attorney’s fees, associated with such settlements or defenses, provided that the customer follows specific procedures for notifying Cymer of such claims and allows Cymer to manage the settlement proceedings. Due to the nature of these indemnification provisions, they are indefinite and extend beyond the term of the actual customer agreements.

An indemnification provision is also included in the contract manufacturing agreement with Seiko, which was terminated effective March 31, 2003.  As with Cymer’s indemnification provisions on intellectual property, Cymer will continue to honor this indemnification clause within the agreement even after its termination. Seiko and at least one Japanese customer have been notified that Cymer’s light source systems in Japan may infringe certain Japanese patents.  Cymer believes, based upon the advice of counsel, that Cymer’s products do not infringe any valid claim of the asserted patents or that it is entitled to prior use claims in Japan.

Guarantees on Subsidiary Debt – During the first quarter of 2003 and part of the second quarter of 2003, Cymer was party to a Parent Guarantee associated with a revolving Loan Agreement held by Cymer Japan. This guarantee was between a commercial bank in the United States and Cymer.  The Parent Guarantee was entered into in 2001 in order to establish a banking relationship between this commercial bank and Cymer Japan.  Per the terms of the Parent Guarantee, Cymer guaranteed payment of any obligations under the revolving loan agreement in the event that Cymer Japan could not make such payments due or defaults on the loan.  Cymer Japan made all payments per the terms of the Loan Agreement and thus, Cymer did not incur any guarantor obligations under the Parent Guarantee.  Since Cymer Japan is a wholly-owned subsidiary of Cymer and Cymer Japan records the revolving loan outstanding balance as a liability on its financial statements, the carrying amount of the liability was included in the consolidated balance sheets.  The Loan Agreement expired on June 16, 2003 and was paid in full by Cymer Japan. The Loan Agreement was not renewed on this expiration date.

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

Revenue Recognition – Cymer recognizes revenue when all four revenue recognition criteria have been met.  These four criteria are as follows: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; seller’s price to buyer is fixed or determinable; and collectibility is reasonably assured. Cymer’s revenue is generated from product sales, which includes

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light source systems, consumables and spare parts, upgrades, service, service contracts and training.  In addition, Cymer generates other revenue which primarily represents revenue earned from funded development activities and license fees.

Cymer’s revenue recognition policy results in revenue being recognized as follows for product sales 1) For light source systems that have proven to meet specifications prior to shipment and do not have acceptance provisions, the revenue is recognized once legal title passes to the customer.  The systems are tested by Cymer in environments similar to those used by the customers prior to shipment to ensure that they meet the customer’s specifications and will interface with the customer’s software.  As the shipping terms vary by customer, title will transfer based upon the shipping terms specific to that customer.  2)  For light source systems which are shipped to customers requiring acceptance provisions, the revenue is recognized at such time that the acceptance conditions are satisfied.  3)  For consumables and spare parts sales, revenue is recognized at the point that legal title passes to the customer.  For consumables and spare parts sales, legal title generally passes to the customer upon shipment from the Cymer facility.  4)  For service and training sales which are generated from a billable service call or a training class, revenue is recognized when the services or training have been rendered to the customer. 5) For service contract sales, revenue is generally recognized ratably over the life of the contract or per the specific terms of the agreement.

Revenue classified as “other revenue” in Cymer’s statements of operations is recorded as revenue on a basis consistent with the performance requirement of the funded development or license agreement. Revenue from funded development contracts is generally recognized on the percentage-of-completion method based on the relationship of costs incurred to total estimated costs.  Revenues generated from funded development contracts are derived from cost sharing contracts between Cymer and certain customers.  The costs associated with these contracts are included in research and development expenses in the period incurred and are not listed separately as other cost or expenses in the consolidated statements of operations.  If milestones on funded development contracts require that specific results be achieved or reported by Cymer, revenue is not recognized until that milestone is completed.  Payments received in advance of performance are recorded as deferred revenue.

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

Research and Development– Research and development costs are expensed in the period incurred and include costs associated with funded development contracts.  The funded development contracts are generally cost sharing contracts between Cymer and a customer where each party pays near equivalent portions of the total development costs.  As a result, costs for the funded development contracts approximate the revenue recorded for these contracts in other revenue in the accompanying statements of operations. The services performed under the funded development contracts are provided on a best efforts basis.

Income Taxes – Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates

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

Stock-Based Compensation – Cymer applies the intrinsic value-based method of accounting 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 Transactions involving Stock Compensation an interpretation of APB Opinion No. 25”to account for its stock option plans.  Under this method, employee-based stock compensation expense is measured on the date of grant only if the then current market price of the underlying stock exceeded the exercise price and is recorded on a straight-line basis over the 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-based method of accounting for stock-based employee compensation plans.  As allowed by SFAS No. 123, Cymer has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”.

All options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

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

Under SFAS 123, the weighted average per share fair value of the options granted for the years ended 2001, 2002, and 2003 was $14.36, $17.45 and $19.20 , respectively, on the date of grant.  Fair value under SFAS 123 is determined using the Black-Scholes option-pricing model with the assumptions noted below.  For risk free interest, Cymer uses the then currently available rate on zero coupon U.S. Government issues with a remaining life of five years for valuing options and one 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

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The following table compares net income (loss) per share as reported by Cymer to the pro forma amounts that would be reported had compensation expense been recognized for Cymer’s stock-based compensation plans in 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 Currency Translation – The financial statements of Cymer’s foreign subsidiaries where the functional currency has been determined to be the local currency are translated into United States dollars using current rates of exchange for assets and liabilities and rates of exchange that approximate the rates in effect at the transaction date for revenues, expenses, gains and losses. Gains and losses resulting from foreign currency translation are accumulated as a separate component of consolidated stockholders’ equity as accumulated other comprehensive income (loss). Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations.

Derivative Instruments– Cymer conducts business in several international currencies through its global operations. Due to the large volume of Cymer’s business that is conducted in Japan, the Japanese operation poses the greatest foreign currency risk.  Cymer uses financial instruments, principally foreign currency forward exchange contracts, to manage its foreign currency exposures in Japan. Cymer enters into foreign currency forward exchange contracts in order to reduce the impact of currency fluctuations related to purchases of Cymer’s inventories by Cymer Japan in US dollars for resale under firm third-party sales commitments denominated in Japanese Yen.  Cymer does not enter into foreign currency forward exchange contracts for trading purposes.

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

Cymer’s derivative instruments are designated as cash flow hedging instruments. Cymer adopted SFAS 133 on January 1, 2001 but did not qualify for cash flow hedge accounting treatment until July 1, 2001 due to the extensive documentation and administrative requirements. Accordingly, for contracts which Cymer entered into from January 1, 2001 to June 30, 2001, Cymer recorded changes in the fair value of these foreign currency forward exchange contracts directly through earnings in other income (expense) in the period that such changes occurred.  For those contracts that have been entered into on or after July 1, 2001, Cymer defers effective changes in the fair value of its foreign currency forward exchange contracts into other comprehensive income and subsequently reclassifies the effective changes to cost of product sales in the same period that the related sale is made to the third party.  Prior to the adoption of SFAS 133, Cymer accounted for all such gains and losses through cost of product sales in the same period as the related sale was made to the third party.  Upon adoption of SFAS 133 on January 1, 2001, Cymer recorded a loss to cumulative change in accounting principle of $370,000 and a gain of $2.4 million to accumulated other comprehensive income per SFAS 133 transition guidelines.

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At December 31, 2003, Cymer had outstanding foreign currency forward exchange contracts to buy US $81.0 million for 9.3 billion yen under foreign currency exchange facilities with contract rates ranging from 107.09 yen to 120.6yen per US dollar.  These contracts expire on various expiration dates through February 2005.  Cymer recognized a net gain through cost of product sales from the foreign currency exchange contracts of $2,320,000 for the year ended December 31, 2001, and a net loss of $992,000 and $2,484,000 for the years ended December 31, 2002 and 2003, respectively.

Concentration of Credit Risk – Financial instruments, which potentially subject Cymer to concentrations of credit risk, consist principally of cash and accounts receivable.

Cash and cash equivalents – Cymer invests its excess cash in an effort to preserve capital, provide liquidity, maintain diversification and generate returns relative to Cymer’s corporate investment policy and prevailing market conditions.  Cymer has not experienced any material losses on its cash and investment accounts.  At times, cash balances held in financial institutions are in excess of federally insured limits. Cymer performs periodic evaluations of the relative credit standing of financial institutions and limits the amount of risk by selecting financial institutions with a strong relative credit standing.  At December 31, 2002 and 2003, Cymer had $196.6 million and $230.4 million respectively, in deposits with major financial institutions that exceeded the federally insured limit of $100,000.

Accounts receivable – Cymer maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, which results in bad debt expense.  Management periodically determines the adequacy of this allowance by continually evaluating individual customer receivables considering the customer’s financial condition, security deposits, and current economic conditions.  Credit losses to date have been minimal.

Major Customers – Revenues from major customers are detailed as 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 major customers 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 primarily by Cymer Japan, accounted for 41%, 43% and 44% of revenues for the years ended December 31, 2001, 2002, and 2003, respectively. Revenues from ASM Lithography in the Netherlands accounted for 32%, 32% and 24% of revenues for the years ended December 31, 2001, 2002, and 2003, respectively.

The loss of business of any of these major customers would have a material adverse effect on our operating results, financial condition, and cash flows.

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

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

The following table sets forth the computation of diluted weighted average common and potential common shares outstanding for the years 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 December 31, 2001, 2002, and 2003, weighted average options and warrants to purchase 3,614,000, 2,489,000 and 3,943,000 shares of common stock, respectively, were outstanding but not included in the computation of diluted earnings per share as their effect was anti-dilutive.  In addition, for the years ended December 31, 2001, 2002, and 2003, weighted average common shares attributable to convertible subordinated notes of 3,387,000, 5,077,000 and 5,000,000, respectively, were not included in the computation of diluted earnings per share as their effect was also anti-dilutive.

Reclassifications – Certain amounts in the prior year consolidated financial statements have been reclassified to conform to current period presentation.

Accounting Pronouncements Adopted

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

Cymer adopted the provisions of Statement of Financial Accounting Standards No. 145 (“SFAS No. 145”), “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections” on January 1, 2003.  SFAS No. 145 provides guidance on the classification of gains and losses from the extinguishment of debt and on the accounting for certain specified lease transactions. Cymer reclassified the 2001 gain and the 2002 loss on extinguishment of debt from an extraordinary gain (loss) on debt extinguishment to operating expenses in the consolidated statements of operations.

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

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The adoption of this statement did not have an impact on Cymer’s financial condition or results of operation.

Cymer adopted the initial recognition and measurement provisions of FIN 45 on January 1, 2003, which apply on a prospective basis to guarantees issued or modified after December 31, 2002.  Cymer adopted the disclosure provisions of FIN 45 during the quarter ended December 31, 2002. In the ordinary course of business, Cymer is not subject to potential obligations under guarantees that fall within the scope of FIN 45 except for warranty provisions, intellectual property indemnification clauses that are contained within many of Cymer’s customer agreements and third-party bank guarantees that Cymer had with one of our subsidiaries until June 2003.  These provisions fall within the disclosure requirements prescribed by FIN 45.

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

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

In May 2003, the FASB issued Statement of Financial Accounting Standards No.150 (“SFAS No. 150”), “Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity”. The standard establishes how an issuer classifies and measures certain freestanding financial instruments with characteristics of liabilities and equity and requires that such instruments be classified as liabilities. The standard is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003.  The adoption of the statement did not have a material impact on Cymer’s consolidated 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 an all-stock transaction including 689,000 shares of Cymer stock and 336,000 stock options. ACX was a leading developer, manufacturer and marketer of hardware, software and firmware solutions for vibrations and nano-motion.  The ACX technology can be physically embedded, creating adaptive “smart structures” to intrinsically improve the stability and precision of nano-motion control in next-generation semiconductor capital equipment. The acquisition was accounted for using the purchase method of accounting, and the results of operations of ACX are included in Cymer’s consolidated financial statements from the acquisition date. The total consideration for the purchase was approximately $24.8 million which included common stock of $15.0 million, $3.0 million liabilities assumed, $5.9 million employee stock options assumed, and $0.9 million capitalized transaction costs. Cymer valued the 689,000 shares of common stock issued to acquire ACX at $21.75 per share, which was the average closing price for Cymer’s common stock for the period of ten trading days commencing five trading days immediately preceding the announcement of the transaction on November 20, 2000. A total of $12.3 million was recorded as goodwill based on the total consideration of $24.8 million less $1.5 million of acquired tangible assets, $1.4 million of acquired identifiable intangible assets, a $5.1 million in process research and

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development charge, and $4.5 million of unearned compensation 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 per share 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 control development project, was expensed upon acquisition because the application of ACX’s technology to semiconductor manufacturing required further research and development before reaching technological feasibility and commercial viability.  In valuing the ACX IPR&D, consideration was given to key characteristics of the product under development, as well as the technology’s life cycle, and the project’s stage of development.  A discounted cash flow model was used to value the ACX IPR&D which included key assumptions related to ACX’s revenue growth, cost of goods levels, selling, general, and administrative expenses, research and development expenses, and income tax rates, all over a four year projection period from 2001 through 2004.  The estimated cash flows attributable to the technology were converted to present value equivalents using a 20% discount rate.  The value of the ACX IPR&D was then calculated by summing the net present value amounts over the four year projection period, adding the tax amortization benefit, and applying a 70% percentage of completion factor for the project.

Cymer continued to conduct research and development on the vibration control project that related to this IPR&D charge following the acquisition in February 2001.  The core technology was pursued as both a stand-alone product and one that could be embedded into Cymer’s future light source system products.  Development of this technology as a stand-alone product was conducted through the end of the third quarter 2001.  At that time, Cymer and a potential customer for the stand-alone product decided not to pursue this product further.  During the same period, Cymer further developed this same core technology so that it could be embedded in certain core modules of its light source system products.  This ACX technology was successfully embedded in the NanoLith 7000 light source system, which was introduced in the third quarter of 2001.  The project completion date was consistent with the Company’s original estimate at the time of the acquisition.  This technology is also embedded in several of the core modules of Cymer’s newest light source system products, the ELS-7000 and the XLA 100 light sources, which were released in early 2002 and 2003, respectively.  During the period that the core technology was being completed as an application in the semiconductor industry, Cymer incurred and expensed additional costs of approximately $2.5 million, which were consistent with the costs originally anticipated to complete the project.  The technology as embedded in Cymer’s existing light systems projects has been consistent with the sales

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projections used in determining the value of the IPR&D.  As with Cymer’s other core technologies, Cymer intends to continue to develop ACX vibration control technology so that it can expand the technology’s application further within Cymer’s existing light source system products and include it in newly developed products.

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

3.BALANCE SHEET DETAILS

The consolidated balance sheets detail is as follows 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

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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, the contractual 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.REPORTING COMPREHENSIVE INCOME

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

The following table summarizes the change in each component of accumulated other comprehensive income (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	)

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6.GOODWILL AND INTANGIBLE ASSETS

As of the date of adoption of SFAS No. 142, on January 1, 2002, Cymer had unamortized goodwill in the amount of $9.8 million and unamortized identifiable intangible assets, excluding acquired patents, in the amount of $1.1 million, all of which were subject to the transition provisions of SFAS No. 142.

During the fourth quarter of 2003, Cymer completed its annual impairment test of goodwill and intangible assets, and concluded that no impairment of goodwill existed.

Also included in intangible assets – net on the accompanying balance sheets are amounts associated with patents which were acquired in 2001 and 2003 (see Note 13).  As of December 31, 2002 and December 31, 2003, the net carrying amount of these patents was $8.2 million and $12.7 million, respectively.

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

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

The following table summarizes the activity in the carrying amount of goodwill for the 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

Income before cumulative change in accounting principle, net income and earnings (loss) per share on a pro forma basis, excluding goodwill and intangible asset amortization expense related to intangibles no longer amortized, would have been 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	)

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	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 Loan Agreements – During 2002 and 2003, Cymer had certain loan agreements with a commercial bank which provided for unsecured revolving loan facilities allowing for borrowings of $10.0 million and $20.0 million under a U.S. line of credit and Japanese line of credit, respectively.  Under the loan agreements, Cymer was able to borrow in U.S. dollars or Japanese yen, and interest 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% on yen-denominated borrowings. The loan agreements required Cymer to maintain compliance with certain financial and other covenants, including tangible net worth, quick ratio and profitability requirements.  The loan agreements expired on June 16, 2003 and were not renewed.

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

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

8.IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS

The total amount of impairment losses incurred in the years ended December 31, 2001, 2002, and 2003 was approximately $510,000, $574,000, and $17.7 million , respectively.  For the year ended December 31, 2001, the impairment loss of $510,000 included write-offs associated with tenant improvements in Cymer’s San Diego facility, obsolete software used in the customer service and support organization and obsolete lasers used within research and development.  The loss of $510,000 was recorded in the research and development, sales and marketing, and general and administrative expenses, as appropriate, in the accompanying consolidated statements of operations. For the year ended December 31, 2002, the impairment loss of $574,000 included write-offs associated with tenant improvements in Cymer’s San Diego facility and test equipment used within research and development.  The loss of $574,000 was recorded in the research and development and general and administrative expenses, as appropriate, in the accompanying

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

9.CONVERTIBLE SUBORDINATED NOTES

In August 1997, Cymer issued $172.5 million in aggregate principal amount in a private placement of notes. These 3½% / 7¼% Step-Up Convertible Subordinated Notes were due on August 6, 2004 and were convertible 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 principal amount or an effective conversion price of $47.00 per share.  In 2001, Cymer repurchased a total of $24.9 million of the 1997 notes then outstanding.  The redemption resulted in a gain on debt extinguishment of $610,000.  The 1997 Notes were called for redemption on March 25, 2002.  Immediately prior to the March 25, 2002 redemption date, holders of $113.0 million of the outstanding principal amount converted their 1997 Notes into shares of Cymer’s common stock.  As a result of these conversions, 2,325,542 shares of Cymer common stock were issued to the note holders and the remaining $38.0 million of the outstanding principal amount of the 1997 Notes was redeemed.    Cymer used its 2,000,000 shares of treasury stock as part of the total 2,325,542 shares issued in the conversion.  The redemption resulted in a loss on debt extinguishment of $163,000.

In February 2002, Cymer issued $250.0 million in aggregate principal amount in a private placement of notes.  The 2002 Notes are due on February 15, 2009 with interest payable semi-annually on February 15 and August 15 of each year at 3½% per annum.  These 2002 Notes are convertible into shares of Cymer common stock at a conversion rate of 20 shares per $1,000 principal amount or an effective conversion price of $50.00 per share.  Cymer used a portion of the net proceeds from this private placement to redeem the 1997 Notes.  Cymer may redeem the 2002 Notes on or after February 20, 2005, or earlier if the price of its common stock reaches certain levels.  The 2002 Notes are subordinated to Cymer’s existing and future senior indebtedness and effectively subordinated to all indebtedness and other liabilities of Cymer’s subsidiaries.  The remaining proceeds are to be used for Cymer’s future operating, investing and financing activities.

10.STOCKHOLDERS’ EQUITY

Common Stock Warrants – During fiscal 2001, Cymer issued warrants to purchase 200,000 shares of its common stock at a weighted average purchase price of $31.43 per share in conjunction with the acquisition of certain patents (See Note 13).  During fiscal 2002 and 2003, no warrants were granted 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 “1996 Plan”) – The 1996 Plan provides for the grant of incentive stock options to employees and nonqualified stock options to employees, directors and consultants of Cymer.  The exercise price of stock options granted under the 1996 Plan must be at least equal to the fair market value of Cymer’s common stock on the date of grant. Options issued under the 1996 Plan expire five to ten years after the options are granted and generally vest and become exercisable ratably over a four-year period following the date of grant.  A total of 7,900,000 shares of common stock were reserved for issuance under the 1996 Stock Plan.  Of these shares, options to purchase 4,476,736 shares are outstanding and 238,946 shares remain available for grants as of December 31, 2003.

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

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stock from Cymer through payroll deductions of up to 15% of his or her compensation (as defined in the plan), at a price per share equal to 85% of the lower of (i) the fair market value of Cymer’s common stock as of the first day of each offering period under the ESPP or (ii) the fair market value of the common stock at the end of the purchase period.  This plan was amended in 2001 by the shareholders to establish two year offering periods with six month purchase periods and to increase the plan shares issuable from 500,000 to 800,000.  This plan was amended in 2003 to increase the plan shares issuable to 1.0 million shares.  The amount of shares issuable under this plan as of December 31, 2003 was 154,338, and 845,662 shares have been previously issued.

2000 Equity Incentive Plan (the “2000 Plan”) – On August 16, 2000, Cymer adopted the 2000 Plan which provides for the grant of options to employees or consultants who are neither directors nor officers. The exercise price of the options granted under the 2000 Plan will equal the quoted market value of the common stock at the date of grant.  Options issued under the 2000 Plan expire ten years after the options are granted and generally vest and become exercisable ratably over a four year period following the date of grant.  This plan was amended in 2002 to increase the shares reserved for issuance under the plan from 1,850,000 to 4,950,000.  Of these shares, options to purchase 2,686,970 shares are outstanding and 1,354,594 shares remain available for grants as of December 31, 2003.

ACX 1993 Stock Option Plan (the “ACX Plan”) – Cymer assumed the ACX Stock Option Plan upon completion of the acquisition of ACX in February 2001.  Outstanding options may be exercised solely for shares of Cymer common stock, according to the conversion ratio established in the terms of the acquisition.  The outstanding ACX options were converted to options to purchase 336,109 Cymer shares, at exercise prices ranging from $2.08 to $38.71 per share.  The ACX Plan provides for the grant of incentive and nonstatutory options to purchase shares of common stock to employees, directors and consultants at prices not less than 100% of the fair market value of common stock on the date the options are granted.  Options issued under the ACX Plan expire five to ten years after the options were granted and generally vest and become exercisable ratably over a four-year period following the date of grant.  No further options will be issued under the ACX Stock Option Plan.  As of December 31, 2003, 42,069 shares are outstanding under the ACX Stock Option Plan.

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

1987 Stock Option Plan (the “1987 Plan”) – The 1987 Plan provided for the grant of incentive and nonstatutory options to purchase shares of common stock to employees and consultants at prices that are not less than 100% (85% for nonstatutory options) of the fair market value of Cymer’s common stock on the date the options are granted.  The 1987 Plan also provided for various restrictions regarding option terms, prices, transferability and other matters.  Options issued under the 1987 Plan expired five to ten years after the options were granted and generally vest and became exercisable ratably over a four-year period following the date of grant.  This plan expired in 1997, and there are no shares outstanding under this plan as of December 31, 2003.

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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 of December 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 Average Exercise 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 of shares in the open market or through private transactions, the rights plan enhances the ability of Cymer’s board of directors to negotiate with a potential acquirer for a fair price to all of the stockholders. Under the rights 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 as of the close of business on March 2, 1998. After March 2, 1998, each holder of shares of common stock is entitled to a Cymer right in respect of each share held by the stockholder. The Cymer rights will expire on February 13, 2008. Under the rights plan, each Cymer right initially entitles stockholders to buy one one-thousandth of a share of preferred stock for $100, subject to subsequent adjustment. The Cymer rights will be exercisable only if a person or group acquires beneficial ownership of 15% or more of Cymer common stock or commences a tender or exchange offer upon consummation of which the person or group would beneficially own 15% or more of Cymer’s common stock.

F-24

If any person becomes the beneficial owner of 15% or more of Cymer’s common stock, other than pursuant to a tender offer for all outstanding shares approved by a majority of Cymer’s directors not affiliated with the person, then each Cymer right not owned by the acquiring person or related parties will entitle its holder to purchase, at the Cymer right’s then current exercise price, shares of Cymer’s common stock having a value of twice the Cymer right’s then current exercise price (or, in certain circumstances as determined by Cymer’s board of directors, cash, other property or other securities in lieu of purchasing preferred shares). If after any person has become a 15% stockholder, Cymer is involved in a merger or other business combination transaction with another person in which Cymer is not the surviving entity or in which Cymer’s common stock is changed or exchanged, or if 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 then current exercise price, shares of common stock of the other person having a value of twice the Cymer right’s then current exercise price.

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

11.INCOME TAXES

Total income taxes for the years ended December 31, 2001, 2002 and 2003 were allocated as follows (in thousands):

	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 the provision (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	)

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The income tax provision (benefit) is different from that 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 of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  Significant components of Cymer’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

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

At December 31, 2003, Cymer had federal and state tax loss carryforwards of $106.6 million and $25.5 million, respectively, which begin to expire in 2018 and 2014, respectively.  At December 31,

F-26

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

It is Cymer’s intention to reinvest undistributed earnings of its foreign subsidiaries and thereby indefinitely postpone their remittance.  Accordingly, no provision has been made for foreign withholding taxes or United States income taxes which may become payable if undistributed earnings of foreign subsidiaries were paid as dividends to Cymer.

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

12.CONTINGENCIES AND COMMITMENTS

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

Rent expense under operating leases is recognized on a straight-line basis over the life of the related leases and totaled approximately $5,052,000, $4,545,000 and $4,773,000 for the years ended December 31, 2001, 2002 and 2003, respectively.

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

Total future minimum lease commitments 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 License Agreement – Cymer has a patent license agreement for a non-exclusive worldwide license to certain patented light source technology.  Under the terms of the agreement, Cymer is required to pay royalties ranging from 0.25% to 5.0% of gross sales and leases as defined depending on the total amounts attained subject to an annual maximum of $100,000.  Royalty fees totaled $100,000 in each of the years ended December 31, 2001, 2002 and 2003.

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

Executive Deferred Compensation Plan – Cymer has an executive deferred compensation plan for certain officers and key 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 and 2003, respectively.  Cymer’s liability for 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 life insurance policies totaled $487,000 and $869,000 as of December 31, 2002 and 2003, respectively, and is included in other assets.

Executive Option and Group Health Coverage Extension Program – Cymer has an executive option and health coverage extension program for eligible executives who meet certain minimum service and age requirements.  This program is designed to provide extended benefits to eligible executives who retire and cease to serve Cymer on a full-time basis.  Under the terms of the plan, the executive acts as a consultant to Cymer for a term of four years.  In return for these services, the program allows the executive to continue vesting in his or her stock options after the retirement separation date.  The program also provides the executives with specified health insurance continuation benefits.  As of December 31, 2002, there were no executives active in this program.  In 2003 one former executive was participating in this program.  The cost for this program was not material in 2003.

Retirement Plan – Cymer Japan has a retirement benefit plan for all Cymer Japan employees and Japanese directors.  The plan consists of a multi-employer retirement plan covering all employees and life insurance policies covering all employees and Japanese directors. The multi-employer retirement plan was established under the Small and Medium-Size Enterprise Retirement Benefits Cooperative Law.  Cymer Japan also has a Retirement Allowance and Pension Plan.  Expense under these plans totaled $492,000, $247,000, and $526,000 for the years ended December 31, 2001, 2002 and 2003, respectively.

Korea Customs Investigation – Thecustoms agency in Korea has asserted that parts being imported into Korea from Cymer’s corporate office in San Diego were classified improperly and some used items which were returned to San Diego were valued improperly during the period from 1997 through July 2003.  Although Cymer does not agree with these assertions, Korean customs has begun to assess and require payment from Cymer on additional duties related to shipments during this time period.  As a result of these assertions and discussions 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 to Korean customs through December 31, 2003.  The remaining accrual is included in accrued patents, royalties and other fees in the accompanying consolidated balance sheets.  The expense resulting from this recorded liability was included in cost of product sales in the accompanying consolidated statements of operations as they pertain to potential costs associated with the shipment of Cymer’s product.

Contingencies – Cymer is party to legal actions in the normal course of business.  Based in part on the advice of legal counsel, management does not expect the outcome of legal action in the normal course of business to have a material impact on the financial 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’s light source systems in Japan may infringe certain Japanese patents held by another Japanese company.  Cymer has agreed to indemnify its former Japanese manufacturing partner and its customers against patent infringement claims under certain circumstances, even after the termination date of the contract manufacturing agreement.  Cymer believes, based upon the advice of counsel, that Cymer’s products do not infringe any valid claim of the asserted patents or that Cymer is entitled to prior user rights in Japan.

13.PATENT LICENSE AGREEMENTS

In May 2001, Cymer acquired certain patents for use in its DUV light source applications.  The total consideration for this transaction was $10.3 million, which included a $6.0 million cash payment and the issuance of 200,000 warrants valued at $4.3 million. The warrants were valued on the date of issuance using the Black-Scholes pricing model using the following assumptions: 87% volatility, 5.0% risk-free interest rate and 4.6 years expected life.  The total value of these patents are being amortized over eight years which represents the remaining life of the patents purchased under the agreement.  The amortization of these patents is included in cost of product sales on the accompanying statements of operations since they are used in products which are currently being shipped to customers.

In November 2003, Cymer acquired the rights to the same list of patents as in the May 2001 agreement but for a different field of use, for a total amount of $6.0 million in cash.  Instead of DUV light source applications for the patents, this license agreement allows Cymer to use the patents for EUV and other future applications.  The total value of these patents are being amortized over a period of 5.5 years which represents the remaining life of the patents purchased under the agreement. The amortization of these patents is included in research and development expenses on the accompanying statements of operations since the field of use involves applications which are still in the research and development stages.  As of December 31, 2002 and December 31, 2003, the net carrying amount of these patents was $8.2 million and $12.7 million, respectively.

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14.RELATED PARTY TRANSACTIONS

Collaborative Arrangement – Cymer has a collaborative arrangement with a Japanese company that was also a stockholder of Cymer until 2000.  The arrangement, entered into in August 1992, includes a product license agreement and 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 the non-exclusive right outside Japan to manufacture and sell one of Cymer’s products and subsequent enhancements thereto. Cymer also granted the stockholder the right of first refusal to license and fund the development of new technologies not developed with funding from other parties.  In exchange for these rights, Cymer received up-front license fees and was entitled to royalties of 5% on related product sales through September 1999, after which the royalty rate was subject to renegotiation.  The license agreement also provides that product sales between Cymer and the stockholder will be at a 15% discount from the respective companies’ list price. The agreement terminates in August 2012.  There was no activity under this agreement in 2001, 2002 and 2003.

Contract Manufacturing Agreement – The stockholder agreed to manufacture for Cymer certain products and Cymer was required to purchase a specified percentage of its total annual product, as defined, from the stockholder.  Cymer and this stockholder mutually agreed to the termination of this contract effective March 31, 2003.

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

15.SEGMENT INFORMATION

Cymer designs, manufactures and sells excimer light source systems, replacement parts, and support services for use in photolithography systems used in the manufacture of semiconductors with critical features sizes.  In accordance with Statement of Financial Accounting Standards No. 131, “Disclosure about Segments of an Enterprise and Related Information”,  Cymer currently considers its business to consist of one reportable operating segment.

Geographic Information

Presented below is information regarding sales to unaffiliated customers, operating income (loss) from operations, long-lived assets, all other identifiable assets and total identifiable assets, classified by 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 are generally priced between 90% to 95% of the price of products sold to outside customers.  All significant intercompany balances are eliminated in consolidation.  The majority of corporate costs and expenses are incurred in the United States and are reflected in the operating loss from the United States operations.

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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

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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 and development agreement with Intel Corporation (“Intel”).  Total funding under the agreement is $20.0 million and will provide Cymer with funding over the next three years to accelerate the development of production-worthy EUV lithography light sources.  The funding to be received from Intel under this agreement is milestone based and will be netted against Cymer’s total research and development expenses in the period that the milestone is completed.

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

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

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

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lithography light source capable of high volume manufacturing by the end of the second quarter of 2008.  The license payments under this agreement are triggered in the quarter in which Cymer successfully ships the first complete high volume manufacturing EUV source system.  Upon shipment of this first unit, Cymer is to pay Intel $1.25 million in license fees per quarter for a period of sixteen quarters.  The quarterly license amounts paid to Intel will 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 to Intel.

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CYMER, INC.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

Years Ended December 31, 2001, 2002 and 2003

(in thousands)

	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

(1)Includes reversals of allowance amounts as deemed necessary.

See accompanying independent auditors’ report.

S-1

(b)  Exhibit Index

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

.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Amendment No. 1 on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized.

			CYMER, INC.
Dated: March 16, 2004	By:	/s/		ROBERT P. AKINS
		Robert P. Akins,
		Chief Executive Officer, and Chairman of the Board