SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)
ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2003

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission File Number 0-21321

CYMER, INC.

(Exact name of 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.

CYMER, INC.

2003 Annual Report on Form 10-K

TABLE OF CONTENTS

PART I
	Item 1.	Business
	Item 2.	Properties
	Item 3.	Legal Proceedings
	Item 4.	Submission of Matters to a Vote of Security Holders

PART II
	Item 5.	Market for Registrant’s Common Stock and Related Stockholder Matters
	Item 6.	Selected Financial Data
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk
	Item 8.	Financial Statements and Supplementary Data
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
	Item 9A.	Controls and Procedures

PART III
	Item 10.	Directors and Executive Officers of the Registrant
	Item 11.	Executive Compensation
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13.	Certain Relationships and Related Transactions
	Item 14.	Principal Accounting Fees and Services

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

	Signatures

Forward-Looking Statements

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

PART I

Item 1. Business

Overview

Cymer is the world’s leading supplier of excimer light sources, the essential light source for deep ultraviolet, (“DUV”), photolithography systems. DUV photolithography is a key enabling technology that has allowed the semiconductor industry to meet the exacting specifications and manufacturing requirements for volume production of today’s most advanced semiconductor chips. Cymer’s light source systems are incorporated into step-and-repeat (“steppers”) and step-and-scan (“scanners”) photolithography systems for use in the manufacture of semiconductors with critical feature sizes below 0.35 microns. One micron equals one millionth of a meter. Cymer’s excimer light source systems constitute a substantial majority of all excimer light sources incorporated in DUV photolithography tools. Cymer’s products consist of photolithography light source systems, replacement parts and service. Cymer maintains a worldwide service organization that supports its installed base of light sources. As of December 31, 2003, this installed base totaled 2,217 light sources. Cymer’s customers include all three manufacturers of DUV photolithography systems: ASM Lithography, Canon and Nikon. Photolithography systems incorporating Cymer’s excimer light sources have been purchased by each of the world’s 20 largest semiconductor manufacturers: Fujitsu, Hynix, IBM, Infineon, Intel, Matsushita, Micron, Motorola, NEC, Qualcomm, Renesas Technology, Rohm, Philips, Samsung, Sanyo, Sharp, Sony, ST Microelectronics, Texas Instruments, and Toshiba.

Other Information

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

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

Products and Services

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

Photolithography Light Sources

Cymer’s photolithography light sources produce narrow bandwidth pulses of short wavelength light within the DUV spectrum. The three DUV wavelengths are measured in nanometers (“nm”). One nanometer equals one billionth of a meter. The light sources are referred to according to the gases mixed to produce the light or by the wavelength. Krypton Fluoride (“KrF”) gases produce 248nm light, Argon Fluoride (“ArF”) gases 193nm light, and Fluorine (“F2”) gas 157nm light. The light sources permit very fine feature resolution for imaging the circuitry on the wafer and high throughput in wafer processing. Cymer has designed its light sources to be highly reliable, easy to install and compatible with existing semiconductor manufacturing processes. Cymer’s light sources are used to pattern the integrated circuits, which are also called semiconductors or “chips”, that power many of today’s advanced consumer and business electronics. In 2003, Cymer sold 163 light source systems at an average selling price of $983,000.

248nm KrF Light Sources

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

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

6000 Series–The 6000 Series consists of light source models that are within Cymer’s cutting-edge 248nm KrF portfolio and are designed for the production of semiconductor devices down to 130nm (0.13 micron) design rules:

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

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

5000 Series – With a repetition rate of 1 kHz, this solid-state pulse power light source series is engineered using modular construction. Enabling higher device yields by delivering improved energy stability, this series is designed specifically for use in the manufacture of semiconductors with 250nm and smaller design rules. The 5000 series consists of the following models: ELS-5010, ELS-5005 upgrade, ELS-5000 and EX-5000.

193nm ArF Light Sources

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

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

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

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

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

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

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

The ELS-6010A, 2 kHz 10 W ArF production laser for 193nm step-and-scan tools provides dependable optical performance. With highly line-narrowed bandwidth, the ELS-6010A enables high contrast imaging from lithography scanners using high NA lenses.

Built-in laser metrology provides pulse-to-pulse data acquisition and feedback control to minimize transient wavelength instabilities, thereby enhancing exposure latitude and CD control. In life tests the ELS-6010A revealed a potential for 70% cost of consumables reduction compared to the ELX-5000A predecessor. The ELS-6010A is built on Cymer’s highly reliable ELS-6000^® platform.

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

Replacement Parts

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

Cymer estimates that a light source used in a semiconductor production environment will require one to two replacement chambers per year, depending upon the level of usage. Similarly, certain optical components of the light source deteriorate with continued exposure to DUV light and require periodic replacement. Cymer provides these and other spare and replacement parts for its photolithography light sources as needed by its customers.

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

Service

As the life and usage of Cymer’s installed base of light sources in production at chipmakers exceeds the original warranty periods (generally 17 to 26 months from date of shipment), some chipmakers request service contracts from Cymer. Additionally, Cymer provides service contracts directly to the three semiconductor DUV photolithography equipment manufacturers. These contracts require Cymer to maintain and/or service these light sources either on an on-call or regular interval basis or both. Some of these contracts include replacement of consumable parts.

In addition to service contracts, Cymer provides an on-line diagnostic product, CymerOnLine^TM.CymerOnLine is a diagnostic and performance software product which delivers critical laser diagnostics and performance information in near real-time directly to authorized users anywhere. The software simplifies reporting and allows users to efficiently manage consumables management. CymerOnLine features a user-friendly browser-based interface features a robust design and provides a secure data environment. Event-initiated messages sent to pagers, email, mobile phones, or other handheld devices enable up-to-the minute communication and proactive management.

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

Customers and End Users

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

ASM Lithography

Canon

Nikon

Cymer believes that maintaining and strengthening customer relationships will play an important role in maintaining its leading position in the photolithography market. Cymer works closely with its customers to integrate Cymer’s products into their photolithography tools. Sales to ASM Lithography, Canon, and Nikon accounted for 24%, 24% and 21%, respectively, of total revenue in 2003.

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

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

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

United States	Japan	Singapore	Taiwan/China	Korea

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

† A semiconductor industry consortium.

Backlog

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

Manufacturing

Cymer’s manufacturing activities consist of material management, assembly, integration and testing. These activities are performed in a 265,000 square foot facility in San Diego, California that includes approximately 31,000 square feet of Class 10,000 cleanroom manufacturing and test space. In order to focus its own resources, capitalize on the expertise of its key suppliers and respond more efficiently to customer demand, Cymer has contracted the manufacture of many of its subassemblies. Cymer’s manufacturing outsourcing strategy is exemplified by the modular design of Cymer’s products. Substantially all manufacturing of nonproprietary subassemblies has been contracted to third-party suppliers. As a result, Cymer is increasingly dependent upon these contract suppliers to meet Cymer’s manufacturing schedules. The failure by one or more of these suppliers to supply Cymer on a timely basis with sufficient quantities of components or subassemblies that perform to Cymer’s specifications could affect Cymer’s ability to deliver completed light sources to its customers on schedule. Cymer believes that the highly outsourced content and manufacturable design of its products allows for reduced manufacturing cycle times and increased output per employee. To improve current

production efficiencies, control costs, and manage overall manufacturing capacity, Cymer intends to continue to provide additional training to manufacturing personnel, improve its assembly and test processes in order to reduce cycle time, invest in additional manufacturing tooling and further develop its supplier management and engineering capabilities.

In addition to the manufacturing capacity at its facilities in San Diego, California, Cymer completed the construction of a manufacturing facility in Korea in late 2002. This facility is used as a refurbishment facility and refurbishes one of Cymer’s core modules, its chamber, initially for light sources in Korea and ultimately for the Asia-Pacific region. The refurbishment facility in Korea includes 6,550 square feet of Class 10,000 cleanroom manufacturing space. All of the final qualification phases for this facility were completed during the fourth quarter of 2002 and the first chamber was shipped to a customer from this facility in January 2003. Throughout 2003 chambers for several of Cymer’s light source models were refurbished in the Korea facility and successfully shipped to customers.

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

A limited number of components and subassemblies included in Cymer’s products are obtained from a single supplier or a small group of suppliers. For certain optical components used in its light source systems, Cymer currently utilizes a single supplier. Where possible, Cymer is working with secondary suppliers to qualify additional sources of supply. To reduce the risk associated with this single supplier, Cymer carries significant strategic stock of these components. Strategic inventories are managed as a percentage of future demand. Cymer has also negotiated to have vendor-managed inventory of critical components to further reduce the risk of a single supplier. To date Cymer has been able to obtain adequate supplies of the components and subassemblies used in the production of Cymer’s light source systems in a timely manner from existing sources. If in the future Cymer is unable to obtain sufficient quantities of required materials, components or subassemblies, or if such items do not meet Cymer’s quality standards, delays or reductions in product shipments could occur which could have a material adverse effect on Cymer’s business, financial condition and results of operations.

Sales and Marketing

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

Service and Support

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

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

located throughout the United States. Support in Europe, Japan, Korea, Singapore, the People’s Republic of China, and Southeast Asia are provided by Cymer’s subsidiaries located within those regions. As part of its customer service, Cymer maintains an inventory of spare parts at each of its service facilities. As Cymer’s installed base grows, replacement parts required to satisfy worldwide support requirements, as well as Cymer’s own logistics support organization, will be subject to the fluctuating demands of the semiconductor industry. In order to meet these demands, Cymer must continue to effectively manage its production of component modules which are required for new systems, as well as for support and warranty requirements for installed systems.

Cymer believes that the need to provide fast and responsive service to the semiconductor manufacturers using its light sources is critical and that it cannot depend solely on its customers and end users to provide this service. Therefore, Cymer believes it is essential to maintain, through its own personnel, a rapid response capability to service its customers throughout the world. Accordingly, Cymer has an ongoing effort to continuously develop its direct support infrastructure in Japan, Korea, Taiwan and Southeast Asia, Singapore, the People’s Republic of China, Europe and the United States. This task entails recruiting and training qualified field service personnel or identifying qualified independent firms and maintaining effective and highly trained organizations that can provide service to customers in various countries in their assigned regions.

Cymer generally warrants its new light source products against defects in design, materials, and workmanship. The warranty coverage period and terms vary by light source model. In general, the warranty coverage 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 spares is 6 months from the date of shipment.

Research and Development

The semiconductor industry is subject to rapid technological change and new product introductions and enhancements. Cymer believes that continued and timely development and introduction of new and enhanced light source products are essential for Cymer to maintain its competitive position. Cymer intends to continue to develop its technology and innovative products to meet customer demands. Current projects include enhancements to Cymer’s KrF and ArF light sources and the new MOPA platform. Cymer has significant development efforts to address the technology and products that will be based on the extreme ultraviolet (“EUV”) technology needed for future generation photolithography illumination sources. Cymer is also continuing its scientific investigation related to F2 since the timing for a commercialized product at this wavelength is still unclear. Cymer may also invest in other product and technology areas in order to expand its portfolio within the semiconductor capital equipment market sector. In addition there are ongoing efforts to improve existing products, reduce manufacturing costs, lower the cost of light source operation, enhance light source performance, develop new features for existing light sources, and conduct research and development of non-light source products.

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

In addition to funding its own research and development projects, Cymer has pursued a strategy of securing research and development contracts from customers, government agencies and SEMATECH, a semiconductor industry consortium, in order to develop advanced technology for current and future light source systems based on Cymer’s core technology. In March 2002, Cymer announced an agreement with a major U.S. chipmaker to provide funding for Cymer’s research and development efforts on EUV technology. In 2003, Cymer entered into an agreement with a government agency to provide funding for EUV technology research and development efforts. Revenues generated from research and development contracts amounted to approximately $2.4 million, $2.2 million, and $1.7

million during 2001, 2002, and 2003, respectively.

In January 2004, Cymer signed a research and development agreement with Intel Corporation (“Intel”). This agreement will provide Cymer with funding of $20.0 million 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.

Intellectual Property Rights

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

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

Others may have filed and in the future may file patent applications that are similar or identical to those of Cymer. To determine the priority of inventions, Cymer may have to participate in interference proceedings declared by the United States Patent and Trademark Office. Such interference proceedings could result in substantial cost to Cymer. Such third-party patent applications might have priority over patent applications filed by Cymer.

Cymer also relies upon trade secret protection, employee and third-party nondisclosure agreements and other intellectual property protection methods to protect its confidential and proprietary information. Despite these efforts, third parties might independently develop substantially equivalent proprietary information and techniques or otherwise gain access to Cymer’s trade secrets or disclose such technology. Cymer might not be able to meaningfully protect its trade secrets.

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

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

Specifically, Cymer has engaged in discussions with Gigaphoton, Inc., a joint venture between Ushio, Inc. and Komatsu, Ltd. with respect to certain of Komatsu’s Japanese patents, in the course of which Komatsu has also identified to Cymer a number of additional Japanese and U.S. patents that Komatsu asserts may be infringed by Cymer or by Cymer’s former Japanese manufacturing partner, Seiko. Komatsu has also notified one of Cymer’s integrator customers, Nikon, of its belief that Cymer’s light sources infringe several of Komatsu’s Japanese and U.S. patents. Cymer, in consultation with Japanese patent counsel, initiated oppositions to certain Komatsu Japanese patents and patent applications in the Japanese Patent Office. These oppositions have been dismissed by the Japanese Patent Office. Litigation might ensue with respect to the Komatsu Japanese patents or Komatsu U.S. patents. Also, Komatsu might assert infringement claims under other or additional patents. Komatsu has notified Seiko that Komatsu intends to enforce its rights under the Komatsu Japanese patents against Seiko if Seiko engages in manufacturing activities for Cymer. In connection with its former manufacturing agreement with Seiko, Cymer has agreed to indemnify Seiko against such claims under certain circumstances. Cymer and Seiko might not ultimately prevail in any such litigation.

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

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

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

Cymer has granted Seiko a right of first refusal to fund Cymer’s development of, and receive a license to, new industrial light source technologies not developed with funding from other parties. In exchange for these rights, Cymer received up-front license fees of $3.0 million in aggregate during 1992 and 1993. Cymer was also entitled to royalties of 5% on related product sales through September 1999, after which the royalty rate is subject to renegotiation. Through 1999, Cymer earned no royalties under the agreement. The license agreement also provides that product sales between Cymer and Seiko will be at a 15% discount from the respective companies’ list prices. The agreement terminates in August

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

Cymer has registered the trademark “CYMER” & “INSIST ON CYMER” and others in the United States and certain other countries and is seeking additional registrations of additional trademarks in the United States and in certain other countries. Cymer uses these and a variety of other marks in its advertisements and other business activities around the world. Based on the use of these or other marks, Cymer might be subjected to actions for trademark infringement, which could be costly to defend. If a challenge to a mark were to be successful, Cymer might be required to cease use of the mark and, potentially, to pay damages.

Competition

Cymer believes that the principal elements of competition in Cymer’s markets are the technical performance characteristics of the excimer light source products and the operating efficiency of the system, which is based on availability, performance efficiency and rate of quality. Cymer believes that it competes favorably with respect to these factors.

Cymer currently has two significant competitors in the market for light source systems for DUV photolithography applications: Gigaphoton, headquartered in Japan, and Lambda-Physik, a subsidiary of Coherent, Inc. headquartered in Germany. In 2003, Coherent purchased an additional 34% of the outstanding shares of Lambda-Physik, increasing Coherent’s ownership to 94%. Cymer believes that Gigaphoton and Lambda-Physik are aggressively seeking to gain larger positions in this market. Cymer believes that its three DUV photolithography tool manufacturing customers have each purchased products offered by these competitors and that its customers have qualified the competitors’ light sources for use with their products. Both Gigaphoton and Lambda-Physik are located in closer proximity to certain of Cymer’s customers than Cymer. Cymer believes that Gigaphoton in particular has been qualified for production use by chipmakers in Japan and elsewhere. Cymer also believes that Lambda-Physik has been qualified for production use by chipmakers in the U.S. and Europe. Cymer could lose market share and its growth could slow or even decline as competitors gain market acceptance.

In the future, Cymer will likely experience competition from other technologies, such as EUV and electron projection lithography (“EPL”). To remain competitive, Cymer believes that it will need to manufacture and deliver products to customers on a timely basis without significant defects and maintain a high level of investment in research and development and sales and marketing. Cymer might not have sufficient resources to continue to make the investments necessary to maintain its competitive position.

Larger competitors with substantially greater financial resources, including other manufacturers of industrial light sources for advanced lithography, may attempt to enter the market. Further, other competitors may introduce new and enhanced product offerings that customers deem superior to Cymer’s products. Future competitors may also be attracted to Cymer’s growing installed base of light sources and seek to provide consumables and refurbished parts to that installed base.

Employees

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

Executive Officers

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

Name	Age	Position

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

Robert P. Akins, one of Cymer’s co-founders, has served as its chairman and chief executive officer since its inception in 1986, and served as president of the company as well from its inception until May 2000. He currently serves on the board of directors of SEMI (Semiconductor Equipment and Materials International), the board of SEMI North America, and on the board of directors of Extraction Systems, Inc, as well as on the council of advisors to the Irwin and Joan Jacobs School of Engineering at the University of California, San Diego (“UCSD”). Mr. Akins currently serves as a board member of the UCSD Foundation Board of Trustees. Mr. Akins received the Ernst & Young Entrepreneur of the Year Award for San Diego County in 1997, and with fellow co-founder Rick Sandstrom, received the outstanding alumnus award from UCSD, and the prestigious SEMI Award for North America, the highest honor conferred by SEMI, in 1996 for contributions to the field of DUV lithography. Mr. Akins received a bachelor’s degree in physics, a bachelor’s degree in literature, and a doctorate in applied physics from the University of California, San Diego.

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

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

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

Hugh R. Grinolds has served as executive vice president of the Corporate Processes and Services group since October 2002. Before that, he served as a senior director of the EUV program, the post he had held since joining the company in May 2002. Prior to joining Cymer, he served as site manager for Agilent Technologies in Fort Collins, Colorado from 1999, when Agilent was spun-off from Hewlett Packard, until May 2002. Dr. Grinolds began his business career with Hewlett-Packard Co. in 1979, and during his tenure with that company, served in a variety of increasingly responsible positions, including managing VLSI design for HP’s internal ASIC needs in Corvallis, Oregon, and serving as manufacturing manager in Fort Collins, Colorado for HP’s internal ASICs which included responsibility for the production of HP’s PA-RISC processors. He assumed the role of worldwide manufacturing manager at HP in 1998. Dr. Grinolds has published 21 technical articles and papers, and holds one patent. He received bachelor’s, master’s and doctorate degrees in electrical engineering from the University of Minnesota.

Edward P. (Ted) Holtaway has served as executive vice president of the Lithography System Solutions business unit since October 2002. He served as senior vice president of operations and business process management from May 2000 until October 2002. He joined Cymer in July 1998 as senior vice president of process quality. Prior to joining Cymer, Mr. Holtaway spent 13 years developing processes for San Diego-based Brooktree Corp., a fabless semiconductor company acquired by Rockwell Semiconductor Systems in September 1996. During his tenure, Mr. Holtaway’s executive posts included director of Rockwell’s San Diego operations from 1997 to 1998, vice president and managing director of Brooktree’s Singapore operations from 1995 to 1996, and vice president of corporate quality from 1989 to 1995. Mr. Holtaway received a bachelor’s degree in electrical engineering from the New Jersey Institute of Technology, a master’s degree in electrical engineering from the Polytechnic Institute of New York, and a master’s degree in business administration from San Diego State University.

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

John Shin has served as executive vice president of the Semiconductor Manufacturing Solutions business unit since October 2002. He served as senior vice president, worldwide customer operations from June 2000 until October 2002. Previously, he served as vice president, worldwide customer operations from September 1999 to June 2000, as vice president of worldwide field operations from April to September 1999, and as vice president, Asia/Pacific Operations from March 1998 to April 1999. He joined Cymer as president, Cymer Korea in May 1997. Immediately prior to joining Cymer, Mr. Shin served as president of Tencor Instruments Korea. From early 1993 to late 1996 he served as country manager in Korea with Watkins-Johnson Co, sales account manager in Korea for Applied Materials, and business development manager with Samsung America. Mr. Shin received a master’s

degree in computer science from Indiana University and a bachelor’s degree in business from Hankuk University of Foreign Studies, Seoul, Korea.

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

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

Anthony (Tony) Yen has served as senior vice president of the Lithography Market Development business unit since September 2003. Mr. Yen served as co-director of the Lithography division of International SEMATECH from May 2001 to September 2003. Prior to his SEMATECH assignment, he managed the Advanced Lithography and Advanced Lithography Technology departments at Taiwan Semiconductor Manufacturing Co., Ltd., which he joined in 1997. Before that, he worked in lithography development and conducted pioneering work on resolution enhancement techniques at Texas Instruments (“TI”) in Dallas, and as a TI assignee at IMEC, the Belgium-based research institute of semiconductor technology. Mr. Yen holds a bachelor’s degree from Purdue University as well as his master’s, engineer’s, and doctorate degrees from Massachusetts Institute of Technology, all in electrical engineering. He is a fellow of the International Society for Optical Engineering and has served as a member of Cymer’s Scientific Advisory Board since 2000.

Executive officers serve at the discretion of the Board of Directors. There are no family relationships between any of the directors and executive officers of Cymer.

Item 2. Properties

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

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

Location		Lease Expiration	Total Square Footage	Primary Usage

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

(1) Land and building is owned by Cymer.

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

Item 3. Legal Proceedings

None.

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

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

PART II

Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters

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

	High		Low
Year ended December 31, 2002
First quarter	$	50.80	$	26.55
Second quarter	$	53.44	$	31.05
Third quarter	$	35.48	$	17.19
Fourth quarter	$	38.91	$	16.31

Year ended December 31, 2003
First quarter	$	40.00	$	23.63
Second quarter	$	36.75	$	23.06
Third quarter	$	49.09	$	30.52
Fourth quarter	$	49.89	$	39.05

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

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

The information required to be disclosed by Item 201(d) of Regulation S-K “Securities Authorized for Issuance Under Equity Compensation Plans” is incorporated herein by reference to Cymer’s Proxy Statement.

Item 6. Selected Financial Data

The following selected consolidated financial data should be read in conjunction with Cymer’s consolidated financial statements and notes thereto and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this report.

	Years ended December 31,
	1999			2000			2001 (1)			2002			2003
	(in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenues:
Product sales	$	220,051		$	366,280		$	267,003		$	287,995		$	265,816
Other	399			1,180			2,441			2,165			1,680
Total revenues	220,450			367,460			269,444			290,160			267,496

Costs and expenses:
Cost of product sales	143,105			187,579			151,340			162,095			187,679
Research and development	34,518			45,433			58,368			73,714			58,231
Sales and marketing	16,742			20,098			19,617			17,153			16,966
General and administrative	13,101			22,510			18,990			18,212			39,094
Amortization of goodwill and intangible assets	—			108			3,148			160			160
Purchased in-process research and development	—			—			5,050			—			—
Loss (gain) on debt extinguishment (2)	—			—			(610		)	163			—
Total costs and expenses	207,466			275,728			255,903			271,497			302,130
Operating income (loss)	12,984			91,732			13,541			18,663			(34,634		)

Other expense - net	(3,748		)	(1,230		)	(1,447		)	(1,914		)	(1,139		)
Income (loss) before income tax provision (benefit) and minority interest	9,236			90,502			12,094			16,749			(35,773		)
Income tax provision (benefit)	—			26,246			2,871			2,706			(21,464		)
Minority interest	(663		)	(484		)	(368		)	(447		)	(1,091		)

Income (loss) before cumulative change in accounting principle	8,573			63,772			8,855			13,596			(15,400		)

Cumulative change in accounting principle, net of taxes	—			—			(370		)	—			—

Net income (loss)	$	8,573		$	63,772		$	8,485		$	13,596		$	(15,400	)

Basic earnings (loss) per share	$	0.31		$	2.19		$	0.28		$	0.41		$	(0.44	)
Weighted average common shares outstanding	27,907			29,113			30,474			33,317			35,065

Diluted earnings (loss) per share	$	0.29		$	2.07		$	0.27		$	0.39		$	(0.44	)
Weighted average common and dilutive potential common shares outstanding	29,640			30,758			31,108			34,712			35,065

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

(1) Includes results of operations of Active Control Experts, Inc. acquired on February 13, 2001 for the periods subsequent to its acquisition. See further discussion under Item 8. Financial Statements and Supplementary Data.

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

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Overview

We are the world’s leading supplier of light source solutions for the semiconductor industry. Our products provide the essential light source for DUV photolithography systems. Almost all consumer electronic devices manufactured in the last several years contain a semiconductor manufactured using light sources, such as ours. We currently supply light sources to all three DUV lithography system manufacturers, ASM Lithography, Canon, and Nikon, who in turn supply their wafer steppers and scanners to chipmakers. Our light source systems currently constitute a substantial majority of all excimer light sources incorporated in DUV photolithography stepper and scanner tools. Our products consist of photolithography light source systems, replacement parts and service. A large portion of our revenue is derived from customers located outside of the United States. In order to support our foreign customers and our installed base of light sources in foreign countries, we maintain a manufacturing and field service office in Korea and field service and support offices in Japan, Taiwan, Singapore, the People’s Republic of China and the Netherlands. We also maintain field service offices in the United States to service our installed base of light sources located in the United States.

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

As a result of the continued downturn in the semiconductor industry in 2003, we took several steps during the year to control our expenses and reduce our operating break-even level, including:

• In April 2003, we conducted a reduction in our workforce. This reduction in workforce affected all areas of the company and resulted in additional expenses during the second quarter. We realized the cost benefits of this reduction in workforce in the third quarter of 2003.

• In April 2003, we wrote down certain of our corporate assets. These asset write downs totaled approximately $1.8 million and were recorded as an additional expense during the second quarter. Again, we realized the cost saving benefits of these transactions in the third quarter of 2003.

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

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

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

• We developed the revolutionary MOPA technology, designed the extendable XL common platform, and ramped the production of our XLA 100 model ArF light source during 2002 and 2003. The first production model was introduced in the first quarter of 2003. We are currently the only light source provider with a production worthy 40 W ArF light source.

• We constructed and qualified our chamber refurbishment factory in Korea in 2002 and officially opened it in 2003, offering faster and less expensive consumable module turn-around.

• We completed the construction of our new San Diego manufacturing facility and qualified it in 2003. This facility is designed to handle light source manufacturing with special emphasis on XL platform-based models.

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

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

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

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

• We experienced strong order growth and our direct customers announced increasing orders and extended delivery times.

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

• The mix of our light source model shipments and orders shifted toward leading edge KrF, reflecting chipmakers’ need for more capacity expansion.

• Semiconductor and electronic market forecasters believe that capital spending will increase in 2004 by 30% to 50% over 2003 levels.

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

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

RESULTS OF OPERATIONS

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

	Years ended December 31,
	2001		2002		2003
Revenues:
Product sales	99.1	%	99.2	%	99.4	%
Other	0.9		0.8		0.6
Total revenues	100.0	%	100.0	%	100.0	%

Cost and expenses:
Cost of product sales	56.2		55.8		70.1
Research and development	21.6		25.4		21.8
Sales and marketing	7.3		5.9		6.3
General and administrative	7.0		6.3		14.6
Amortization of goodwill and intangible assets	1.2		0.1		0.1
Purchased in-process research and development	1.9		—		—
(Gain) loss on debt extinguishment	(.2	)	0.1		—
Total costs and expenses	95.0		93.6		112.9

Operating income (loss)	5.0		6.4		(12.9	)

Other expense – net	(0.5	)	(0.6	)	(0.4	)

Income (loss) before income tax provision (benefit) and minority interest	4.5		5.8		(13.3	)

Income tax provision (benefit)	1.1		1.0		(8.0	)
Minority interest	(0.2	)	(0.1	)	(0.4	)

Income (loss) before cumulative change in accounting principle	3.2		4.7		(5.7	)

Cumulative change in accounting principle, net of taxes	(.1	)	—		—

Net income (loss)	3.1	%	4.7	%	(5.7	)%
Gross margin on product sales	43.3	%	43.7	%	29.4	%

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

General

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and use judgment that may impact the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. As a

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

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

Inventory Allowance

We perform an analysis of our inventory allowances on at least a quarterly basis to determine the adequacy of this allowance on our financial statements. The amount of the inventory allowance is determined by taking into consideration certain assumptions related to market conditions and future demands for our products, including changes to product mix, new product introductions, and/or product discontinuances, which may result in excess or obsolete inventory. We determine the level of excess and obsolete inventory associated with our raw materials and production inventory by comparing the on hand inventory balances and inventory on order to the next 12 months of forecasted demand. We then adjust this calculation for inventory that has a high likelihood of use beyond one year or can be used in other products which may have lower demands. After this adjustment, we arrive at our total exposure for excess and obsolete inventory within our raw materials and production inventory. As part of this analysis, we also determine whether there are potential amounts owed to vendors as a result of cancelled or modified inventory orders. We estimate and record a separate liability which is included in accrued and other liabilities in the accompanying balance sheets for such amounts owed. For spare parts inventory, we calculate the inventory allowance based upon a percentage of total spare parts inventory balances. This percentage is calculated using certain estimates and assumptions, including comparisons of on hand inventory to build forecasts, historical obsolescence in our spare parts warehouses, and spare parts specifically identified as excess or obsolete.

Both methodologies for analyzing excess and obsolete inventory and determining the inventory allowance are significantly affected by future demand and usage of our products. There are many factors that could potentially affect the future demand or usage of our products, including the following:

• Overall condition of the semiconductor manufacturing equipment industry which is highly cyclical in nature;

• Rate at which our customers take delivery of our light source systems;

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

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

• Utilization rates of our light sources at semiconductor device manufacturers

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

Warranty Provision

We maintain an accrual for the estimated cost of product warranties associated with our product sales. Warranty costs include the replacement parts and labor costs to repair our products during the warranty periods. At the time revenue is recognized, we record a warranty provision, which is included in

cost of product sales in the accompanying consolidated statements of operations. The warranty coverage period and terms vary by light source model. In general, the light source system warranty period ranges from 17 to 26 months after shipment. We also warrant consumables and spare parts sold to our 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. The warranty provision for light source systems is reviewed monthly and determined by using a financial model, which takes into consideration actual historical expenses, and potential risks associated with our different light source system models. This financial model is then used to estimate future expenses related to warranty and the required warranty provision. The risk levels used within this model are reviewed and updated as risk levels change by model over its product life cycle. Due to the highly technical nature of our light source system products, the newer model light sources have higher inherent warranty risks and require higher warranty provisions. The warranty provision for consumables and spare parts is determined by using actual historical data.

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

Income Taxes

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

We have considered our industry’s outlook for the future, our historical performance and estimated future taxable income, and ongoing tax planning strategies in assessing the need for a valuation allowance. Using this information, we have prepared a model to forecast our expected taxable income in future years in order to estimate when the benefits of our deferred tax assets are likely to be realized. Based upon the analysis, we believe that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets within the period allowed by current applicable tax law and, as such, no valuation allowance against deferred tax assets is provided.

A material adverse change in the outlook for worldwide lithography tool sales, in the expected selling prices or profit margins for our products, or in our expected share of the global market for lithography light sources could cause us to determine that a valuation allowance is needed for some or all of our deferred tax assets, and would result in an increase to our income tax provision in the period in which such determination is made.

YEARS ENDED DECEMBER 31, 2002 AND 2003

Revenues. Our revenues consist of product sales, which include sales of light source systems, consumable and spare parts, upgrades, service, service contracts and training. Our revenues also consist of other revenues which include revenue from funded development activities performed for customers and government contracts and license agreements. We do not recognize any revenue for light source systems prior to shipment. The systems are tested by us in environments similar to those used by our customers prior to shipment to ensure that they meet the customers’ specifications and will interface with the customers’ software. Our installation obligations are perfunctory within the framework of Staff Accounting Bulletin 104. One of our customers has an acceptance provision, which is satisfied by the issuance of an acceptance certificate following a visual inspection of the system by the customer. We do not recognize revenue on systems shipped to that customer until we receive the acceptance certificate. There are no customer retentions. Revenue from consumables and spare parts sales is recognized at the point that legal title passes to the customer, which is generally upon shipment from our facility. Service and training revenue is generally recognized at the time that the services are rendered or the training class is completed. Service contract revenues are generally recorded as revenue ratably over the life of the contract or per the specific terms of the agreement. Funded development contracts are accounted for 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 us 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 us, revenue is not recognized until that milestone is completed.

The following table summarizes the components of our revenue:

	December 31,
	2001		2002		2003
	(in thousands, except units sold)

Light source systems:
Revenue	$	189,518	$	203,106	$	160,302
Units sold	335		282		163
Average selling price	$	566	$	720	$	983

Consumable and spare parts and service products	$	77,485	$	84,889	$	105,514
Other revenue	$	2,441	$	2,165	$	1,680