CYMER LASER TECHNOLOGIES, 424B4, 1996-09-19

CYMER LASER TECHNOLOGIES
424B4, 1996-09-19
PHOTOGRAPHIC EQUIPMENT & SUPPLIES

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<PAGE> 1

PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-08383

PROSPECTUS

3,340,000 Shares

LOGO
COMMON STOCK

------------------------

OF THE 3,340,000 SHARES OF COMMON STOCK OFFERED HEREBY, 3,007,532 SHARES ARE
BEING SOLD BY THE COMPANY AND 332,468 SHARES ARE BEING SOLD BY THE SELLING
STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE COMPANY
WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES BY THE
SELLING STOCKHOLDERS. PRIOR TO THIS OFFERING, THERE HAS BEEN NO
PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. SEE
"UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS
CONSIDERED IN DETERMINING THE INITIAL PUBLIC
OFFERING PRICE.

------------------------

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON
PAGE 5 HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------

PRICE $9 1/2 A SHARE

------------------------

<TABLE>
<S> <C> <C> <C> <C>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
------------------------------------------------------------
Per Share............................ $9.500 $0.665 $8.835 $8.835
Total(3)............................. $31,730,000 $2,221,100 $26,571,545 $2,937,355
</TABLE>

- ------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.

(2) Before deducting expenses payable by the Company estimated at $1,000,000.

(3) The Company has granted to the Underwriters an option, exercisable within
30 days of the date hereof, to purchase up to an aggregate of 501,000
additional Shares at the price to public less underwriting discounts and
commissions for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total price to public,
underwriting discounts and commissions and proceeds to Company will be
$36,489,500, $2,554,265 and $30,997,880, respectively. See "Underwriters."

------------------------

The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to the approval of certain legal
matters by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
counsel for the Underwriters. It is expected that delivery of the Shares will be
made on or about September 24, 1996, at the offices of Morgan Stanley & Co.
Incorporated, New York, New York, against payment therefor in immediately
available funds.

------------------------
MORGAN STANLEY & CO.
Incorporated
MONTGOMERY SECURITIES
NEEDHAM & COMPANY, INC.

September 18, 1996

<PAGE> 2

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING
STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF,
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------

UNTIL OCTOBER 13, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

------------------------

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
The Company........................... 4
Risk Factors.......................... 5
Use of Proceeds....................... 15
Dividend Policy....................... 15
Capitalization........................ 16
Dilution.............................. 17
Selected Consolidated Financial
Data................................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 27

<CAPTION>
PAGE
----
<S> <C>
Management............................ 41
Certain Transactions.................. 48
Principal and Selling Stockholders.... 50
Description of Capital Stock.......... 52
Shares Eligible for Future Sale....... 54
Underwriters.......................... 56
Legal Matters......................... 58
Experts............................... 58
Additional Information................ 58
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>

------------------------

The Company intends to furnish its stockholders annual reports containing
consolidated financial statements audited by its independent auditors, and
quarterly reports containing unaudited consolidated
financial data for the first three quarters of each fiscal year.
------------------------

Cymer and the Cymer logo are registered trademarks of the Company. All
other trademarks or trade names referred to in this Prospectus are the property
of their respective owners.
------------------------

Except as otherwise indicated, all information contained in this
Prospectus: (i) reflects the reincorporation of the Company into Nevada effected
in August 1996 and an increase in the number of authorized shares of Common
Stock to 25,000,000 effected in connection therewith; (ii) assumes no exercise
of the Underwriters' over-allotment option; (iii) reflects the conversion of all
outstanding shares of existing series of Preferred Stock (the "Redeemable
Convertible Preferred Stock") into 7,562,527 shares of Common Stock and the
authorization of a new class of 5,000,000 shares of blank check Preferred Stock,
which will occur upon the closing of this offering; and (iv) assumes the
issuance simultaneously with the offering of 84,077 shares of Common Stock upon
the anticipated exercise of outstanding warrants.

------------------------

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus.

THE COMPANY

Cymer is the leading provider of excimer laser illumination sources for use
in deep ultraviolet ("DUV") photolithography systems targeted at the pilot and
volume production segments of the semiconductor manufacturing market. The
Company's lasers are incorporated into step-and-repeat and step-and-scan
photolithography systems for use in the manufacture of semiconductors with
critical feature sizes below 0.35 microns. The Company believes that its excimer
lasers constitute a substantial majority of all excimer lasers incorporated in
DUV photolithography tools. The Company's customers include all five
manufacturers of DUV photolithography systems: ASM Lithography, Canon,
Integrated Solutions, Nikon and SVG Lithography. Photolithography systems
incorporating the Company's excimer lasers have been purchased by each of the
world's 10 largest semiconductor manufacturers: Intel, NEC, Toshiba, Hitachi,
Motorola, Samsung, Texas Instruments, Mitsubishi, Fujitsu and Philips.

The Company believes its leading position in the excimer laser market is
attributable to its development of advanced technologies that address the needs
of its customers as well as semiconductor manufacturers. The performance
characteristics of the Company's excimer lasers include high pulse repetition
rate, narrow bandwidth, energy stability and reliability relative to competing
products. The Company also believes that it is currently the only volume
supplier of excimer laser systems for DUV photolithography applications. The
Company's krypton fluoride excimer lasers are currently capable of producing
critical features as small as 0.25 microns, and the Company believes its
technology is extendible to critical feature sizes as small as 0.10 microns by
using different gas combinations and advanced optical and photomask technology.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered................................... 3,340,000 shares, including
3,007,532 shares by the Company(1) and
332,468 shares by the Selling Stockholders
Common Stock to be outstanding after the offering...... 11,856,928 shares(1)(2)
Use of proceeds........................................ Repayment of indebtedness and general corporate
purposes, including working capital
Nasdaq National Market symbol.......................... CYMI
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues...................................... $ 4,480 $ 9,131 $ 5,699 $ 8,921 $18,820 $ 7,279 $19,182
Operating income (loss)............................. (3,181) (1,117) (2,696) (1,788) (150) (397) 876
Net income (loss)................................... (2,961) (1,268) (2,924) (2,045) 69 (383) 957
Pro forma earnings (loss) per share (3)............. $ 0.01 $ (0.06) $ 0.10
Pro forma weighted average common and common
equivalent shares outstanding (3)................. 7,571 6,692 9,666
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------
ACTUAL AS ADJUSTED(4)
------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................................................................... $ 1,981 $ 22,303
Working capital................................................................................ 5,961 31,533
Total assets................................................................................... 31,376 51,698
Total debt (5)................................................................................. 9,497 4,247
Redeemable Convertible Preferred Stock......................................................... 35,234 --
Stockholders' equity (deficit)................................................................. (21,991) 38,815
</TABLE>

- ---------------
(1) Assumes no exercise of the Underwriters' over-allotment option. See
"Underwriters."

(2) Based on the number of shares outstanding as of June 30, 1996. Assumes the
issuance simultaneously with the offering of 84,077 shares of Common Stock
upon the anticipated exercise of outstanding warrants. Excludes (i)
1,191,753 shares of Common Stock issuable upon exercise of options
outstanding as of June 30, 1996 at a weighted average exercise price of
$1.83 per share, (ii) 1,500,000 shares reserved for issuance under the
Company's 1996 Stock Option Plan, (iii) 100,000 shares reserved for issuance
under the Company's 1996 Director Stock Option Plan and (iv) 250,000 shares
of Common Stock reserved for issuance under the Company's 1996 Employee
Stock Purchase Plan. Also excludes 385,334 shares of Common Stock issuable
upon exercise of outstanding warrants at a weighted average exercise price
of $3.42 per share. See "Management -- Stock Plans" and Note 6 of Notes to
Consolidated Financial Statements.

(3) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing pro forma earnings (loss)
per share. See "Selected Consolidated Financial Data" for supplementary
earnings (loss) per share information.

(4) Adjusted to reflect the conversion of all outstanding shares of Redeemable
Convertible Preferred Stock into 7,562,527 shares of Common Stock upon the
closing of this offering, the assumed issuance of 84,077 shares of Common
Stock upon the exercise of certain outstanding warrants, the sale by the
Company of 3,007,532 shares of Common Stock offered hereby after deducting
underwriting discounts and commissions and estimated offering expenses
payable by the Company, and the application of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."

(5) Total debt includes indebtedness for borrowed money and capital lease
obligations.

3
<PAGE> 4

THE COMPANY

To compete effectively, semiconductor manufacturers are continually seeking
to improve their process and design technologies to manufacture smaller, more
powerful, more complex devices at a lower cost per function. A major factor in
fabricating such devices is the ability to reduce circuit geometries, measured
in microns (a millionth of a meter, "m") and defined in terms of critical, or
smallest, feature size. Reduced circuit geometries permit semiconductor
manufacturers to increase the number of transistors per area of silicon. The
trend toward smaller critical feature sizes is expected to continue, with the
Semiconductor Industry Association's Technology Roadmap projecting production of
leading edge 0.25m devices by 1998 and 0.18m devices by 2001. The Company
believes that volume production of semiconductors with critical geometries below
0.35m generally requires DUV photolithography systems and that the excimer laser
is the optimal illumination source for such DUV systems.

The Company believes its leading position in the excimer laser market is
attributable to its development of advanced technologies that address the needs
of its customers as well as semiconductor manufacturers. The performance
characteristics of the Company's excimer lasers include high pulse repetition
rate, narrow bandwidth, energy stability and reliability relative to competing
products. The Company also believes that it is currently the only volume
supplier of excimer laser systems for DUV photolithography applications. The
Company's krypton fluoride ("KrF") excimer lasers are currently capable of
producing critical features as small as 0.25m, and the Company believes its
technology is extendible to critical feature sizes as small as 0.10m by using
different gas combinations and advanced optical and photomask technology.

The Company's objective is to maintain its position as the leading supplier
of DUV illumination sources to photolithography tool manufacturers. To
accomplish this objective, the Company expects to continue to make significant
investments in research and development to enhance its KrF lasers and develop
its next generation argon fluoride ("ArF") laser. As part of this effort, the
Company is collaborating with its customers on advanced technology development
to better anticipate technology trends in the semiconductor manufacturing
industry. To meet current and anticipated demand for its products, the Company
is increasing its manufacturing capability at its San Diego facility and has
entered into a contract manufacturing agreement with Seiko Instruments to
manufacture excimer lasers in Japan. In order to support its growing installed
base, the Company is expanding its field service and support operations in the
United States, Japan, Korea and Europe and is in the process of establishing a
field service and support presence in Taiwan and Southeast Asia.

The Company was incorporated in California in 1986 and reincorporated in
Nevada in August 1996. The Company's principal offices are located at 16275
Technology Drive, San Diego, California 92127-1815, and its telephone number at
that location is (619) 487-2442. Unless the context otherwise requires, the
terms "Cymer" and the "Company" as used in this Prospectus refer to Cymer, Inc.,
Cymer Laser Technologies (Cymer, Inc.'s California predecessor) and Cymer,
Inc.'s wholly-owned subsidiary, Cymer Japan, Inc.

4
<PAGE> 5

RISK FACTORS

In addition to other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing shares of the Common Stock offered hereby.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
described in such forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in the following
risk factors.

Likely Fluctuations in Quarterly Operating Results. The Company's
quarterly operating results have in the past fluctuated and are likely in the
future to fluctuate significantly depending upon a variety of factors. Such
factors may include: the demand for semiconductors in general and, in
particular, for leading edge devices with smaller circuit geometries;
cyclicality in the market for semiconductor manufacturing equipment; the timing
and size of orders from the Company's small base of customers; the ability of
the Company to manufacture, test and deliver laser systems in a timely and cost
effective manner; the ability of the Company's competitors to obtain orders from
the Company's customers; the timing of new product announcements and releases by
the Company and its competitors; the entry of new competitors into the market
for DUV photolithography illumination sources; the ability of the Company to
manage its costs as it begins to supply its products in volume; and the
Company's ability to manage effectively its exposure to foreign currency
exchange rate fluctuations, principally with respect to the yen (in which sales
by the Company's Japanese subsidiary are denominated).

The Company has historically derived a substantial portion of its quarterly
and annual revenues from the sale of a relatively small number of systems, which
are priced at up to $450,000. As a result, the precise timing of the recognition
of revenue from an order for one or a small number of systems can have a
significant impact on the Company's total revenues and operating results for a
particular period. The Company's operating results for a particular period could
be adversely affected if orders for a small number of systems, or even one
system, are canceled or rescheduled by customers or cannot be filled in time to
recognize revenue during that period due to, for example, unanticipated
manufacturing, testing, shipping or product acceptance delays. The Company had a
backlog of orders at June 30, 1996 of approximately $49.3 million for shipment
during the 12 months ending June 30, 1997. However, customers may cancel or
delay orders with little or no penalty, and because of the Company's limited
experience in producing lasers in volume, there can be no assurance that the
Company will recognize revenue on any significant portion of this backlog. The
Company's expense levels are based, in large part, on the Company's expectations
as to future revenues and are, therefore, relatively fixed in the short term. If
revenue levels fall below expectations, net income will be disproportionately
and adversely affected. The impact of these and other factors on the Company's
revenues and operating results in any future period cannot be forecast with any
degree of certainty. See "Business -- Backlog."

The Company believes that semiconductor manufacturers are currently
developing capability for pilot production of 0.25(LOGO)mm devices. The Company
also believes that demand for its excimer lasers for DUV photolithography tools
is currently being driven by the efforts to develop such capability. Once
semiconductor manufacturers have acquired such capability, the Company believes
that they will not invest in DUV photolithography tools to expand their capacity
to manufacture 0.25(LOGO)mm devices until such time as their sales forecasts
justify such investment. As a result, the Company believes that once current
demand is satisfied, the Company's revenues could flatten or even decline in
future periods before resuming growth in response to future demand, if any.
Accordingly, the Company currently expects that demand for its DUV excimer
lasers, and thus its revenues, may decrease in the second half of 1997, as
compared to the first half of 1997.

Recently, the Company has significantly increased the scale of its
operations and its manufacturing capacity, including hiring additional personnel
and substantially increasing the number of systems in production. This expansion
has resulted in higher materials and work-in-process inventory levels and
significantly higher operating expenses, and has required the Company to
implement a variety of new systems, procedures and controls. Based on its
backlog of orders at June 30, 1996, the Company expects to continue to increase
its inventories and operating expenses. If orders received by the Company do not
result in sales, or if

5
<PAGE> 6

the Company is unable to sustain its revenues at anticipated levels, the
Company's operating results will be materially adversely affected.

Due to the foregoing factors, as well as other unanticipated factors, it is
likely that in some future quarter the Company's operating results will be below
the expectations of public market analysts or investors. In such event, the
price of the Company's Common Stock would be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

History of Losses; Unpredictability of Future Operating Results. The
Company was founded in 1986 and shipped its first prototype laser system in
1988. Although the Company's revenues have increased over the last three years
and each of the last six quarters, the Company has incurred annual operating
losses since inception and incurred an operating loss in the quarter ended March
31, 1996. The Company had an accumulated deficit of approximately $21.9 million
at June 30, 1996. There can be no assurance that the Company's revenues will
grow or be sustained in future periods or that the Company will be profitable in
any future period. The Company's history of annual and quarterly operating
losses, its substantial expansion in manufacturing capacity, its limited
experience in supplying products in volume and the difficulty of predicting the
demand for its products, among other factors, make the prediction of future
operating results difficult if not impossible. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business -- Backlog."

Risk of Excessive Inventory Buildups by Photolithography Tool
Manufacturers. Substantially all of the Company's customers are
photolithography tool manufacturers, which in turn sell their systems to
semiconductor manufacturers. Over the past year, the Company's customers have
substantially increased their forecasted shipments of DUV photolithography
tools. The Company believes that the increase in demand for DUV photolithography
tools coupled with the dependence of the manufacturers of these tools on a
limited number of laser suppliers may have caused a degree of over-ordering of
the Company's products. The Company is working with its customers to better
understand end user demand for DUV photolithography tools. However, there can be
no assurance that the Company will be successful in this regard, or that its
customers will not build excessive laser inventories. Excessive customer laser
inventories could result in a material decline in the Company's revenues and
operating results in future periods as such inventories are brought into
balance.

Risks Associated with Rapid and Substantial Manufacturing Expansion. To
meet current and anticipated demand for its products, the Company must
substantially increase the rate by which it manufactures and tests its
photolithography laser systems by the end of 1996. This increase would follow a
nearly four-fold increase in the manufacturing rate from December 1995 to June
1996. The Company is currently unable to manufacture and test its
photolithography laser systems fast enough to fill orders and is behind on its
delivery schedules. While the Company is not aware of any order cancellations as
a result of these delays, such delays, if they continue or recur, increase the
risk that customers will cancel orders and seek to meet all or a portion of
their needs for illumination sources from the Company's competitors. The Company
is also increasingly relying on outside suppliers for the manufacture of various
components and subassemblies used in its products and is dependent upon these
suppliers to meet the Company's manufacturing schedules. The failure by one or
more of these suppliers to supply the Company on a timely basis with sufficient
quantities of components or subassemblies that perform to the Company's
specifications could affect the Company's ability to deliver completed lasers to
its customers on schedule. Additionally, the Company may underestimate the costs
required to increase its manufacturing capacity, which may materially adversely
affect the Company's results of operations.

In addition to increasing manufacturing capacity at its facilities in San
Diego, California, the Company is also seeking to qualify Seiko Instruments,
Inc. ("Seiko") of Japan as a contract manufacturer of its photolithography
lasers. While the Company is seeking to have Seiko begin limited production of
lasers for the Company in 1996, there can be no assurance that Seiko will be
successfully qualified and commence production on schedule. The failure of Seiko
to be so qualified or to commence production on schedule could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Manufacturing" and "-- Intellectual Property
Rights."

6
<PAGE> 7

Dependence on Single Product Line. The Company's only product line is
excimer lasers, the primary market for which is for use in DUV photolithography
equipment for manufacturing deep-submicron semiconductor devices. Demand for the
Company's products will depend in part on the rate at which semiconductor
manufacturers adopt excimer lasers as the illumination source for their
photolithography tools. Impediments to such adoption include a shortage of
engineers with experience implementing, utilizing and maintaining DUV
photolithography systems that incorporate excimer laser illumination sources,
instability of photoresists used in DUV photolithography and a shortage of
specialized glass used in DUV optics. There can be no assurance that such
impediments can or will be overcome, and, in any event, such impediments may
materially reduce the demand for the Company's products. In addition, to the
extent that such manufacturers are able to produce semiconductors with smaller
critical feature sizes by extending the performance capabilities of mercury lamp
illumination sources used in existing i-line or DUV photolithography tools, the
demand for the Company's products would also be materially reduced. Further, if
the Company's customers experience reduced demand for DUV photolithography
tools, or if the Company's competitors are successful in obtaining significant
orders from such customers, the Company's results of operations would be
materially adversely affected.

Limited Production Use of Excimer Lasers. The Company first shipped its
lasers for photolithography applications in 1988. The Company is not aware of
any semiconductor manufacturer using the Company's lasers for volume production
of semiconductor devices. There can be no assurance that the Company's products
will meet production specifications when subjected to prolonged and intense use
in volume production in semiconductor manufacturing processes. If any
semiconductor manufacturer is not able to successfully achieve volume production
using the Company's lasers, the Company's reputation with semiconductor
manufacturers or the limited number of photolithography tool manufacturers could
be damaged, which would have a material adverse effect on the Company's
business, financial condition and results of operations.

Dependence on Small Number of Customers. The Company's primary customer
base is composed of a small number of manufacturers of DUV photolithography
tools. Four large firms, ASM Lithography, Canon, Nikon and SVG Lithography (a
subsidiary of Silicon Valley Group, Inc.), dominate the photolithography tool
business and collectively accounted for approximately 65% and 86% of the
Company's total revenues in 1995 and the six months ended June 30, 1996,
respectively. Sales to ASM Lithography, Canon, Nikon and SVG Lithography
accounted for approximately 18%, 19%, 27% and 1%, respectively, of total
revenues in 1995 and approximately 22%, 37%, 20% and 7%, respectively, of total
revenues in the six month period ended June 30, 1996. The Company expects that
sales of its systems to these customers will continue to account for
substantially all of its revenues in the foreseeable future. None of the
Company's customers is obligated to purchase a minimum number of the Company's
products. Loss of any significant business from any one of these customers or a
significant reduction in orders from any one of these customers, including
reductions caused by changes in a customer's competitive position, a decision to
purchase illumination sources from other suppliers or economic conditions in the
semiconductor and photolithography tool industries, would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business -- Customers and End Users" and "-- Backlog."

Need to Manage a Changing Business. The Company recently has dramatically
expanded the scope of its operations and the number of employees in most of its
functional areas. For example, the Company increased the number of its employees
from 136 to 240 between December 31, 1995 and June 30, 1996. The Company also
substantially increased its manufacturing capacity during that period and
installed a new management information system. If demand for the Company's
products continues to grow, the Company will be required to continue this
expansion. The management of such growth, if such growth occurs, will require
the Company to continue to improve and expand its management, operational and
financial systems, procedures and controls, including accounting and other
internal management systems, and its quality control, delivery and field service
and customer support capabilities. The Company will also be required to manage
effectively its expanding international operations, including the operations of
its Japanese subsidiary, its field service and support presence in Asia and
Europe and its qualification of Seiko as a manufacturer of its photolithography
lasers. There can be no assurance that the Company will be able to successfully
expand its

7
<PAGE> 8

operations, effect timely deliveries of its products or maintain the product
quality and reliability required by its customers. The Company has experienced,
and may continue to experience, delays in deliveries to customers as a result of
its inability to increase its manufacturing capacity fast enough to meet demand.
Any failure to manage the Company's growth, if such growth occurs, would
materially adversely effect the Company's financial condition and results of
operations.

Dependence on Semiconductor Industry. Substantially all of the Company's
revenues are derived from photolithography tool manufacturers that in turn
depend on the demand for their products from semiconductor manufacturers.
Semiconductor manufacturers correspondingly depend on the demand from
manufacturers of end-products or systems that use semiconductors. The
semiconductor industry is highly cyclical and has historically experienced
periodic and significant downturns, which often have had a severe effect on the
demand for semiconductor manufacturing equipment, including photolithography
tools. The Company believes that downturns in the semiconductor manufacturing
industry will occur in the future, and will result in decreased demand for
semiconductor manufacturing equipment. In addition, the Company believes that
its ability to reduce expenses in a future downturn will be constrained by the
need for continual investment in research and development, and the need to
maintain extensive ongoing customer service and support capability. Accordingly,
any downturn in the semiconductor industry could have a material adverse effect
on the Company's business, financial condition and results of operations.

Dependence on Key Suppliers. Certain of the components and subassemblies
included in the Company's products are obtained from a single supplier or a
limited group of suppliers. In particular, there are no alternative sources for
certain of the components and subassemblies, including certain optical
components and the pre-ionizer tubes used in the Company's lasers. In addition,
the Company is increasingly outsourcing the manufacture of various
subassemblies. Although to date the Company has been able to obtain adequate
supplies of its components and subassemblies in a timely manner from existing
sources, the Company has only recently commenced volume production of its laser
systems. If the Company is unable to obtain sufficient quantities of components
or subassemblies, or if such items do not meet the Company's quality standards,
delays or reductions in product shipments could occur which would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Manufacturing."

Competition. The Company currently has two significant competitors in the
market for excimer laser systems for photolithography applications,
Lambda-Physik R&D ("Lambda-Physik"), a German-based subsidiary of Coherent, Inc.
("Coherent"), and Komatsu, Ltd. ("Komatsu"), located in Japan. Both of these
companies are larger than the Company, have access to greater financial,
technical and other resources than does the Company and are located in closer
proximity to the Company's customers than is the Company. Although the Company
believes that these competitors are not yet supplying excimer lasers in volume
for photolithography applications, the Company believes that both companies are
aggressively seeking to gain larger positions in this market. The Company
believes that its customers have each purchased one or more products offered by
these competitors and that its customers will consider further purchases, in
part as a result of delays in deliveries by the Company in recent months as the
Company has been seeking to expand its manufacturing capacity. The Company also
believes that its customers are actively seeking a second source for excimer
lasers. Furthermore, photolithography tool manufacturers may seek to develop or
acquire the capability to manufacture internally their own excimer lasers. In
the future, the Company will likely experience competition from other
technologies, such as X-ray, electron beam and ion projection processes. To
remain competitive, the Company believes that it will be required to manufacture
and deliver products to customers on a timely basis and without significant
defects and that it will also be required to maintain a high level of investment
in research and development and in sales and marketing. There can be no
assurance that the Company will have sufficient resources to continue to make
the investments necessary to maintain its competitive position. In addition, the
market for excimer lasers is still small and immature and there can be no
assurance that larger competitors with substantially greater financial
resources, including other manufacturers of industrial lasers, will not attempt
to enter the market. There can be no assurance that the Company will remain
competitive. A failure to remain competitive would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Competition" and "-- Intellectual Property Rights."

8
<PAGE> 9

Rapid Technological Change; New Product Introductions. Semiconductor
manufacturing equipment and processes are subject to rapid technological change.
The Company believes that its future success will depend in part upon its
ability to continue to enhance its excimer laser products and their process
capabilities and to develop and manufacture new products with improved
capabilities. In order to enhance and improve its products and develop new
products, among other things, the Company must work closely with its customers,
particularly in the product development stage, to integrate its lasers with its
customer's photolithography tools. There can be no assurance that future
technologies, such as X-ray, electron beam and ion projection processes, will
not render the Company's excimer laser products obsolete or that the Company
will be able to develop and introduce new products or enhancements to its
existing products and processes in a timely manner that satisfy customer needs
or achieve market acceptance. The failure to do so could materially adversely
affect the Company's business, financial condition and results of operations.

Need to Expand Field Service and Support Organization. The Company
believes that the need to provide fast and responsive service to the
semiconductor manufacturers using its lasers is critical and that it will not be
able to depend solely on its customers to provide this specialized service.
Therefore, the Company believes it is essential to establish, through trained
third-party sources or through its own personnel, a rapid response capability to
service its lasers throughout the world. Accordingly, the Company intends to
expand its direct support infrastructure in Japan and Europe, expand its field
service and support in Korea through an independent firm, and establish a joint
service and support capability with an independent firm to serve Taiwan and
Southeast Asia. The establishment of these activities will entail recruiting and
training qualified personnel, identifying qualified independent firms and
building effective and highly trained organizations that can provide service to
customers in various countries in their assigned regions. There can be no
assurance that the Company will be able to attract qualified personnel to
establish these operations successfully or that the costs of such operations
will not be excessive. A failure to implement this plan effectively could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Service and Support."

Need for Additional Capital. The Company requires substantial working
capital to fund its business, particularly to finance inventories and accounts
receivable and for capital expenditures. The Company believes that the net
proceeds of this offering, together with anticipated cash provided by operations
and available lines of credit, will be adequate to meet its cash needs for at
least the next 12 months. The Company's future capital requirements will depend
on many factors, including the rate of the Company's manufacturing expansion,
the timing and extent of spending to support product development efforts and
expansion of sales and marketing and field service and support, the timing of
introductions of new products and enhancements to existing products, and market
acceptance of the Company's products. The Company expects that it may need to
raise additional equity or debt financing in the future. There can be no
assurance that additional equity or debt financing, if required, will be
available on acceptable terms or at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

Risks Associated with Customer-Funded Research and Development. The
Company has in the past funded a significant portion of its research and
development expenses from research and development revenues received from
photolithography tool manufacturers and from SEMATECH, a semiconductor industry
consortium, in connection with the design and development of specific products.
The Company's staffing levels and other expenditures for research and
development are, in part, determined by the level of funding that the Company
expects to receive for specific projects. No assurance can be given that the
Company will continue to generate research and development revenues to offset a
sufficient portion of its product development costs. Any material cancellation
of this funding or a failure to secure research and development funding
commensurate with the Company's expectations could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the recognition of research and development revenues is dependent
on the Company accomplishing certain research and development milestones. If
such milestones are not achieved, the Company will not recognize the associated
research and development revenues, which could have a material adverse effect on
its business, financial condition and results of operations. Although the
Company anticipates that it will continue to receive research and development
revenues in the future, there can be no assurance that this level of support
will be maintained at

9
<PAGE> 10

past levels, and the Company believes that such revenues will constitute a
decreasing percentage of its overall revenues. As a result, the Company may have
to bear a greater proportion of the cost of design and development of its
products which could have a material adverse effect on the Company's business,
financial condition and results of operations.

Although the Company's arrangements with photolithography tool
manufacturers and SEMATECH seek to clarify the ownership of the intellectual
property arising from research and development services performed by the
Company, there can be no assurance that disputes over the ownership or rights to
use or market such intellectual property will not arise between the Company and
such parties. Any such dispute could result in restrictions on the Company's
ability to market its products and could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business -- Research and Development" and "-- Intellectual
Property Rights."

Uncertainty Regarding Patents and Protection of Proprietary
Technology. The Company 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 abilities, than on
patents, copyrights trade secrets and other intellectual property rights.
Nevertheless, the success of the Company may depend in part on patents, and the
Company owns 16 United States patents covering certain aspects of technology
associated with excimer lasers which expire from May 2008 to December 2011 and
has applied for 12 additional patents in the United States, four of which have
been allowed. The Company also has filed 31 patent applications in other
countries. There can be no assurance that the Company's pending patent
applications or any future applications will be approved, that any issued
patents will provide it with competitive advantages or will not be challenged by
third parties, or that the patents of others will not have an adverse effect on
the Company's ability to do business. In this regard, due to cost constraints,
the Company 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 recently and has therefore lost the right to seek patent
protection in those countries for certain of its inventions. Additionally,
because foreign patents may afford less protection under foreign law than is
available under United States patent law, there can be no assurance that any
such patents issued to the Company will adequately protect the Company's
proprietary information. Furthermore, there can be no assurance that others will
not independently develop similar products, duplicate the Company's products or,
if patents are issued to the Company, design around the patents issued to the
Company.

Others may have filed and in the future may file patent applications that
are similar or identical to those of the Company. To determine the priority of
inventions, the Company may have to participate in interference proceedings
declared by the United States Patent and Trademark Office that could result in
substantial cost to the Company. No assurance can be given that any such patent
application will not have priority over patent applications filed by the
Company.

The Company 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, there can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology or that
the Company can meaningfully protect its trade secrets.

10
<PAGE> 11

Company. However, there can be no assurance that the Company will prevail in
this or any future litigation with respect to these patents. If the claims of
Coherent are upheld as valid, enforceable and infringed, the Company would be
required to obtain a license from Coherent or required to redesign its products
to avoid infringement. There can be no assurance that a license would be
available from Coherent, or if available, would be available on terms acceptable
to the Company or that the Company would be successful in any attempt to
redesign its products to avoid infringement. Accordingly, an adverse
determination in the pending judicial proceeding could prevent the Company from
manufacturing and selling its products, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Legal Proceedings."

In July 1996, the Company's prospective Japanese manufacturing partner,
Seiko, was notified by Komatsu, one of the Company's competitors, that certain
aspects of the Company's lasers might infringe certain claims furnished by
Komatsu to Seiko that Komatsu advised Seiko were included in a patent
application filed by Komatsu in Japan (the "Patent Claims"). Komatsu also
advised Seiko that the Patent Claims have been allowed by the Japanese Patent
Office. Seiko in turn notified the Company of this claim. In connection with its
manufacturing agreement with Seiko, the Company has agreed to indemnify Seiko
against such claims under certain circumstances. The Company has been advised by
its patent counsel in this matter, Wilson, Sonsini, Goodrich & Rosati,
Professional Corporation, which is relying in part on the opinion of the
Company's Japanese patent counsel, that in the opinion of such firm the
Company's products do not infringe any valid Patent Claims. However, there can
be no assurance that, if the patent issues, litigation will not ensue with
respect to these claims or that the Company and Seiko would ultimately prevail
in any such litigation.

The Coherent litigation will, and any other patent litigation would, at a
minimum be costly and could divert the efforts and attention of the Company's
management and technical personnel, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
Furthermore, there can be no assurance that other infringement claims by third
parties or other claims for indemnification by customers or end users of the
Company's products resulting from infringement claims will not be asserted in
the future or that such assertions, if proven to be true, will not materially
adversely affect the Company's business, financial condition and results of
operations. If any such claims are asserted against the Company, the Company may
seek to obtain a license under the third party's intellectual property rights.
There can be no assurance, however, that a license will be available on
reasonable terms or at all. The Company could decide, in the alternative, to
resort to litigation to challenge such claims or to design around the patented
technology. Such actions could be costly and would divert the efforts and
attention of the Company's management and technical personnel, which would
materially adversely affect the Company's business, financial condition and
results of operations.

The Company has registered the trademark CYMER in the United States and
certain other countries and is seeking additional registrations in certain
countries. In Japan, the Company's application for registration was rejected on
the grounds that it is similar to a trademark previously registered by a
Japanese company for a broad range of products. The Company is seeking a partial
nullification of the other registration with respect to laser devices and
related components and does not believe that the holder of the other trademark
is engaged in any business similar to that of the Company. For this reason, the
Company is continuing to use the trademark CYMER in Japan and believes that it
will ultimately be permitted to register such mark for use with its products and
that it is not infringing the other company's trademark. There can be no
assurance that the Company will ultimately succeed in its efforts to register
its trademark in Japan or that it will not be subjected to an action for
trademark infringement, which could be costly to defend and, if successful,
would require the Company to cease use of the mark and, potentially, to pay
damages. See "Business -- Intellectual Property Rights."

Dependence on Key Personnel. The Company is highly dependent on the
services of a number of key employees in various areas, including engineering,
research and development, sales and marketing and manufacturing. In particular,
there are a limited number of experts in excimer laser technology and
competition for such personnel is intense. The Company has in the past
experienced difficulty in hiring personnel, including experts in laser
technology. The Company believes that, to a large extent, its future success
will depend upon the continued service of its engineering, research and
development, sales and

11
<PAGE> 12

marketing and manufacturing personnel and on its ability to attract and retain
highly skilled personnel in each of these areas. The Company does not have
employment agreements with any of its employees, and there is no assurance that
the Company will be able to retain its key employees. The failure of the Company
to hire and retain such personnel could have a material adverse effect on the
Company's business, financial condition and results of operation. See
"Business -- Employees."

Risks of International Sales and Operations. Approximately 54%, 69% and
83% of the Company's revenues in 1994, 1995 and the six months ended June 30,
1996, respectively, were derived from customers located outside the United
States. Because a significant majority of the Company's principal customers are
located in other countries, the Company anticipates that international sales
will continue to account for a significant portion of its revenues. In order to
support its overseas customers, the Company maintains a subsidiary in Japan, is
expanding its field service and support operations in Japan and Europe, is
working with an independent firm to expand field service and support in Korea,
is seeking to establish with an independent firm a joint field service and
support capability to serve Taiwan and Southeast Asia, and is seeking to qualify
Seiko as a manufacturer of its products in Japan. There can be no assurance that
the Company will be able to manage these operations effectively or that the
Company's investment in these activities will enable it to compete successfully
in international markets or to meet the service and support needs of its
customers. Additionally, a significant portion of the Company's sales and
operations could be subject to certain risks, including tariffs and other
barriers, difficulties in staffing and managing foreign subsidiary and branch
operations, currency exchange risks and exchange controls, potentially adverse
tax consequences and the possibility of difficulty in accounts receivable
collection. Further, while the Company has experienced no difficulty to date in
complying with U.S. export controls, these rules could change in the future and
make it more difficult or impossible for the Company to export its products to
various countries. There can be no assurance that any of these factors will not
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Service and Support."

The Company's results of operations are subject to fluctuations in the
value of the Japanese yen against the U.S. dollar due to sales by the Company to
its Japanese subsidiary being denominated in dollars, and sales by the
subsidiary to customers in Japan being denominated in yen. The Company's
subsidiary manages its exposure to such fluctuations by entering into foreign
currency exchange contracts to hedge its purchase commitments. Although
management will continue to monitor the Company's exposure to currency
fluctuations, and, when appropriate, use financial hedging techniques to
minimize the effect of these fluctuations, there can be no assurance that
exchange rate fluctuations will not have a material adverse effect on the
Company's results of operations or financial condition. In the future, the
Company could be required to sell its products in other currencies, which would
make the management of currency fluctuations more difficult and expose the
Company to greater risks in this regard. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

The Company's products are subject to numerous foreign government standards
and regulations that are continually being amended. Although the Company
endeavors to meet foreign technical and regulatory standards, there can be no
assurance that the Company's products will continue to comply with foreign
government standards and regulations, or changes thereto, or that it will be
cost effective for the Company to redesign its products to comply with such
standards and regulations. The inability of the Company to design or redesign
products to comply with foreign standards could have a material adverse effect
on the Company's business, financial condition and results of operations.

Environmental and Other Government Regulations. Federal, state and local
regulations impose various controls on the storage, handling, discharge and
disposal of substances used in the Company's manufacturing process and on the
facility leased by the Company. The Company believes that its activities conform
to present governmental regulations applicable to its operations and its current
facilities, including those related to environmental, land use, public utility
utilization and fire code matters. There can be no assurance that such
governmental regulations will not in the future impose the need for additional
capital equipment or other process requirements upon the Company or restrict the
Company's ability to expand its operations. The adoption of such measures or any
failure by the Company to comply with applicable environmental and land

12
<PAGE> 13

use regulations or to restrict the discharge of hazardous substances could
subject the Company to future liability or could cause its manufacturing
operations to be curtailed or suspended.

Risk of Product Liability Claims. The Company faces a significant risk of
exposure to product liability claims in the event that the use of its products
results in personal injury or death, and there can be no assurance that the
Company will not experience material product liability losses in the future. The
Company maintains insurance against product liability claims in the amount of
$5.0 million per occurrence and
$6.0 million in the aggregate, but there can be no assurance that such coverage
will continue to be available on terms acceptable to the Company or that such
coverage will be adequate for liabilities actually incurred. Also, in the event
that any of the Company's products prove to be defective, the Company may be
required to recall or redesign such products. A successful claim brought against
the Company in excess of available insurance coverage, or any claim or product
recall that results in significant adverse publicity against the Company, could
have a material adverse effect on the Company's business, financial condition
and results of operations.

Unallocated Proceeds of the Offering. A significant portion of the net
proceeds of the offering has not been designated for specific uses. Accordingly,
management of the Company will have broad discretion with respect to the use of
these funds. In particular, the Company could use a portion of these funds for
the acquisition of complementary businesses, products and technologies, although
it has no present plans, agreements or commitments with respect to any such
transaction. Acquisitions involve numerous risks, including difficulties
assimilating new operations and products, the need to manage geographically
remote business units and the diversion of management attention from other
business concerns. There can be no assurance that any acquisition would result
in long-term benefits to the Company or that management would be able to manage
effectively the resulting business. See "Use of Proceeds."

Shares Eligible for Future Sale. Sales of a substantial number of shares
of Common Stock in the public market following this offering could adversely
affect the market price for the Company's Common Stock. The number of shares of
Common Stock available for sale in the public market is limited by restrictions
under the Securities Act of 1933, as amended (the "Securities Act"), and by
lock-up agreements under which certain holders of such shares have agreed not to
sell or otherwise dispose of any of their shares for a period of 180 days after
the date of this Prospectus without the prior written consent of Morgan Stanley
& Co. Incorporated. However, Morgan Stanley & Co. Incorporated, in its capacity
as Representative of the several Underwriters, may, in its sole discretion and
at any time without notice, release all or any portion of the securities subject
to lock-up agreements. Certain other stockholders of the Company have agreed not
to sell or otherwise dispose of any of their shares for a period of 120 days
after the date of this Prospectus without the prior written consent of the
Company. The Company has agreed not to release any of the shares subject to such
lock-up agreements without the prior written consent of Morgan Stanley & Co.
Incorporated. As a result of these restrictions, based on shares, options and
warrants outstanding as of June 30, 1996, the following shares of Common Stock
will be eligible for future sale: on the date of this Prospectus, 170,547 shares
in addition to the 3,340,000 shares offered hereby will be eligible for sale; an
additional 13,795 shares will be eligible for sale 90 days after the date of
this Prospectus; an additional 80,432 shares will be eligible for sale 120 days
after the date of this Prospectus; an additional 6,464,692 shares will be
eligible for sale 180 days after the date of this Prospectus; and an additional
1,787,462 shares will be eligible for sale thereafter upon expiration of their
respective two-year holding periods. In addition, the Company intends to
register for sale not earlier than 180 days following the date of this
Prospectus a total of 3,041,753 shares of Common Stock subject to outstanding
options or reserved for issuance under the Company's 1987 Stock Option Plan,
1996 Stock Option Plan, 1996 Director Stock Option Plan and Employee Stock
Purchase Plan. In addition, the Company has, pursuant to agreements with certain
stockholders, included in the Registration Statement, of which this Prospectus
is a part, 142,918 shares of Common Stock to be offered on a continuous basis by
such stockholders beginning 180 days following the date of this Prospectus.
Further, upon expiration of the lock-up agreements referred to above, holders of
approximately 7,555,525 shares of Common Stock will be entitled to certain
registration rights with respect to such shares. If such holders, by exercising
their registration rights, cause a large number of shares to be registered and
sold in the public market, such sales could have a material adverse effect on
the market price for the Company's Common Stock. In addition, if the Company is
required to include in a Company-initiated registration shares held by such
holders pursuant to the exercise of their registration rights, the Company's

13
<PAGE> 14

ability to raise needed capital may be adversely affected. See
"Management -- Stock Plans," "Description of Capital Stock -- Registration
Rights," "Shares Eligible for Future Sale" and "Underwriters."

No Prior Market; Possible Volatility of Stock Price; Dilution. Prior to
the offering contemplated by this Prospectus, there has been no public market
for the Common Stock of the Company, and there can be no assurance that an
active public market will develop or be sustained after the offering. The
initial public offering price was determined by negotiations among the Company
and the representatives of the Underwriters based upon several factors. The
trading price of the Company's Common Stock could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by the Company or its
competitors, as well as other events or factors. In addition, the equity markets
have from time to time experienced extreme price and volume fluctuations which
have particularly affected the market price of many high technology companies
and which often have been unrelated to the operating performance of these
companies. These broad market fluctuations may adversely affect the market price
of the Company's Common Stock. Furthermore, purchasers of the Common Stock
offered by this Prospectus will suffer an immediate and substantial dilution in
the net tangible book value per share of the Common Stock from the initial
public offering price. See "Dilution" and "Underwriters."

Anti-Takeover Effect of Nevada Law and Charter and Bylaw Provisions;
Availability of Preferred Stock for Issuance. Nevada law and the Company's
Articles of Incorporation and Bylaws contain provisions that could discourage a
proxy contest or make more difficult the acquisition of a substantial block of
the Company's Common Stock. In addition, the Board of Directors is authorized to
issue, without stockholder approval, up to 5,000,000 shares of Preferred Stock
with voting, conversion and other rights and preferences that may be superior to
those of the Common Stock and that could adversely affect the voting power or
other rights of the holders of Common Stock. The issuance of Preferred Stock or
of rights to purchase Preferred Stock could be used to discourage an unsolicited
acquisition proposal. See "Description of Capital Stock -- Preferred Stock" and
"-- Nevada Anti-Takeover Statutes."

14
<PAGE> 15

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 3,007,532 shares of
Common Stock offered by the Company hereby are estimated to be $25.6 million
($30.0 million if the Underwriters' over-allotment option is exercised in full),
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company. The Company expects to use approximately $10.0
million of such proceeds to retire outstanding indebtedness (including $5.3
million outstanding as of June 30, 1996, and $4.7 million incurred subsequent to
June 30, 1996), which consists of the following:

(i) $9.0 million under line of credit agreements with a bank that
provide for the following facilities: (a) a $1.0 million revolving bank
line of credit that is secured by the Company's assets, bears interest at a
rate of prime plus 0.75% per annum (9.0% as of June 30, 1996), is due March
5, 1997 and was incurred for general working capital purposes, and (b) $8.0
million under lines of credit that are guaranteed by the Export-Import Bank
of the United States, bear interest at a rate of prime plus 0.75% per annum
(9.0% as of June 30, 1996), are due March 5, 1997 (as to $3.0 million) and
June 27, 1997 (as to $5.0 million) and were incurred to finance inventory
and receivables for export sales; and

(ii) a $1.0 million revolving loan facility from Mitsubishi
International Corporation which is due on the earlier of March 31, 1997 or
the completion of this offering and bears interest at a rate of prime plus
1.5% per annum (9.75% as of June 30, 1996).

The Company also anticipates that approximately $2.0 million of the net
proceeds to the Company from this offering will be used for capital expenditures
through 1996, primarily for factory expansion and improvements, test equipment,
research tools and computer equipment. The remaining net proceeds to the Company
from this offering will be used primarily for general corporate purposes,
including working capital. A portion of the net proceeds to the Company from
this offering may also be used for the acquisition of businesses, products and
technologies that are complementary to those of the Company. The Company has no
present plans, agreements or commitments and is not currently engaged in any
negotiations with respect to any such transaction. Pending such uses, the net
proceeds to the Company from this offering will be invested in short-term,
investment grade, interest-bearing securities. The Company will not receive any
proceeds from the sale of shares of Common Stock by the Selling Stockholders.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its Common Stock
and does not anticipate paying cash dividends in the foreseeable future. In
addition, the Company's bank lines of credit prohibit the payment of cash
dividends without the bank's consent.

15
<PAGE> 16

CAPITALIZATION

The following table sets forth, as of June 30, 1996, (i) the actual
short-term obligations and capitalization of the Company, (ii) the short-term
obligations and capitalization of the Company on a pro forma basis after giving
effect to (a) the conversion of all outstanding shares of Redeemable Convertible
Preferred Stock into 7,562,527 shares of Common Stock and the authorization of a
new class of Preferred Stock, which will occur upon the closing of this
offering, (b) the assumed issuance of 84,077 shares of Common Stock upon the
exercise of certain outstanding warrants and (c) the reincorporation of the
Company into Nevada and the increase in the authorized number of shares of
Common Stock to be effected in connection therewith, and (iii) the pro forma
short-term obligations and capitalization of the Company as adjusted to give
effect to the receipt by the Company of the estimated net proceeds from the sale
of the 3,007,532 shares of Common Stock offered by the Company after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company and the application of the net proceeds thereof.

<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Short-term obligations(1)................................. $ 9,110 $ 9,110 $ 3,860
======== ======== ========
Capital lease obligations (excluding current
portion)(1)............................................. $ 387 $ 387 $ 387
-------- -------- --------
Redeemable Convertible Preferred Stock: actual -- $0.01
par value, 9,834,880 shares authorized, 7,526,951 shares
issued and outstanding; pro forma and as
adjusted -- $0.001 par value, no shares authorized,
issued or outstanding................................... 35,234 -- --
-------- -------- --------
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value: actual -- no shares
authorized, issued or outstanding; pro forma and as
adjusted -- 5,000,000 shares authorized, no shares
issued or outstanding................................ -- -- --
Common Stock: actual -- $0.01 par value, 15,000,000
shares authorized, 1,202,792 shares issued and
outstanding; pro forma and as adjusted -- $0.001 par
value, 25,000,000 shares authorized; pro
forma -- 8,849,396 shares issued and outstanding; as
adjusted -- 11,856,928 shares issued and
outstanding(2)....................................... 12 9 12
Additional paid-in capital................................ 241 27,471 53,040
Accumulated deficit....................................... (21,947) (13,940) (13,940)
Cumulative translation adjustment......................... (297) (297) (297)
-------- -------- --------
Total stockholders' equity (deficit)................. (21,991) 13,243 38,815
-------- -------- --------
Total capitalization................................. $ 13,630 $ 13,630 $ 39,202
======== ======== ========
</TABLE>

- ---------------
(1) Short-term obligations consist of short-term indebtedness for borrowed money
and the current portion of capital lease obligations. See Notes 3 and 8 of
Notes to Consolidated Financial Statements.

(2) Excludes 1,500,000 shares of Common Stock available for issuance pursuant to
the Company's 1987 Stock Option Plan, of which 1,191,753 shares were subject
to outstanding options at a weighted average exercise price of $1.83 per
share as of June 30, 1996. Also excludes 385,334 shares of Common Stock
issuable upon exercise of outstanding warrants at a weighted average
exercise price of $3.42 per share. Subsequent to June 30, 1996, the Company
adopted the 1996 Stock Option Plan to succeed the 1987 Stock Option Plan,
and reserved 1,500,000 shares for issuance thereunder. In addition,
subsequent to June 30, 1996, the Company (i) adopted the 1996 Employee Stock
Purchase Plan and reserved 250,000 shares of Common Stock for issuance
thereunder and (ii) adopted the 1996 Director Stock Option Plan and reserved
100,000 shares for issuance thereunder. See "Management -- Stock Plans."

16
<PAGE> 17

DILUTION

The pro forma net tangible book value of the Company as of June 30, 1996
was $13,243,000, or approximately $1.50 per share. Pro forma net tangible book
value per share represents the amount of total tangible assets less total
liabilities, divided by the number of shares of Common Stock outstanding after
giving effect to the conversion of all outstanding shares of Redeemable
Convertible Preferred Stock into 7,562,527 shares of Common Stock and the
assumed issuance of 84,077 shares of Common Stock as a result of the exercise of
warrants upon completion of this offering. After giving effect to the sale by
the Company of 3,007,532 shares of Common Stock in this offering, after
deducting underwriting discounts and commissions and estimated offering expenses
payable by the Company, the pro forma net tangible book value of the Company at
June 30, 1996 would have been $38,815,000, or $3.27 per share. This represents
an immediate increase in pro forma net tangible book value of $1.77 per share to
existing stockholders and an immediate dilution in pro forma net tangible book
value of $6.23 per share to new investors purchasing shares of Common Stock in
this offering. The following table illustrates the per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $9.50
Pro forma net tangible book value per share as of June 30, 1996.... $1.50
Increase in pro forma net tangible book value per share
attributable to new investors................................... 1.77
-----
Pro forma net tangible book value per share after the offering....... 3.27
-----
Dilution per share to new investors.................................. $6.23
=====
</TABLE>

The following table summarizes on a pro forma basis, as of June 30, 1996,
the difference between the existing stockholders and the purchasers of shares in
the offering with respect to the number of shares purchased from the Company,
the total consideration paid and the average price per share paid, assuming
conversion of all outstanding shares of Redeemable Convertible Preferred Stock
into Common Stock, the assumed issuance of shares of Common Stock as a result of
the exercise of warrants upon completion of this offering and the sale by the
Company of 3,007,532 shares of Common Stock in this offering (before deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)..... 8,849,396 74.6% $27,320,000 48.9% $3.09
New investors................ 3,007,532 25.4 28,572,000 51.1 9.50
------- ----- -------- -----
Total.............. 11,856,928 100.0% $55,892,000 100.0%
======= ===== ======== =====
</TABLE>

- ---------------

(1) Sales by the Selling Stockholders in the offering will reduce the number of
shares held by existing stockholders to 8,516,928 shares, or 71.8% of the
total number of shares outstanding after the offering, and will increase the
number of shares held by new investors to 3,340,000 shares, or 28.2% of the
total number of shares outstanding after the offering. See "Principal and
Selling Stockholders."

The foregoing analysis assumes no exercise of outstanding options. As of
June 30, 1996, 1,191,753 shares were subject to outstanding options under the
Company's 1987 Stock Plan at a weighted average exercise price of $1.83 per
share and 33,268 shares remained available for future grant. Subsequent to June
30, 1996, the Company adopted the 1996 Stock Plan to succeed the 1987 Stock
Plan, and reserved 1,500,000 shares for issuance thereunder. In addition,
subsequent to June 30, 1996, the Company (i) adopted the Employee Stock Purchase
Plan and reserved 250,000 shares of Common Stock for issuance thereunder and
(ii) adopted the 1996 Director Stock Option Plan and reserved 100,000 shares for
issuance thereunder. To the extent outstanding options are exercised, or shares
reserved for future option grants or direct issuances are issued, there will be
further dilution to new investors. See "Management -- Stock Plans" and Note 6 of
Notes to Consolidated Financial Statements.

17
<PAGE> 18

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the Company'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 Prospectus. The
consolidated statement of operations data for the years ended December 31, 1993,
1994 and 1995 and the six months ended June 30, 1996 and the consolidated
balance sheet data at December 31, 1994 and 1995 and June 30, 1996 are derived
from, and are qualified by reference to, the consolidated financial statements
included elsewhere in this Prospectus, which have been audited by Deloitte &
Touche LLP. The consolidated statement of operations data for the years ended
December 31, 1991 and 1992 and the consolidated balance sheet data at December
31, 1991, 1992 and 1993 are derived from consolidated financial statements not
included in this Prospectus, which have also been audited by Deloitte & Touche
LLP. The consolidated statement of operations data for the six months ended June
30, 1995 are derived from unaudited financial statements included elsewhere in
this Prospectus that have been prepared on the same basis as the audited
financial statements and, in the opinion of management, contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for such
period. These historical results are not necessarily indicative of the results
to be expected in the future and results for interim periods are not necessarily
indicative of results for the entire year.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales............................ $ 4,480 $ 7,423 $ 3,393 $ 7,705 $15,576 $5,458 $17,768
Other.................................... -- 1,708 2,306 1,216 3,244 1,821 1,414
------- ------- ------- ------- ------- ------ -------
Total revenues.................... 4,480 9,131 5,699 8,921 18,820 7,279 19,182
------- ------- ------- ------- ------- ------ -------
Costs and expenses:
Cost of product sales.................... 3,275 4,404 2,726 4,797 9,282 3,243 10,929
Research and development................. 1,903 2,673 2,733 3,283 6,154 2,920 4,249
Sales and marketing...................... 1,710 2,182 2,154 1,780 2,353 1,011 1,825
General and administrative............... 773 989 782 849 1,181 502 1,303
------- ------- ------- ------- ------- ------ -------
Total costs and expenses.......... 7,661 10,248 8,395 10,709 18,970 7,676 18,306
------- ------- ------- ------- ------- ------ -------
Operating income (loss).................... (3,181) (1,117) (2,696) (1,788) (150) (397) 876
Other income (expense)..................... 220 (51) (7) (199) 255 50 267
------- ------- ------- ------- ------- ------ -------
Income (loss) before provision for income
taxes.................................... (2,961) (1,168) (2,703) (1,987) 105 (347) 1,143
Provision for income taxes................. -- 100 221 58 36 36 186
------- ------- ------- ------- ------- ------ -------
Net income (loss).......................... $(2,961) $(1,268) $(2,924) $(2,045) $ 69 $ (383) $ 957
======== ======== ======== ======== ======== ====== ========
Pro forma earnings (loss) per share(1)..... $ 0.01 $(0.06) $ 0.10
======== ====== ========
Pro forma weighted average common and
common equivalent shares
outstanding(1)........................... 7,571 6,692 9,666
======== ====== ========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
------- ------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 557 $ 1,537 $ 715 $ 2,326 $ 2,015 $ 1,981
Working capital................................ 2,245 2,289 (122) (1,557) 3,845 5,961
Total assets................................... 6,046 6,265 5,805 9,172 15,619 31,376
Total debt(2).................................. 1,059 1,026 2,717 6,879 4,164 9,497
Redeemable convertible preferred stock......... 10,980 12,889 12,989 19,290 28,409 35,234
Stockholders' deficit.......................... (7,647) (8,947) (11,828) (19,752) (21,830) (21,991)
</TABLE>

- ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing pro forma net income (loss)
per share. Supplementary earnings (loss) per share was $0.03, $(0.03) and
$0.08 in 1995, the six months ended June 30, 1995 and the six months ended
June 30, 1996, respectively. Supplementary weighted average common and
common equivalent shares outstanding were 10,579, 9,699 and 12,673 for 1995,
the six months ended June 30, 1995 and the six months ended June 30, 1996,
respectively. Supplementary earnings (loss) per share and the related
weighted average common and common equivalent shares outstanding were
determined giving effect to the transactions described in note (4) to
"Summary Consolidated Financial Data," and the reduction of historical
interest expense resulting from the retirement of indebtedness with a
portion of the proceeds of the offering. See "Use of Proceeds" and
"Capitalization."

(2) Total debt includes indebtedness for borrowed money and capital lease
obligations.

18
<PAGE> 19

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains trend analysis and other forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from those described in such forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed below and elsewhere in this Prospectus, particularly under "Risk
Factors."

OVERVIEW

The Company was founded in 1986 to develop commercial applications for
excimer lasers. In 1987, the Company began to focus on applications for
semiconductor photolithography and, in 1988, shipped its first semiconductor
photolithography laser. In 1990, the Company shipped its second generation
photolithography laser, the ELS-4000, of which three successive versions were
introduced through 1994. From 1986 through 1994, the Company shipped a total of
78 laser systems, principally for use in semiconductor photolithography research
and development applications. During this period, revenues generated by lasers,
replacement parts and service were small and fluctuated widely, and the Company
funded its operations primarily through successive rounds of equity financing as
well as through government, industry and customer research and development
contracts. In 1992, the Company introduced a higher power, industrial laser, the
model HPL-100K series KrF laser. The Company licensed this complementary laser
technology to Seiko in 1992 for the Japanese market in exchange for up-front
license fees totaling $3.0 million over a two-year period. The Company expects
minimal revenues from industrial laser products in 1996. See
"Business -- Manufacturing, Assembly and Test."

In August 1994, the Company entered into a contract with SEMATECH to
develop a production-
worthy laser illumination source for SVG Lithography's Micrascan step-and-scan
photolithography tool. SEMATECH paid the Company an aggregate of $1.6 million
over the term of the contract, which ended in December 1995. The Company
obtained additional development contracts in early 1995 from certain stepper
manufacturers to develop a production-worthy, narrower bandwidth version of its
laser illumination source. These development efforts led directly to the
introduction of the ELS-4000F in the third quarter of 1995 and the 5000 series
laser in the first quarter of 1996.

Beginning in 1995, as both photolithography tool and semiconductor
manufacturers began to anticipate the need for production-worthy DUV
photolithography equipment, the Company's order backlog for photolithography
lasers began to grow. The Company's twelve-month order backlog was $28.5 million
at December 31, 1995, and $49.3 million at June 30, 1996. The Company believes
that semiconductor manufacturers are currently developing capability for pilot
production of 0.25(LOGO)mm devices. The Company also believes that demand for
its excimer lasers for DUV photolithography tools is currently being driven by
the efforts to develop such capability. Once semiconductor manufacturers have
acquired such capability, the Company believes that they will not invest in DUV
photolithography tools to expand their capacity to manufacture 0.25(LOGO)mm
devices until such time as their sales forecasts justify such investment. As a
result, the Company believes that once current demand is satisfied, the
Company's revenues could flatten or even decline in future periods before
resuming growth in response to future demand, if any. Accordingly, the Company
currently expects that demand for its DUV excimer lasers, and thus its revenues,
may decrease in the second half of 1997, as compared to the first half of 1997.
See "Risk Factors -- Likely Fluctuations in Operating Results" and
"Business -- Backlog."

The Company's sales are generated primarily by shipments to customers in
Japan, the Netherlands, and the United States. Approximately 78%, 54%, 69% and
83% of the Company's sales in 1993, 1994, 1995 and the first six months of 1996,
respectively, were derived from customers outside of the United States. The
Company maintains a wholly-owned Japanese subsidiary which sells to the
Company's Japanese customers. Revenues from Japanese customers, generated
primarily by this subsidiary, accounted for 68%, 33%, 50% and 60% of revenues
for 1993, 1994, 1995 and the first six months of 1996, respectively. The
activities of the Company's Japanese subsidiary are limited to sales and service
of products purchased by the subsidiary from

19
<PAGE> 20

the parent corporation. All costs of development and production of the Company's
products, including costs of shipment to Japan, are recorded on the books of the
parent company. The Company anticipates that international sales will continue
to account for a significant portion of its net sales. See Notes 1 and 11 of
Notes to Consolidated Financial Statements.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
PERCENT OF TOTAL REVENUES
------------------------------------------------------
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------- -----------------
1993 1994 1995 1995 1996
-------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales......................... 59.5% 86.4% 82.8% 75.0% 92.6%
Other................................. 40.5 13.6 17.2 25.0 7.4
-------- -------- ------ ------ ------
Total revenues................ 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of product sales................. 47.8 53.8 49.3 44.6 57.0
Research and development.............. 48.0 36.8 32.7 40.1 22.1
Sales and marketing................... 37.8 20.0 12.5 13.9 9.5
General and administrative............ 13.7 9.5 6.3 6.9 6.8
-------- -------- ------ ------ ------
Total costs and expenses...... 147.3 120.1 100.8 105.5 95.4
-------- -------- ------ ------ ------
Operating income (loss)................. (47.3) (20.1) (0.8) (5.5) 4.6
Other income (expense).................. (0.1) (2.2) 1.4 0.7 1.4
-------- -------- ------ ------ ------
Income (loss) before provision for (47.4) (22.3) 0.6 (4.8) 6.0
income taxes..........................
Provision for income taxes.............. 3.9 0.7 0.2 0.5 1.0
-------- -------- ------ ------ ------
Net income (loss)....................... (51.3)% (23.0)% 0.4% (5.3)% 5.0%
======== ======== ====== ====== ======
Gross margin on product sales........... 19.7% 37.7% 40.4% 40.6% 38.5%
======== ======== ====== ====== ======
</TABLE>

SIX MONTHS ENDED JUNE 30, 1995 AND 1996

Revenues. The Company's total revenues consist of product sales, which
include sales of laser systems and spare parts and service and training
revenues, and other revenues, which include license fees and revenues from
funded development activities performed for customers and for SEMATECH. Revenue
from product sales is generally recognized at the time of shipment unless
customer agreements contain inspection or other conditions, in which case
revenue is recognized at the time such conditions are satisfied. Funded
development contracts are accounted for on the percentage-of-completion method
based on the relationship of costs incurred to total estimated costs, after
giving effect to estimates of costs to complete the development project.

Product sales increased 226% from $5.5 million in the six months ended June
30, 1995 to $17.8 million in the six months ended June 30, 1996, primarily due
to increased sales of DUV photolithography laser systems. A total of 42 laser
systems (39 of which were DUV photolithography laser systems) were sold in the
first six months of 1996 compared to 11 laser systems (three of which were DUV
photolithography laser systems) in the first six months of 1995. The decrease in
sales of industrial lasers reflects the Company's increasing focus on its
photolithography laser products. Funded development revenues decreased 22% from
$1.8 million for the six months ended June 30, 1995 to $1.4 million in the six
months ended June 30, 1996, primarily due to the completion in 1995 of a laser
research project sponsored by SEMATECH.

20
<PAGE> 21

Cost of Product Sales. Cost of product sales includes direct material and
labor, warranty expenses, license fees and manufacturing and service overhead.
Cost of product sales rose 237% from $3.2 million for the six months ended June
30, 1995 to $10.9 million for the six months ended June 30, 1996. The gross
margin on these sales decreased to 38.5% for the six months ended June 30, 1996
from 40.6% in the first six months of 1995 as the Company incurred increased
costs associated with expansion of its manufacturing capacity and service
support infrastructure.

Research and Development. Research and development expenses include costs
of internally-funded and customer-funded projects as well as continuing product
support expenses which primarily include employee and material costs,
depreciation of equipment and other engineering related costs. Research and
development expenses increased 46% from $2.9 million in the six months ended
June 30, 1995 to $4.2 million in the six months ended June 30, 1996, due
primarily to increased product support efforts associated with the release of
the Company's 5000 series lasers and the hiring of additional technical
personnel. As a percentage of total revenues, such expenses declined from 40.1%
to 22.1% in the respective periods due to the growth in the Company's revenues.

Sales and Marketing. Sales and marketing expenses include the expenses of
the sales, marketing and customer support staffs and other marketing expenses.
Sales and marketing expenses increased 81% from $1.0 million for the six months
ended June 30, 1995 to $1.8 million in the six months ended June 30, 1996 due
primarily to increased sales commissions and increased sales support efforts and
marketing activities as more lasers were placed in the field. As a percentage of
total revenues, such expenses declined from 13.9% to 9.5% in the respective
periods due to the growth in the Company's revenues.

General and Administrative. General and administrative expenses consist
primarily of management and administrative personnel costs, professional
services and administrative operating costs. These expenses increased 160% from
$502,000 in the six months ended June 30, 1995 to $1.3 million in the six months
ended June 30, 1996 due to an increase in general and administrative support as
the Company's sales volume, manufacturing capacity and overall level of business
activity increased. As a percentage of total revenues, such expenses decreased
from 6.9% to 6.8% in the respective periods.

Other Income (Expense). Other income (expense) consists primarily of
interest income and expense and foreign currency exchange gains and losses
associated with fluctuations in the value of the Japanese yen against the U.S.
dollar. Other income increased from $50,000 for the six months ended June 30,
1995 to $267,000 for the six months ended June 30, 1996. Foreign currency
exchange gains totaled $167,000 and interest expense totaled $138,000 for the
six months ended June 30, 1995 compared to $388,000 and $148,000, respectively,
for the six months ended June 30, 1996.

The Company's results of operations are subject to fluctuations in the
value of the Japanese yen against the U.S. dollar due to the fact that sales by
the Company to its Japanese subsidiary are denominated in dollars, and sales by
the subsidiary to customers in Japan are denominated in yen. The Company's
subsidiary manages its exposure to such fluctuations by entering into foreign
currency exchange contracts to hedge its purchase commitments to the Company.
While management will continue to monitor the Company's exposure to currency
fluctuations, and, as deemed appropriate, use financial hedging techniques to
minimize the effect of these fluctuations, there can be no assurance that
exchange rate fluctuations will not have a material adverse effect on the
Company's results of operations or financial condition. In the future, the
Company could be required to sell its products in other currencies, which would
make the management of currency fluctuations more difficult and expose the
Company to greater risks in this regard.

Provision for Income Taxes. The provision for income taxes was
insignificant in the six months ended June 30, 1995 and primarily represented
taxes in Japan for research and development revenues generated from agreements
with Seiko. The tax provision of $186,000 for the six months ended June 30, 1996
was primarily attributable to income generated in the second quarter of 1996. At
June 30, 1996, the Company had $6.6 million in federal and state net operating
loss carryforwards which may be offset against future income.

21
<PAGE> 22

YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

Revenues. Product sales increased 127%, from $3.4 million in 1993 to $7.7
million in 1994, and 102% to $15.6 million in 1995, reflecting significant
increases in sales of DUV photolithography laser systems and replacement parts
and, to a lesser extent, increases in sales of industrial laser systems. The
Company sold five, 10 and 26 DUV photolithography laser systems in 1993, 1994
and 1995, respectively, and sold two, seven and eight industrial laser systems
during the same periods. In 1993, the Company generated license fees of $2.0
million from Seiko for industrial laser technology. See "Business--Proprietary
Rights" and Note 9 of Notes to Consolidated Financial Statements. Funded
development revenues increased 297%, from $306,000 in 1993 to $1.2 million in
1994, and 167% to $3.2 million in 1995. These increases were primarily due to
increased customer interest in the development of production-worthy illumination
sources. The Company expects that funded development revenues will decrease as a
percentage of total revenues as the Company focuses on product sales.

Cost of Product Sales. Cost of product sales increased 76% from $2.7
million in 1993 to $4.8 million in 1994 and 94% to $9.3 million in 1995, as the
Company's product sales increased. Gross margin on product sales increased from
19.7% in 1993 to 37.7% in 1994 to 40.4% in 1995. These increases were primarily
due to economies of scale realized as the Company's sales volume increased.

Research and Development. Research and development expenses increased 20%,
from $2.7 million in 1993 to $3.3 million in 1994, and 87% to $6.2 million in
1995. The substantial increase in 1995 was primarily due to the Company's
research contract with SEMATECH for the EX-5000 series laser system and to
continuing product development and enhancements associated with the ELS-4000F
series laser system. As a percentage of revenues, research and development
expenses decreased from 48.0% to 36.8% and to 32.7% in 1993, 1994 and 1995 due
to the growth in the Company's revenues in those periods.

Sales and Marketing. Sales and marketing expenses decreased 17% from $2.2
million in 1993 to $1.8 million in 1994, due to the reclassification of certain
costs associated with the testing of lasers to customer specifications to cost
of product sales and, to a lesser extent, reduced depreciation on lasers used
for demonstrations and customer training. In 1995, as industry interest in DUV
photolithography accelerated, the Company's sales and marketing expenses,
including sales commissions, increased 32% to $2.4 million. As a percentage of
total revenues, these expenses declined from 37.8% to 20.0% to 12.5% in 1993,
1994, and 1995, respectively.

General and Administrative. General and administrative expenses increased
9%, from $782,000 in 1993 to $849,000 in 1994, and 39% to $1.2 million in 1995,
reflecting increases in general and administrative support as the Company's
sales volume increased and its scope of operations expanded. As a percentage of
total revenues, these expenses decreased from 13.7% to 9.5% and to 6.3% in 1993,
1994 and 1995, respectively, reflecting economies of scale as total revenues
increased.

Other Income (Expense). Other expense increased from $7,000 in 1993 to
$199,000 in 1994, primarily reflecting increased interest expense in 1994 on
bridge financing obtained from the Company's investors to support its expanding
operations. This debt financing was subsequently converted into equity by the
investors in February 1995. The Company generated other income of $255,000 in
1995 due to foreign exchange gains of $506,000 and interest income of $32,000,
which were partially offset by interest expense of $283,000.

Provision for Income Taxes. The Company's provision for income taxes,
which primarily represents taxes paid in Japan for license fees and research and
development revenues generated from agreements with Seiko, decreased from
$221,000 to $58,000 and to $36,000 in 1993, 1994 and 1995, respectively, as
revenues from these activities decreased over these periods.

To date, inflation has not had a significant effect on the Company or its
results of operations.

22
<PAGE> 23

SELECTED QUARTERLY INFORMATION

The following table sets forth consolidated statement of operations data
for each of the six quarters through the period ended June 30, 1996 and the
percentage of the Company's total revenues represented by each item of the
respective quarter. This unaudited quarterly information has been prepared on
the same basis as the audited consolidated financial statements presented
elsewhere in this Prospectus and, in management's opinion, includes all
adjustments (consisting only of normal recurring entries) necessary for a fair
presentation of the information for the quarters presented. The operating
results for any quarter are not necessarily indicative of results for any future
period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1995 1995 1995 1995 1996 1996
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales.................... $ 1,476 $3,982 $ 4,892 $5,226 $ 6,526 $ 11,242
Other............................ 802 1,019 827 596 634 780
------ ------ ------ ------ ------ -------
Total revenues................ 2,278 5,001 5,719 5,822 7,160 12,022
------ ------ ------ ------ ------ -------
Costs and expenses:
Cost of product sales............ 967 2,276 2,893 3,146 4,210 6,719
Research and development......... 1,347 1,573 1,773 1,461 1,958 2,291
Sales and marketing.............. 421 590 652 690 755 1,070
General and administrative....... 235 267 324 355 551 752
------ ------ ------ ------ ------ -------
Total costs and expenses...... 2,970 4,706 5,642 5,652 7,474 10,832
------ ------ ------ ------ ------ -------
Operating income (loss)............ (692) 295 77 170 (314) 1,190
Other income (expense)............. 90 (40) 11 194 64 203
------ ------ ------ ------ ------ -------
Income (loss) before provision for
income taxes..................... (602) 255 88 364 (250) 1,393
Provision for income taxes......... 9 27 -- -- 10 176
------ ------ ------ ------ ------ -------
Net income (loss).................. $ (611) $ 228 $ 88 $ 364 $ (260) $ 1,217
====== ====== ====== ====== ====== =======
</TABLE>

<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUES
-----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1995 1995 1995 1995 1996 1996
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales.................... 64.8% 79.6% 85.5% 89.8% 91.2% 93.5%
Other............................ 35.2 20.4 14.5 10.2 8.8 6.5
------ ------ ------ ------ ------ -------
Total revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------ -------
Costs and expenses:
Cost of product sales............ 42.4 45.5 50.6 54.1 58.8 55.9
Research and development......... 59.1 31.5 31.0 25.1 27.4 19.1
Sales and marketing.............. 18.5 11.8 11.4 11.9 10.5 8.9
General and administrative....... 10.3 5.3 5.7 6.1 7.7 6.3
------ ------ ------ ------ ------ -------
Total costs and expenses...... 130.3 94.1 98.7 97.2 104.4 90.2
------ ------ ------ ------ ------ -------
Operating income (loss)............ (30.3) 5.9 1.3 2.8 (4.4) 9.8
Other income (expense)............. 3.9 (0.8) 0.2 3.4 0.9 1.7
------ ------ ------ ------ ------ -------
Income (loss) before provision for
income taxes..................... (26.4) 5.1 1.5 6.2 (3.5) 11.5
Provision for income taxes......... 0.4 0.5 -- -- 0.1 1.5
------ ------ ------ ------ ------ -------
Net income (loss).................. (26.8)% 4.6% 1.5% 6.2% (3.6)% 10.0%
====== ====== ====== ====== ====== =======
Gross margin on product sales...... 34.5% 42.8% 40.9% 39.8% 35.5% 40.2%
====== ====== ====== ====== ====== =======
</TABLE>

23
<PAGE> 24

The Company's total revenues have increased in each quarter since the first
quarter of 1995, primarily due to increased sales of DUV photolithography laser
systems. Of the three systems sold in the quarter ended March 31, 1995, one was
a DUV photolithography laser system, and of the 27 systems sold in the quarter
ended June 30, 1996, 26 were DUV photolithography laser systems. The Company
also generated modest other revenues in each of the past six quarters from
research and development activities performed for certain of the Company's
customers and for SEMATECH.

Cost of product sales also increased in absolute dollars in each of the
past six quarters as sales of laser systems and replacement parts increased.
Gross margins on product sales have ranged from a high of 42.8% in the second
quarter of 1995 to a low of 34.5% in the first quarter of 1995. The increase in
gross margin in the second quarter of 1995 was due to economies of scale
realized as unit sales increased. The decrease in gross margin in the third
quarter of 1995 was caused primarily by a relatively higher proportion of sales
of the Company's industrial laser product, which has a lower gross margin than
the Company's photolithography laser product, as well as replacement parts for
such product. The subsequent decrease in gross margin in the fourth quarter of
1995 was due primarily to the write off of inventory associated with the
Company's older lasers caused by the introduction of the ELS-4000F and 5000
series products. Gross margin declined in the first quarter of 1996 as the
Company began to experience increased manufacturing overhead costs as it
expanded capacity to meet its growing order backlog. The increase in gross
margin during the second quarter of 1996 was due to realization of economies of
scale associated with increased laser unit sales.

Operating expenses have generally increased in absolute dollars over the
quarters shown as the Company has increased staffing in research and
development, sales and marketing and administrative functions. Research and
development expenses increased through the first three quarters of 1995
reflecting the increased development activity under the SEMATECH contract and
material costs associated with the delivery of the first prototype unit in the
early part of the fourth quarter. Following such delivery, research and
development expenses decreased in the fourth quarter of 1995. Research and
development expenses rose rapidly in the first quarter of 1996 as the Company
expanded its product support capabilities in response to customer requirements.
As a percentage of total revenues, operating expenses have generally declined as
the Company's revenues have increased in the past four quarters, although
research and development and general and administrative expenses increased
somewhat as a percentage of revenues in the first quarter of 1996.

The Company achieved operating income and net income in the last three
quarters of 1995, but reported a loss for the first quarter of 1996 due to
delays in manufacturing, testing and shipping laser systems.

The Company's operating results have in the past fluctuated and are likely
in the future to fluctuate significantly depending upon a variety of factors.
Such factors may include: the demand for semiconductors in general and for
leading edge devices with smaller circuit geometries in particular; cyclicality
in the market for semiconductor manufacturing equipment; the timing and size of
orders from the Company's small base of customers; the ability of the Company to
manufacture, test and deliver systems in a timely and cost effective manner; the
ability of the Company's competitors to win orders from the Company's customers;
the timing of new product announcements and releases by the Company and its
competitors; the entry of new competitors into the market for DUV
photolithography illumination sources; the ability of the Company to manage its
costs as it begins to supply its products in volume; and the Company's ability
to manage effectively its exposure to foreign currency exchange rate
fluctuations, principally with respect to the yen (in which sales by the
Company's Japanese subsidiary are denominated).

24
<PAGE> 25

because of the Company's limited experience in producing lasers in volume, there
can be no assurance that the Company will recognize revenue on any significant
portion of this backlog. The Company's expense levels are based, in large part,
on the Company's expectations as to future revenues and are therefore relatively
fixed in the short term. Therefore, if revenue levels fall below expectations,
net income will be disproportionately and adversely affected. The impact of
these and other factors on the Company's revenues and operating results in any
future period cannot be forecast with certainty. See "Business -- Backlog."

Recently, the Company has significantly increased the scale of its
operations and its manufacturing capacity. This has included the hiring of
additional personnel and substantially increasing the number of systems in
production. This expansion has resulted in higher materials and work-in-process
inventory levels and significantly higher operating expenses, and has required
the Company to implement a variety of new systems, procedures and controls.
Based on its backlog of orders at June 30, 1996, the Company expects to continue
to increase its inventories and operating expenses. If orders received by the
Company do not result in sales, or if the Company is unable to sustain its
revenues at anticipated levels, the Company's operating results will be
materially adversely affected.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has funded its operations primarily through
the private sale of equity securities, totaling approximately $27.1 million,
borrowings from its investors for bridge financing and bank borrowings. As of
June 30, 1996, the Company had approximately $2.0 million in cash and cash
equivalents, $6.0 million in working capital and $9.5 million in bank and other
debt.

Net cash used in operating activities was approximately $2.1 million, $2.2
million, $2.1 million and $5.8 million for 1993, 1994, 1995, and the six months
ended June 30, 1996, respectively. The relatively consistent use of cash in
operations during the three full years was primarily the result of improved
operating results which offset to a degree increasing working capital
requirements as the Company's business expanded during these periods. The
increase in cash used in operations in the six months ended June 30, 1996 was
primarily attributable to an increase in accounts receivable and inventory.

Net cash used for investing activities was approximately $410,000,
$549,000, $2.4 million and $5.0 million in 1993, 1994, 1995 and the six months
ended June 30, 1996. These expenditures were primarily for the purchase of
computer equipment, test equipment, research and development tools, a management
information system, and, particularly during the six months ended June 30, 1996,
manufacturing process machinery and tenant improvements in the manufacturing
area. The Company anticipates making additional capital expenditures of
approximately $4.0 million for the remainder of 1996, primarily for
manufacturing expansion and improvements, test equipment, research tools and
computer equipment.

The Company's financing activities provided net cash of approximately $1.7
million, $4.5 million, $4.3 million and $10.7 million in 1993, 1994, 1995 and
the six months ended June 30, 1996, respectively. In 1993, this consisted
primarily of borrowings of approximately $474,000 from investors and bank
borrowings of approximately $1.6 million, partially offset by a reduction in
advances against commercial drafts in Japan of $487,000. In 1994, the Company
borrowed approximately $3.2 million from investors, received approximately
$404,000 from the sale of Redeemable Convertible Preferred Stock and received
approximately $945,000 in net advances against commercial drafts in Japan. In
1995, the Company sold Redeemable Convertible Preferred Stock for approximately
$3.4 million, increased its bank borrowings by $1.2 million and reduced advances
against commercial drafts by $390,000. In the six months ended June 30, 1996,
the Company received net proceeds of approximately $5.8 million from the sale of
Redeemable Convertible Preferred Stock and increased bank borrowings by $4.5
million. During the same period, the Company received net advances against
commercial drafts in Japan of approximately $459,000.

The Company has available line of credit arrangements with a bank
permitting borrowings of up to $11.0 million. These borrowings are secured by
substantially all of the Company's assets, including its intellectual property,
and provide for the following facilities: (i) a $5.0 million revolving line of
credit expiring June 27, 1997, which is based on eligible accounts receivable of
the Company's Japanese subsidiary and eligible inventory of the Company and its
subsidiary and is partially guaranteed by the Export-Import Bank of the United
States; (ii) a $3.0 million revolving line of credit expiring March 5, 1997
based on eligible international

25
<PAGE> 26

accounts receivable and inventory (excluding Japan) and partially guaranteed by
the Export-Import Bank of the United States; (iii) a $1.0 million domestic
revolving loan facility expiring March 5, 1997 based on eligible domestic
accounts receivable; and (iv) a $2.0 million term loan facility from a bank
which is due September 30, 1998. The Company also has a $1.0 million loan
facility which is guaranteed by Mitsubishi International Corporation, is due on
the earlier March 31, 1997 or the completion of this offering and was fully
utilized at June 30, 1996. At June 30, 1996, the Company had outstanding
indebtedness for borrowed money of $7.3 million. See Notes 3 and 9 of Notes to
Consolidated Financial Statements. The Company intends to repay a portion of the
indebtedness under the above facilities from the net proceeds of this offering.
See "Use of Proceeds." The Company also has through its subsidiary in Japan a
Y500 million credit facility for the discounting of customer promissory notes,
under which Y184 million ($1.7 million) was outstanding as of June 30, 1996. The
Company also has two foreign currency exchange facilities. See Note 1 of Notes
to Consolidated Financial Statements. The Company anticipates that it will seek
to expand its credit lines following this offering.

The Company anticipates that the proceeds from this offering together with
anticipated cash provided by operations and available bank credit will be
adequate to meet its cash needs for at least the next 12 months. Thereafter, the
Company may require additional funds to support its working capital requirements
or for other purposes and may seek to raise such additional funds through public
or private equity financings or other sources. There can be no assurance that
additional financing will be available at all or that, if available, such
financing will be obtainable on terms favorable to the Company and would not be
dilutive. See "Risk Factors -- Need for Additional Capital."

26
<PAGE> 27

BUSINESS

INDUSTRY BACKGROUND

Semiconductor Industry

The worldwide market for semiconductors has grown from approximately $22
billion in 1985 to over $140 billion in 1995 as the use of semiconductors has
expanded beyond computer systems to a wide array of additional applications such
as telecommunications and data communications systems, automotive products,
consumer goods, medical products, household appliances and industrial automation
and control systems. To compete effectively in this market, semiconductor
manufacturers are continually seeking to improve their process and design
technologies to manufacture smaller, more powerful, more complex, more reliable
devices at a lower cost per function. A major factor in fabricating such devices
is the ability to reduce circuit geometries, measured in microns (a millionth of
a meter, "m") and defined in terms of critical, or smallest, feature size.
Reduced circuit geometries permit semiconductor manufacturers to increase
transistor density or the number of transistors per area of silicon. On average,
the power and complexity (number of transistors) of semiconductor devices has
doubled every 18 months with proportionate decreases in cost. This phenomenon
was first articulated by Dr. Gordon Moore, a co-founder of Intel Corporation,
and has come to be known as "Moore's Law."

Recent advances in both memory circuits, such as DRAMs, and logic devices,
such as microprocessors, illustrate this continuing trend toward higher
complexity and smaller critical feature sizes. According to the Semiconductor
Industry Association's ("SIA") Technology Roadmap, critical feature sizes in
leading edge (first engineering samples) DRAM devices have decreased from 0.8m
in four megabit devices in 1989, to 0.5m in 16 megabit devices in 1992, to 0.35m
in 64 megabit devices in 1995. The SIA expects that this trend will continue
with the introduction of leading edge 256 megabit DRAMs with 0.25m geometries in
1998. Critical feature sizes in microprocessors have also followed a similar
downward sloping curve. The following graph illustrates the reduction in
critical feature size in DRAM devices over time:

REDUCTION IN CRITICAL FEATURE SIZE OVER TIME

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<PAGE> 28

Semiconductor Photolithography Process

Integrated circuits ("ICs") are complex semiconductor devices made up of
multiple transistors fabricated on silicon wafers in a series of process steps.
During IC fabrication, thin films of material are deposited or grown on the
surface of a wafer. Following thin film deposition, IC features are projected
onto light-sensitive emulsion ("photoresist") on the surface of the wafer with
optical photolithography tools. Advanced ICs require 20 or more deposition and
photolithography steps. After photolithography, IC features are formed with etch
systems that selectively remove unwanted material as determined by the
patterning process. Ultimately, IC features are formed into functioning
electronic circuits.

Photolithography is one of the most critical and expensive steps in the IC
manufacturing process. This process requires either a step-and-repeat
photolithography system ("stepper") or a step-and-scan photolithography system
that projects light through a photomask containing the master image of a
particular circuit layer onto a light sensitive photoresist coated on the wafer.
ICs are patterned through a series of such optical exposures until the full
three-dimensional structure of the circuit elements has been completed. The
critical feature size of a semiconductor device depends upon the resolution
capability of the stepper or step-and-scan photolithography system. Resolution
capability, in turn, is a function of the projected wavelength of the
illumination source and the numerical aperture of the lens, with a shorter
wavelength or higher numerical aperture enabling smaller feature sizes.
Historically, notwithstanding adjustments in numerical aperture and advancements
in optical and photomask technology, photolithography tools have had physical
resolution limits approximating the wavelength of their illumination source.
Accordingly, shorter wavelength illumination technology has been used to achieve
the higher resolution requirements of successive IC generations.

Mercury arc lamps have been the primary illumination source used for the
last decade. Initially, g-line emission from these lamps, with a wavelength of
436nm (0.436m), was used to commercially produce critical feature sizes down to
0.6m. Subsequently, i-line emission from these lamps, with a wavelength of 365nm
(0.365m), has been used to commercially produce critical feature sizes of 0.6m
to 0.35m. The next generation of photolithography tools use DUV light with
wavelengths of 250nm (0.25m) and below. The graph below shows how the adoption
of the three principal illumination technologies corresponds to decreases in
critical feature sizes:

CRITICAL FEATURE SIZE AND ILLUMINATION TECHNOLOGIES

LOGO

As critical feature sizes approached 0.6m, i-line systems began to be
widely deployed and g-line systems were used for applications requiring less
critical resolutions. The Company believes i-line systems were purchased in
volume by IC manufacturers in advance of reaching the physical resolution limits
of g-line systems for two principal reasons. First, by adopting i-line
technology early, IC manufacturers were able to

28
<PAGE> 29

perfect new process technology at geometries well above the practical limits of
i-line steppers. Second, because these systems had the capability to be used in
the production of multiple future IC generations, they were more extendable and
therefore more cost effective than the older g-line systems. Today's i-line
steppers are capable of producing resolutions as fine as 0.35m, and possibly
lower, when used in conjunction with photomask technologies such as phase shift
or optical proximity correction.

The SIA's Technology Roadmap projects production of leading edge 0.25m
devices by 1998 and 0.18m devices by 2001. The Company believes that volume
production of ICs with critical geometries below 0.35m will require DUV steppers
or step-and-scan systems. While the Company believes that semiconductor
manufacturers are no longer attempting to achieve sub-0.35m geometries with
i-line steppers employing mercury arc lamp light sources, successful process
development at 0.25m has been achieved with DUV step-and-scan systems using the
250nm emission of mercury arc lamps. However, mercury arc lamps are not optimal
for DUV step-and-scan systems for several reasons. First, mercury arc lamps emit
a wide spectrum of light. This wide band of wavelengths causes a degradation of
resolution for DUV photolithography which limits its effectiveness for critical
feature sizes below 0.30m. Second, because only a portion of the light emitted
by mercury arc lamps is of the appropriate wavelength for DUV applications, the
relatively small amount of DUV light delivered to the wafer's surface
necessitates a longer exposure time which slows throughput. Third, recent
advances in step-and-scan optical system designs require narrower-band light
than the 250nm emission of mercury arc lamps. Consequently, at critical feature
sizes below 0.35m, the Company believes that mercury arc lamp technology will be
inadequate for volume production and that manufacturers of DUV photolithography
tools require alternative illumination sources for their DUV steppers and
step-and-scan systems.

THE CYMER SOLUTION -- EXCIMER LASERS

The Company believes that the excimer laser is the optimal illumination
source for volume production of semiconductors using DUV photolithography at
critical geometries below 0.35m. The excimer laser is a gas discharge laser that
produces pulses of powerful, narrow bandwidth and short wavelength light,
permitting very fine feature resolution. In addition, its high power allows for
shorter exposure times, thereby increasing throughput. Finally, the Company
believes that excimer laser technology is ultimately extendible to critical
feature sizes as small as 0.10m by using different gas combinations and advanced
optical and photomask technology.

Cymer is the leading provider of excimer laser illumination sources for use
in DUV photolithography systems targeted at the pilot and volume production
segments of the semiconductor market. The Company believes that its leadership
position in the photolithography excimer laser market is attributable to the
Company's development of advanced technologies that address the needs of its
customers and semiconductor manufacturers. The performance characteristics of
the Company's excimer laser include high pulse repetition rate, narrow
bandwidth, energy stability and reliability relative to competitive products.
The Company's krypton fluoride ("KrF") excimer lasers are currently capable of
producing critical features as small as 0.25m. When combined with advanced
optical and photomask technology and advanced wafer processing techniques such
as chemical mechanical planarization, the Company's KrF systems are capable of
producing critical features as small as 0.20m. The Company believes that its
technological capabilities provide it with a competitive advantage in supplying
excimer lasers for both DUV steppers and DUV step-and-scan systems. The Company
also believes that it is currently the only volume supplier of excimer laser
systems for photolithography applications. The Company has sold its
photolithography lasers to all five DUV photolithography tool manufacturers: ASM
Lithography, Canon, Integrated Solutions, Nikon and SVG Lithography. In
addition, photolithography systems that incorporate the Company's excimer lasers
have been purchased by the world's 10 largest semiconductor manufacturers:
Intel, NEC, Toshiba, Hitachi, Motorola, Samsung, Texas Instruments, Mitsubishi,
Fujitsu and Philips.

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<PAGE> 30

STRATEGY

Cymer's objective is to maintain its position as the leading supplier of
DUV illumination sources to photolithography tool manufacturers. The principal
elements of the Company's strategy include:

Maintain Technology Leadership. Since entering the excimer laser
photolithography market in 1988, the Company has achieved a technology
leadership position in this market by investing heavily in research and
development, by developing higher performance products and by focusing on
satisfying the needs of both its photolithography customers and end user IC
manufacturers. The Company intends to continue to invest heavily in
research and development to enhance its KrF excimer laser and is working
with its customers on developing its next-generation argon fluoride ("ArF")
excimer laser in preparation for a transition to 0.18m and smaller critical
feature sizes. In addition, the Company intends to continue to invest in
other advanced technologies for photolithography and other applications of
excimer laser technology.

Deepen Customer Relationships. The Company maintains relationships
with all of the manufacturers that make DUV photolithography tools: ASM
Lithography, Canon, Integrated Solutions, Nikon and SVG Lithography and
believes that deepening these relationships will play an important role in
maintaining its leading position in the photolithography excimer laser
market. The Company is seeking to build and expand relationships with its
customers at multiple levels within their organizations. The Company is
collaborating with its customers on advanced technology development to
better anticipate technology trends in the semiconductor manufacturing
industry. Three of these companies, ASM Lithography, Canon and Nikon, have
made equity investments in the Company.

Increase Volume Manufacturing Capability. The Company is investing
heavily in its laser manufacturing facilities in response to increased
demand for its photolithography laser products and intends to increase
production capacity substantially to fulfill both backlog and anticipated
customer orders. During the first six months of 1996, the Company increased
its clean room manufacturing space to approximately 11,000 square feet from
approximately 6,000 square feet, increased the number of test bays to 15
from six, created an in-house manufacturing capability for its solid-state
pulse power modules, installed a new management information system,
outsourced the manufacturing of several major sub-assemblies and increased
its manufacturing headcount to 78 from 43. The Company intends to continue
to increase its manufacturing capability by hiring and training additional
manufacturing and test personnel, improving its assembly and test processes
in order to reduce cycle time, investing in additional manufacturing
tooling and implementing a multi-shift testing schedule. In addition, under
a contract manufacturing agreement with the Company, Seiko is establishing
a manufacturing capability to produce photolithography lasers for the
Company in Japan.

Enhance Worldwide Service and Support. The Company is expanding its
field service and support operations in the United States, Japan, Korea and
Europe and is in the process of establishing a presence in Taiwan and
Southeast Asia. The Company believes that this five-region presence, in
close proximity to both the photolithography tool manufacturers and major
semiconductor manufacturers, will enable it to enhance customer
productivity, provide a faster response time and receive continual feedback
on its excimer laser performance and desired technological and product
refinements.

Pursue Additional Applications for Excimer Laser Technology. The
Company believes that there is an opportunity to use excimer lasers in
areas of semiconductor manufacturing other than photolithography. For
example, the Company has recently manufactured and sold a laser system that
is being evaluated by the customer for use in photoresist stripping. In
addition, the Company believes that applications exist for the Company's
excimer laser outside of the semiconductor manufacturing industry. As the
Company satisfies demand for DUV photolithography lasers, the Company
intends to pursue new applications for its laser systems over the next
several years.

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<PAGE> 31

PRODUCTS

The Company's products consist of photolithography lasers, industrial high
power lasers and replacement parts.

Photolithography Laser Products

The Company's photolithography lasers produce narrow bandwidth pulses of
short wavelength light. The lasers permit very fine feature resolution and high
throughput. The Company has designed its lasers to be highly reliable, easy to
install and compatible with existing semiconductor manufacturing processes.

Introduced in the third quarter of 1995, the Company's ELS-4000F KrF
excimer laser is designed to meet the requirements of photolithography tool and
semiconductor manufacturers. The laser operates at a 600Hz pulse repetition rate
and provides power output of 7.2 watts of 248nm wavelength light. The ELS-4000F
incorporates advanced discharge chamber technology and solid state pulse power
technology to excite the laser gas efficiently, reducing the cost of ownership.
The ELS-4000F achieves high resolution and stable focus through proprietary
optical modules that perform line-narrowing and wavelength stabilization,
thereby optimizing the light emitted by the laser for the photolithography
application. The list price of the ELS-4000F is approximately $425,000.

The Company's 5000 series KrF excimer lasers, introduced in the first
quarter of 1996, are offered in both narrowband, ELS-5000, and broadband,
EX-5000, configurations. The 5000 series lasers incorporate the advanced
technological features of the Company's ELS-4000F laser but operate at a higher
pulse repetition rate and provide higher power outputs that shorten exposure
time and increase throughput, and in the case of the ELS-5000, a narrower
bandwidth. The 5000 series lasers incorporate the Company's proprietary line
narrowing and wavelength stabilization modules together with an atomic reference
for long-term accuracy of the wavemeter calibration. The 5000 series lasers
utilize a modular design that allows the Company to outsource many of the
system's subassemblies, thereby reducing manufacturing cycle times. The list
price of the 5000 series is approximately $450,000.

The Company's lasers incorporate advanced software control and diagnostic
systems. The control system provides users with on-line monitoring of laser
operating conditions, with approximately 75 diagnostic readings (including flow
rate, temperatures, pressures and light quality), that are automatically
monitored by the photolithography tool's control system. Additionally,
approximately 140 configurable parameters can be adjusted to optimize the
laser's performance for each customer's system. A portable computer attached to
the laser logs this data, automatically providing critical information about
performance and reliability. The lasers are also designed for easy
serviceability, with most major modules and components articulated for easy
swing-out or roll-out motion to facilitate inspection and replacement.

Certain specifications of the Company's photolithography lasers are set
forth below:

<TABLE>
<CAPTION>
PRODUCT SPECIFICATIONS COMPONENT LIFE
------------------------------------------------------------------------------------------------------------
---------------------------------
FREQUENCY AND BANDWIDTH AND
OUTPUT POWER STABILITY
--------------------- -------------------------
PULSE AVERAGE (BILLION PULSES) GAS CHARGE
REPETITION OUTPUT SPECTRAL ENERGY POWER LIFE
-----------------
POWER BANDWIDTH PULSES
------- ------------ STABILITY CHAMBER WINDOW SUPPLY --------- DAYS
RATE (WATTS) (PICOMETERS) --------- ------- ------ ------------ (MILLION) ----
----------
(HERTZ)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NARROWBAND
ELS-5000........ 1000 10 <0.8 <P1% 3 1 10 100 5
ELS-4000F....... 600 7.2 <3.0 <P1% 2 1 10 50 3
BROADBAND
EX-5000......... 1000 15 100 <P1% 3 1 10 100 5
</TABLE>

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<PAGE> 32

Industrial High Power Laser Products

The Company's HPL-100K/110K series KrF excimer lasers are designed to meet
the rigors of high duty cycle industrial usage, such as microdrilling,
micromachining and annealing applications. The laser operates at a 200 to 250Hz
pulse repetition rate and provides average power output of 100 watts for the
HPL-100K and 110 watts for the HPL-110K. The pulse repetition rate and high
power makes these lasers well suited for micro-fabrication processes. The
Company is currently focusing its development and marketing efforts on its
photolithography laser products, and the Company expects minimal revenues from
industrial laser products in 1996. Sales of industrial lasers to Tamarack
Scientific Co., Inc., a supplier of equipment used by Hewlett-Packard to
manufacture InkJet print heads, accounted for 10% of the Company's total
revenues in 1995.

Replacement Parts

Certain components and subassemblies included in the Company's lasers
require replacement or refurbishment following continued operation. For example,
the discharge chamber of the Company's lasers has a component life of
approximately two to three billion pulses, depending on the model. The Company
estimates that a laser used in a semiconductor production environment will
require one to three replacement chambers per year. Similarly, certain optical
components of the laser will deteriorate with continued exposure to DUV light
and will require periodic replacement. The Company provides these and other
spare and replacement parts for its photolithography lasers as needed by its
customers. On a limited basis, the Company also refurbishes and resells complete
laser systems.

CUSTOMERS AND END USERS

The Company sells its photolithography laser products to each of the five
manufacturers of DUV photolithography tools:

<TABLE>
<S> <C>
ASM Lithography Nikon
Canon SVG Lithography
Integrated Solutions
</TABLE>

The Company believes that maintaining and strengthening these customer
relationships will play an important role in maintaining its leading position in
the photolithography market. The Company works closely with its customers to
integrate the Company's products into their photolithography tools and is
collaborating with certain of its customers on advanced technology developments
under jointly funded programs. See "-- Research and Development." Sales to ASM
Lithography, Canon and Nikon accounted for 18%, 19% and 27%, respectively, of
total revenue in 1995 and 22%, 37% and 20% in the six months ended June 30,
1996. ASM Lithography, Canon and Nikon are stockholders of the Company. See
"Risk Factors -- Dependence on Small Number of Photolithography Tool
Manufacturers" and "Principal and Selling Stockholders."

End users of the Company's lasers include the world's 10 largest
semiconductor manufacturers. The following semiconductor manufacturers have
purchased one or more DUV photolithography tools incorporating the Company's
laser:

UNITED STATES
Advanced Micro Devices
Digital Equipment Corporation
IBM
Integrated Device Technology
Intel Corporation
Micron Technology
Motorola
SEMATECH*
Texas Instruments
JAPAN
Fujitsu
Hitachi
Mitsubishi Electric
NEC
NTT
Oki Electric
Sharp
Sony
Toshiba
KOREA
Hyundai
Samsung
EUROPE
C-Net
IMEC
LETI
Philips

- ---------------
* A semiconductor industry consortium.

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<PAGE> 33

BACKLOG

The Company schedules production of lasers based upon order backlog and
informal customer forecasts. The Company 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, the Company's backlog as of any
particular date may not be a reliable indicator of actual sales for any
succeeding period. At June 30, 1996, the Company had a backlog of approximately
$49.3 million, compared with a backlog of $28.5 million at December 31, 1995.
See "Risk Factors -- Potential Fluctuations in Operating Results," and "-- Risk
of Excessive Inventory Buildup by Photolithography Tool Manufacturers."

TECHNOLOGY

The word "excimer" derives from the combination of "excited" and "dimer." A
dimer is a molecule consisting of two atoms. Excimer lasers utilize a mixture of
a rare gas (krypton, argon, xenon) and a halogen gas (fluorine, chlorine,
bromine). Through electrical discharge, these two gases combine to form excited
dimers such as KrF or ArF molecules, which only exist in an excited state and
have a very short lifetime. In an avalanching process of stimulated emission,
the excimer de-excites and in the process releases energy in the form of DUV
light. The emitted light from an excimer laser consists of a band of colors, or
wavelengths, in the DUV spectrum. The KrF excimer laser produces a band of light
centered around 248 nanometers and the ArF excimer laser produces a band of
light centered around 193 nanometers. The Company believes that both of these
laser gases and wavelengths will be of importance in current and future
photolithography applications.

The excimer lasers' emissions are beyond the transmission capabilities of
optical materials traditionally used in photolithography applications, such as
borosilicate glass or flint glass. Materials exhibiting both good optical
transmissive properties in the DUV spectrum and the mechanical and thermal
stability necessary for precise optical performance are limited and include
fused silica (synthetic quartz) for KrF lasers and calcium fluoride for ArF
lasers. However, such single-material lenses cannot be designed to be
color-corrected to produce a sharply focused image on a particular plane over a
broad range of wavelengths. Instead, these projection lenses need to be operated
at very narrow and stable DUV wavelengths to produce sharp and stable images.

As a result of the foregoing, there are four principal technical challenges
the Company has had to overcome to produce excimer lasers for photolithography
applications:

- Devise a means to contain and electrically excite highly reactive
KrF gas mixtures in a minimally-reactive fashion to provide long gas
life and stable optical power;

- Adapt a technology that provides the high voltage electrical charge
required to excite gases in order to produce a laser beam with a
high pulse repetition rate while minimizing the naturally
destructive effects of the process on the discharge chamber;

- Develop a technology to "compress" the broadband, multi-color DUV
emission from an excimer laser into a very narrow wavelength band
suitable for sharp focus using single-material projection lenses;
and

- Devise a technique to precisely measure and stabilize the wavelength
of the resulting light, preventing any drift of this narrowed
emission to ensure stable focus at the wafer plane.

The Company has had to combine successfully the four core technologies
described above with the product engineering necessary to provide reliable,
production-caliber manufacturing equipment for the semiconductor industry.
Production-worthy lasers must be easy to operate and service and be capable of
meeting industry reliability requirements. Such lasers must be customized to
interface mechanically, optically and electrically with a variety of wafer
stepper and step-and-scan equipment. The control and self-diagnostic systems in
the laser must be electronically and software compatible with the control
systems residing inside the photolithography tool. Finally, production-worthy
laser equipment must meet the rigorous safety and facilities standards of the
semiconductor manufacturing industry.

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A schematic diagram of the Company's photolithography excimer laser is
shown below.

LOGO

The Company has addressed the technical challenges described above by
developing the following subassemblies:

Laser Discharge Chamber. The Company's discharge chamber incorporates
an all-metal and ceramic design to present only extremely inert materials
to the reactive gases. Corona pre-ionization provides consistent, uniform
preseeding of the gas with charge carriers to enhance electrical discharge
uniformity and pulse-to-pulse energy stability. An electrostatic filtration
system prevents contaminants from adhering to laser window surfaces,
promoting a longer lifetime. A temperature stabilization system eliminates
warm-up periods and provides higher operating efficiency.

Solid State Pulse Power Module ("SSPPM"). The SSPPM utilizes a high
power silicon control rectifier switch that has been developed by a third
party to replace the thyratron vacuum tube technology traditionally used
for high power switching in lasers, radar and similar applications. Working
with the developers of this technology, Cymer adapted the technology for
excimer laser applications and is the exclusive licensee for such
applications. The expected lifetime of the SSPPM is approximately 10 times
that of a thyratron-based power source, reducing the cost of ownership of
the laser. When the SSPPM is used in conjunction with advanced chamber
designs, the discharge chamber lifetime can be significantly extended,
thereby further decreasing the laser's cost of ownership.

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Line Narrowing Module. The broadband DUV emission from the laser is
compressed into a narrow band wavelength by the line narrowing module in
the laser's optical system. A one-dimensional beam expander illuminates a
highly dispersive reflection grating positioned to reflect back into the
discharge chamber only that wavelength desired by the photolithography
tool. This line narrowing system is "tunable" in two ways to optimize
performance. First, a unique grating distortion system matches the
curvature of the grating surface to the natural wavefront curvature,
minimizing the spectral bandwidth of the laser light. Second, a computer
controlled stepper motor automatically realigns the angle of the
diffraction grating to compensate, as necessary, for any wavelength drift.

Wavelength Stabilization Module. Prior to the narrowed light exiting
the laser enclosure, the wavelength stabilization module measures the
bandwidth and center wavelength stability of the laser light. These
measurements are made using a two channel etalon-based diagnostic system,
referenced to an ultra-stable optically contacted etalon reference. If any
wavelength drift is detected, a feedback control signal is directed to the
stepper motor in the line narrowing module to automatically compensate for
such drift. Periodically, the wavemeter can be automatically calibrated to
an atomic reference that is optional on the ELS-4000F laser and standard on
the 5000 series lasers.

MANUFACTURING

The Company's manufacturing activities consist of assembly, integration and
test. These activities are performed in a 22,800 square foot facility in San
Diego, California that includes approximately 11,000 square feet of class 1000
clean room manufacturing and test space. In order to focus on its core
technology, leverage the expertise of its key suppliers and respond more
efficiently to customer demand, the Company has outsourced many of its
subassemblies. The Company's outsourcing strategy is exemplified by the modular
design of the Company's 5000 series laser, for which substantially all of the
nonproprietary subassemblies have been outsourced. The Company believes that the
highly outsourced content and manufacturable design of the 5000 series laser
allows for reduced manufacturing cycle times and increased output per employee.

To meet current and anticipated demand for its products, the Company must
substantially increase the rate by which it manufactures and tests its
photolithography laser systems by the end of 1996. In order to accomplish this
objective, the Company intends to hire and train additional manufacturing
personnel, improve its assembly and test processes in order to reduce cycle
time, invest in additional manufacturing tooling and implement a multi-shift
testing schedule. This increase would follow a nearly four-fold increase in the
manufacturing rate from December 1995 to June 1996. The Company has been unable
to manufacture and test its photolithography laser systems fast enough to fill
orders and is behind on its delivery schedules. While the Company is not aware
of any order cancellations as a result of these delays, such delays, if they
continue or recur, increase the risk that customers will cancel orders and seek
to meet all or a portion of their needs for illumination sources from the
Company's competitors. The Company is also increasingly relying on outside
suppliers for the manufacture of various components and subassemblies used in
its products and is dependent upon these suppliers to meet the Company's
manufacturing schedules. The failure by one or more of these suppliers to supply
the Company on a timely basis with sufficient quantities of components or
subassemblies that perform to the Company's specifications could affect the
Company's ability to deliver completed lasers to its customers on schedule.
Additionally, the Company may underestimate the costs required to increase its
manufacturing capacity, which may materially adversely affect the Company's
results of operations.

In addition to increasing manufacturing capacity at its San Diego facility,
the Company has entered into a contract manufacturing agreement with Seiko
Instruments under which Seiko has agreed to manufacture for the Company a
certain number of the Company's photolithography excimer lasers and subsequent
enhancements. In order to ensure uniformity of product for all customers, the
Company will maintain control of all work flow design, manufacturing process,
engineering changes and component sourcing decisions. The Company will
manufacture and seal all core technology modules in San Diego. The agreement
expires in 2001, but will automatically renew for two-year terms unless one
year's notice to terminate is given by either party. While the Company is
seeking to have Seiko begin limited production of lasers in 1996, there can be
no assurance that the Seiko factory will be successfully qualified and commence
production on schedule. See "-- Proprietary Rights" for a description of a
license granted to Seiko to manufacture and sell the Company's

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<PAGE> 36

industrial laser product and a notice of alleged patent infringement received by
Seiko from one of the Company's competitors.

Certain of the components and subassemblies included in the Company's
products are obtained from a single supplier or a limited number of suppliers.
In particular, there are no alternative sources for certain of the components
and subassemblies, including certain optical components and the pre-ionizer
tubes used in the Company's lasers. In addition, the Company is increasingly
outsourcing the manufacture of various subassemblies. Although to date the
Company has been able to obtain adequate supplies of its components and
subassemblies in a timely manner from existing sources, the Company has only
recently commenced volume production of its laser systems. If the Company were
unable to obtain sufficient quantities of components or subassemblies, or if
such items do not meet the Company's quality standards, delays or reductions in
product shipments could occur which would have a material adverse effect on the
Company's business, financial condition and results of operations.

SALES AND MARKETING

The Company's sales and marketing efforts have been predominately focused
on DUV photolithography tool manufacturers. The Company markets and sells its
products through four account managers, two of whom are located in the United
States and two of whom are based in Japan. The Company is in the process of
developing product and applications engineering teams to support the account
managers and the Company's customers. The Company believes that to facilitate
the sales process it must work closely with and understand the requirements of
semiconductor manufacturers, the end users of the Company's products. The
Company visits major semiconductor manufacturers, and their representatives
attend Company-sponsored seminars on advanced excimer photolithography. In
Japan, the Company sponsors an annual seminar with Seiko in conjunction with
Semicon Japan. This seminar has attracted representatives of semiconductor
manufacturers from Japan, Korea, the United States and SEMATECH, as well as
photolithography tool manufacturers and other photolithography process
suppliers.

SERVICE AND SUPPORT

The Company believes its success in the semiconductor photolithography
market is highly dependent upon after-sales support of both the customer and the
end user. The Company 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, the Company's support personnel typically assist the customer in site
preparation and inspection and provide customers with training at the Company's
facilities or at the customer's location. Customers and end users are also
provided with a comprehensive set of manuals, including operations, maintenance,
service, diagnostic and safety manuals.

The Company's field engineers and technical support specialists are based
at its San Diego headquarters, its field service office near Boston and its
Japanese facility. Support in Korea is provided by EO Technics, a contractor
trained and supported by the Company. As part of its customer service, the
Company maintains an inventory of spare parts at each of its service facilities.

The Company believes that the need to provide fast and responsive service
to the semiconductor manufacturers using its lasers is critical and that it will
not be able to depend solely on its customers to provide this specialized
service. Therefore, the Company believes it is essential to establish, through
trained third party sources or through its own personnel, a rapid response
capability to service its customers throughout the world. Accordingly, the
Company intends to expand its direct support infrastructure in Japan and Europe,
expand its field service and support in Korea through an independent firm, and
establish a joint service and support capability with an independent firm to
serve Taiwan and Southeast Asia. The establishment of these activities will
entail recruiting and training qualified personnel or identifying qualified
independent firms and building effective and highly trained organizations that
can provide service to customers in various countries in their assigned regions.
There can be no assurance that the Company will be able to attract qualified
personnel to establish these operations successfully or that the costs of such
operations will not be excessive. A failure to

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<PAGE> 37

implement this plan effectively could have a material adverse effect on the
Company's business, financial condition and results of operations.

The Company generally warrants its products against defects in design,
materials and workmanship for the earlier to occur of 17 months from the date of
shipment or 12 months after acceptance by the end user.

RESEARCH AND DEVELOPMENT

The semiconductor industry is subject to rapid technological change and new
product introductions and enhancements. The Company believes that continued and
timely development and introduction of new and enhanced laser products are
essential for the Company to maintain its competitive position. The Company
intends to continue to develop its technology and innovative products to meet
customer demands. Current projects include the development of the next
generation of photolithography lasers, including ArF lasers. Other research and
development efforts are currently focused on reducing manufacturing costs,
lowering the cost of laser operation, enhancing laser performance and developing
new features for existing lasers. See "Risk Factors -- Rapid Technological
Change; New Product Introductions."

The Company 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. As of June 30, 1996, the
Company had 64 employees engaged in research and development. Research and
development expenses for 1993, 1994, 1995 and the first six months of 1996 were
approximately $2.7 million, $3.3 million, $6.2 million and $4.2 million,
respectively.

In addition to funding its own research and development projects, the
Company has pursued a strategy of securing research and development contracts
from customers, government agencies and SEMATECH in order to develop advanced
technology for current and future laser systems based on the Company's core
technology. Revenues generated from research and development contracts amounted
to approximately $306,000, $1.2 million, $3.2 million and $1.4 million during
1993, 1994, 1995 and the first six months of 1996. See "Risk Factors -- Risks
Associated with Customer Funded Research and Development."

INTELLECTUAL PROPERTY RIGHTS

The Company 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 abilities, than on patents,
copyrights trade secrets and other intellectual property rights. Nevertheless,
the success of the Company may depend in part on patents, and the Company owns
16 United States patents covering certain aspects of technology associated with
excimer lasers which expire from May 2008 to December 2011 and has applied for
12 additional patents in the United States, four of which have been allowed. The
Company also has filed 31 patent applications in other countries. There can be
no assurance that the Company's pending patent applications or any future
applications will be approved, that any issued patents will provide it with
competitive advantages or will not be challenged by third parties, or that the
patents of others will not have an adverse effect on the Company's ability to do
business. In this regard, due to cost constraints, the Company 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 recently and
has therefore lost the right to seek patent protection in those countries for
certain of its inventions. Additionally, because foreign patents may afford less
protection under foreign law than is available under United States patent law,
there can be no assurance that any such patents issued to the Company will
adequately protect the Company's proprietary information. Furthermore, there can
be no assurance that others will not independently develop similar products,
duplicate the Company's products or, if patents are issued to the Company,
design around the patents issued to the Company.

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The Company has in the past been, and may in the future be, notified that
it may be infringing intellectual property rights possessed by third parties. In
November 1993, with respect to one patent and, following further correspondence
between the parties, in June 1996 with respect to a second patent, the Company
was notified by Coherent, the parent corporation of Lambda-Physik, one of the
Company's competitors, that certain aspects of the Company's products might
infringe the two patents owned by Coherent and that the Company might wish to
procure a license with respect to these patents. In September 1996, Coherent and
Lambda-Physik commenced a patent infringement action with respect to the first
patent in the United States District Court for the Northern District of
California. The Company has been advised by patent counsel in this matter,
Townsend and Townsend and Crew, LLP, that in the opinion of such firm the
Company's products do not infringe any valid claim of the patents that have been
asserted by Coherent to the Company. However, there can be no assurance that the
Company will prevail in this or any future litigation with respect to these
patents. If the claims of Coherent are upheld as valid, enforceable and
infringed, the Company would be required to obtain a license from Coherent or
required to redesign its products to avoid infringement. There can be no
assurance that a license would be available from Coherent, or if available,
would be available on terms acceptable to the Company or that the Company would
be successful in any attempt to redesign its products to avoid infringement.
Accordingly, an adverse determination in the pending judicial proceeding could
prevent the Company from manufacturing and selling its products, which would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "-- Legal Proceedings."

In July 1996, the Company's prospective Japanese manufacturing partner,
Seiko, was notified by Komatsu, one of the Company's competitors, that certain
aspects of the Company's lasers might infringe certain claims furnished by
Komatsu to Seiko that Komatsu advised Seiko were included in a patent
application filed by Komatsu in Japan (the "Patent Claims"). Komatsu also
advised Seiko that the Patent Claims have been allowed by the Japanese Patent
office. Seiko in turn notified the Company of this claim. In connection with its
manufacturing agreement with Seiko, the Company has agreed to indemnify Seiko
against such claims under certain circumstances. The Company has been advised by
its patent counsel in this matter, Wilson, Sonsini, Goodrich & Rosati,
Professional Corporation, which is relying in part on the opinion of the
Company's Japanese patent counsel, that in the opinion of such firm the
Company's products do not infringe any valid Patent Claims. However, there can
be no assurance that, if the patent issues, litigation will not ensue with
respect to these claims or that the Company and Seiko would ultimately prevail
in any such litigation.

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broad range of products. The Company is seeking a partial nullification of the
other registration with respect to laser devices and related components and does
not believe that the holder of the other trademark is engaged in any business
similar to that of the Company. For this reason, the Company is continuing to
use the trademark CYMER in Japan and believes that it will ultimately be
permitted to register such mark for use with its products and that it is not
infringing the other company's trademark. There can be no assurance that the
Company will ultimately succeed in its efforts to register its trademark in
Japan or that it will not be subjected to an action for trademark infringement,
which could be costly to defend and, if successful, would require the Company to
cease use of the mark and, potentially, to pay damages.

Effective August 1, 1989 and lasting until the expiration of the licensed
patents, the Company entered into an agreement for a nonexclusive worldwide
license to certain patented laser technology with Patlex Corp., a patent holding
company ("Patlex"). Under the terms of the agreement, the Company is required to
pay royalties ranging from 0.25% to 5% of gross sales and leases of its lasers,
as defined, based on total revenues earned. During 1995 and the first six months
of 1996, royalty fees totaled $64,000 and $66,000, respectively.

The Company has granted to Seiko the exclusive right in Japan and the
non-exclusive right outside of Japan to manufacture and sell the Company's
industrial high power laser and subsequent enhancements thereto. The Company has
also granted Seiko a right of first refusal to fund the Company's development
of, and receive a license to, new industrial laser technologies not developed
with funding from other parties. In exchange for these rights, the Company
received upfront license fees of $3.0 million. The Company is also entitled to
royalties of 5% on related product sales through September 1999, after which the
royalty rate is subject to renegotiation. The license agreement also provides
that product sales between the Company and Seiko will be at a 15% discount from
the respective companies' list prices. The agreement terminates in August 2012.
See "Risk Factors -- Dependence on Patents and Intellectual Property."

COMPETITION

The Company believes that the principal elements of competition in the
Company's markets are the technical performance characteristics of the excimer
laser products; the cost of ownership of the system, which is based on price,
operating cost and productivity; customer service and support; and product
availability. The Company believes that it competes favorably with respect to
these factors.

The Company also believes that the development of the next generation of
excimer lasers will be an important element of competition. The Company believes
that its competitors are emphasizing development of ArF lasers as the next
generation of excimer lasers. The Company is engaging in its own research and
development with respect to ArF lasers. There can be no assurance, however, that
the Company will emerge as the technological or market leader with respect to
ArF lasers, even if it maintains its leadership position in the KrF laser
market.

The Company currently has two significant competitors in the market for
photolithography laser systems, Lambda-Physik, a German-based subsidiary of
Coherent, and Komatsu located in Japan. Both of these companies are larger than
the Company, have access to greater financial, technical and other resources
than the Company and are located in closer proximity to certain of the Company's
customers than is the Company. Although the Company believes that these
competitors are not yet supplying excimer lasers in volume, the Company believes
that both companies are aggressively seeking to gain larger positions in the
market for photolithography applications. The Company believes that its
customers have each purchased one or more products offered by these competitors
and that its customers may consider further purchases, in part as a result of
delays in deliveries by the Company in recent months as the Company has been
seeking to expand its manufacturing capacity. The Company also believes that its
customers are actively seeking a second source for excimer lasers. Furthermore,
photolithography tool manufacturers may seek to develop or acquire the
capability to manufacture internally their own excimer lasers. In the future,
the Company will likely experience competition from other technologies, such as
X-ray, electron beam and ion projection processes. To remain competitive, the
Company believes that it will be required to manufacture and deliver products to
customers on a timely basis and without significant defects and that it will
also be required to maintain a high level of investment in research and
development and sales and marketing. There can be no assurance that the

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Company will have sufficient resources to continue to make the investments
necessary to maintain its competitive position. In addition, the market for
excimer lasers is still relatively small and immature and there can be no
assurance that larger competitors with substantially greater financial
resources, including other manufacturers of industrial lasers, will not attempt
to enter the market. There can be no assurance that the Company will remain
competitive. A failure to remain competitive would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Risk Factors -- Competition."

LEGAL PROCEEDINGS

The Company is a named defendant in an action commenced on September 6,
1996 by Coherent and Lambda-Physik in the United States District Court for the
Northern District of California. The suit alleges that the Company's laser
systems infringe a patent owned by Coherent. Coherent and Lambda-Physik have not
made a specific claim for damages as yet, but have requested that any damages be
trebled by reason of the Company's alleged willful infringement. The Company has
been advised by its patent counsel in this matter, Townsend and Townsend and
Crew, LLP, that in the opinion of such firm the Company's products do not
infringe any valid claim of the Coherent patent, and the Company intends to
defend this lawsuit vigorously. For a discussion of the risks associated with
this litigation, see "Risk Factors -- Uncertainty Regarding Patents and
Protection of Proprietary Technology."

As of the date of this Prospectus, the Company is not a party to any other
legal proceedings.

EMPLOYEES

As of June 30, 1996, the Company employed 240 people on a full-time basis,
including 12 in Japan. The Company believes that its relations with its
employees are good. None of the employees is covered by a collective bargaining
agreement or employment agreements. See "Risk Factors -- Dependence on Key
Personnel."

FACILITIES

Cymer's headquarters and manufacturing facility is housed in a 65,775
square foot building located in San Diego, California which the Company leases
under a lease expiring in January 1, 2010. For use as a field service office,
the Company also leases a 400 square foot facility near Boston, Massachusetts
under a lease expiring on August 31, 1998, and, for use as a field service and
sales office, the Company leases 268 square meters of facilities in Ichikawa,
Japan under four renewable one and two year leases expiring at various times but
cancelable by the Company upon three months notice. The Company intends to add
additional field service offices as necessary to service its customers. The
Company is currently seeking to expand its San Diego facility by leasing
approximately 30,000 square feet of additional space and believes that it will
be able to secure such space on commercially reasonable terms.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company, and their ages as of
June 30, 1996, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- --- -------------------------------------------------------
<S> <C> <C>
Dr. Robert P. Akins.......... 44 Chairman of the Board, Chief Executive Officer and
President
William A. Angus, III........ 49 Senior Vice President, Chief Financial Officer and
Secretary
Kurt J. Lightfoot............ 49 Senior Vice President of Market Operations
G. Scott Scholler............ 45 Senior Vice President of Operations
Dr. Richard L. Sandstrom..... 45 Vice President of Advanced Research
Thomas C. Dannemiller........ 36 Vice President of Manufacturing
Robert B. MacKnight, III..... 47 Vice President and General Manager, Customer
Satisfaction
Robert G. Ozarski............ 49 Vice President of Engineering
Nancy J. Baker............... 34 Controller
Richard P. Abraham(1)........ 66 Director
Kenneth M. Deemer(1)......... 44 Director
Peter J. Simone(2)........... 49 Director
F. Duwaine Townsen(2)........ 63 Director
</TABLE>

- ---------------
(1) Member of Compensation Committee

(2) Member of Audit Committee

DR. ROBERT P. AKINS, a co-founder of the Company, has served as its
President, Chief Executive Officer and Chairman of the Board since its inception
in January 1986. From 1980 to 1985, Dr. Akins was a Senior Program Manager for
HLX, Inc., a manufacturer of laser and defense systems, where he was responsible
for managing the development of a compact excimer laser for military
communications applications and an excimer laser trigger for the particle beam
fusion accelerator at Sandia National Laboratories. Dr. Akins received a B.S. in
Physics and a B.A. in Literature in 1974, and a Ph.D. in Applied Physics in
1983, from the University of California, San Diego.

WILLIAM A. ANGUS, III has served as Senior Vice President and Chief
Financial Officer since February 1996 and Secretary of the Company since July
1990. From July 1990 to February 1996, Mr. Angus served as Vice President of
Finance and Administration. From April 1988 to June 1990, Mr. Angus was
Executive Vice President and Chief Operating Officer, and from May 1985 to April
1988, Chief Financial Officer, of Avant-Garde Computing Inc., a manufacturer of
data communications network management systems. Mr. Angus graduated from the
Wharton School of the University of Pennsylvania with a B.S. in Economics in
1968.

KURT J. LIGHTFOOT has served as Senior Vice President of Market Operations
of the Company since August 1995. From May 1995 to August 1995, Mr. Lightfoot
served as Vice President of Sales and Marketing for Gregory Associates, a
specialty contract manufacturer. From April 1993 to April 1995, he served as
Director of Marketing for the Semiconductor Equipment Group of Watkins-Johnson
Company, a maker of semiconductor equipment and electronic products for wireless
communications and defense. From June 1989 to June 1991, Mr. Lightfoot was
Division Vice President of Sales for the Reticle and Photomask Inspection
Division, and from June 1991 to October 1992, Division Vice President of
Marketing, for the Automated Test Systems Division at KLA Instruments
Corporation ("KLA"), a maker of inspection and metrology systems for the
semiconductor manufacturing industry. Mr. Lightfoot received a B.S. in
Automotive Technology from Western Michigan University in 1970.

G. SCOTT SCHOLLER has served as Senior Vice President of Operations of the
Company since March 1996. From June 1995 to February 1996, Mr. Scholler served
as a consultant in product development and program management for Electro
Scientific Industries, a manufacturer of semiconductor capital equipment. From
March 1994 until October 1995, Mr. Scholler was a co-founder and President of
Black Rose Ltd., a developer of computer telephony software for automated
commerce applications. From August 1992 to September 1994,

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he was Senior Vice President of Operations for Whittaker Communications, Inc., a
wholly-owned subsidiary of Whittaker Corporation, and a manufacturer of
high-performance multimedia servers. From October 1988 to August 1992, Mr.
Scholler served as Vice President of Operations for Etec Systems, Inc., a
manufacturer of semiconductor capital equipment and as General Manager of its
Laser Lithography subsidiary. From 1986 to 1988, Mr. Scholler was Director of
Engineering, and from 1983 to 1986, Director of Manufacturing, of the Etch
Products Division of Applied Materials Inc., a supplier of equipment to the
semiconductor industry. Mr. Scholler received a B.S. in Nuclear Engineering from
the United States Military Academy at West Point in 1972 and an M.S. in Research
and Development Management in 1978 from the University of Southern California.

DR. RICHARD L. SANDSTROM, a co-founder of the Company, has served as its
Vice President of Advanced Research since June 1994. From February 1986 to June
1994, Dr. Sandstrom served as Vice President of Technology for the Company. Dr.
Sandstrom received a B.A. in Physics in 1972 and a Ph.D. in Engineering Physics
in 1979 from the University of California, San Diego.

THOMAS C. DANNEMILLER has served as Vice President of Manufacturing of the
Company since July 1995. From May 1991 to July 1995, Mr. Dannemiller served as
Director of Logistics at A.G. Associates, Inc., a manufacturer of rapid thermal
processing equipment for the semiconductor industry. From September 1988 to
February 1991, he was Director of Operations for KLA. From 1986 to 1988, Mr.
Dannemiller served as Manufacturing Manager for Applied Materials, Inc., a
supplier of equipment to the semiconductor industry. Mr. Dannemiller graduated
from the DeVry Institute of Technology with a B.S. in Electronics Engineering
Technology in 1982.

ROBERT B. MACKNIGHT, III joined the Company in September 1996 as Vice
President and General Manager, Customer Satisfaction. From June 1995 to May
1996, Mr. MacKnight was Senior Vice President, Worldwide Business Development,
and from September 1994 to June 1995, General Manager of Flat Panel Operations,
of Watkins-Johnson Company, a maker of semiconductor equipment and electronic
products for wireless communications and defense. From January 1990 to September
1994, Mr. MacKnight was the founder and President of Aktis Corporation, a
developer and manufacturer of advanced thermal processing technology and
equipment for the flat panel display industry. From 1984 to 1989, Mr. MacKnight
was a co-founder and Executive Vice President of Peak Systems Inc., a
manufacturer of semiconductor capital equipment specializing in rapid thermal
processing technology. Mr. MacKnight received a B.S. in Business Administration
in 1971, and an M.B.A. in 1973, from the University of Massachusetts.

ROBERT G. OZARSKI joined the Company in September 1996 as Vice President of
Engineering. From August 1992 to September 1996, Mr. Ozarski served in various
engineering management positions at Applied Materials, Inc., a supplier of
equipment to the semiconductor industry. From March 1995 to September 1996, Mr.
Ozarski was Director of Engineering and Production for its Silicon Etch
Division, from August 1994 to March 1995, Director of Engineering for its MCVD
Division, from September 1993 to August 1994, Director of Manufacturing
Engineering for its CVD Division, and from August 1992 to September 1993,
Director of Engineering for its ACET Division. From October 1991 to August 1992,
Mr. Ozarski served as Director of Engineering for Etec Systems, Inc., a
manufacturer of semiconductor capital equipment. From September 1989 to October
1991, Mr. Ozarski served as Director of Engineering of Airco Coating Technology,
Inc., a manufacturer of sputtering equipment for architectural glass coatings
and of electron-beam evaporation systems principally used for semiconductor
coating applications. From 1985 to 1989, Mr. Ozarski was Director of Engineering
for General Signal Thinfilm Co., a maker of semiconductor capital equipment for
thin film deposition and metrology. Mr. Ozarski received a B.S. in 1970, and an
M.S. in 1972, in Electrical Engineering from Wayne State University.

NANCY J. BAKER has served as Controller of the Company since August 1992.
From March 1987 to April 1992, Ms. Baker was Accounting Manager at International
Totalizator Systems, Inc., a designer, manufacturer and distributor of lottery
and racetrack wagering systems. Ms. Baker graduated from the University of Texas
with a B.B.A. in Accounting in 1985.

RICHARD P. ABRAHAM has served as a Director of the Company since October
1987. From October 1994 to the present, Mr. Abraham has served as Chairman and
President of BTR, Inc., which licenses various

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technologies to the semiconductor industry. From October 1993 to the present, he
has served as Chairman and President of Advantage Logic, Inc., which also
licenses various technologies to the semiconductor industry. From 1987 to the
present, Mr. Abraham has served as a general partner of Weeden Capital Partners.
From 1980 to the present, Mr. Abraham has served as President of Pacific
Associates, a consulting firm for the semiconductor industry. From 1988 to the
present, Mr. Abraham has served as a director of Rainbow Technology, a maker of
software protection devices for the computer industry and encryption chips for
the satellite communications industry. Mr. Abraham received a B.S. in Electrical
Engineering in 1951, and an M.S. in Electrical Engineering in 1954, from
Stanford University.

KENNETH M. DEEMER has served as a Director of the Company since June 1988.
Since 1985, Mr. Deemer has been a Vice President of InterVen Partners, Inc., a
venture capital firm and an affiliate of InterVen II, L.P., and InterVen
Ventures 1987. From January 1982 to June 1985, Mr. Deemer served as a Vice
President at First Interstate Capital, a venture capital firm. Mr. Deemer
received a B.S. in Physics and a B.S. in Electrical Engineering in 1975 from
Massachusetts Institute of Technology and an M.B.A. from Carnegie Mellon
University in 1979.

PETER J. SIMONE has served as a Director of the Company since July 1993.
Since December 1992, he has served as Group Vice President of Simplex Time
Recorder Company, a manufacturer of time, attendance, building life safety and
security systems. From May 1987 to December 1992, he was President and a
director of GCA Corporation, a manufacturer of wafer stepper photolithography
equipment. Mr. Simone received a B.S. in Accounting from Bentley College in 1970
and an M.B.A. from Babson College in 1974.

F. DUWAINE TOWNSEN has served as a Director of the Company since October
1987. Since June 1983, he has been a managing partner of Ventana Growth Fund,
L.P., a venture capital firm and investor in the Company. Mr. Townsen received a
B.S. in Business Administration and Accounting from San Diego State University
in 1962.

All directors are elected annually and serve until the next annual meeting
of stockholders or until the election and qualification of their successors. All
executive officers serve at the discretion of the Board of Directors. There are
no family relationships between any of the directors or executive officers of
the Company.

The Company's articles of incorporation currently provide that holders of
the Company's Common Stock elect two members of the Board of Directors, holders
of Series A Preferred Stock elect two members, holders of Series B Preferred
Stock elect one member and that the holders of Preferred Stock voting as a class
elect any remaining directors. The Board of Directors currently consists of five
members. Four founders of the Company who are holders of Common Stock, including
Robert Akins, President, and Richard Sandstrom, Vice President of Advanced
Research, and the holders of the Company's Series A and Series B Preferred Stock
have agreed that they will vote their shares of the Company's capital stock so
as to elect (i) two of such four founding stockholders as the two directors
representing the Common Stock, (ii) one representative of Weeden Capital
Partners, L.P. and one representative of Interven II, L.P. as the two directors
representing the Series A Preferred Stock and (iii) one representative of
Ventana Growth Fund II, L.P. as the director representing the Series B Preferred
Stock. Currently, Mr. Akins and Mr. Simone serve as the directors elected by
holders of the Common Stock, Mr. Abraham and Mr. Deemer serve as the directors
elected by holders of the Series A Preferred Stock and Mr. Townsen serves as the
director elected by holders of the Series B Preferred Stock. Both the special
voting provisions in the articles of incorporation and the contractual voting
provisions will terminate upon the completion of this offering.

DIRECTOR COMPENSATION

With the exception of Mr. Simone who receives $1,000 per meeting, members
of the Company's Board of Directors do not receive compensation for their
services as directors. The Company's 1996 Director Option Plan provides that
options will be granted to non-employee directors pursuant to an automatic
nondiscretionary grant program. See "-- 1996 Director Option Plan."

43
<PAGE> 44

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors was formed in June
1996 and consists of Richard P. Abraham and Kenneth M. Deemer. Neither of these
individuals was at any time during 1995, or at any other time, an officer or
employee of the Company. No executive officer of the Company serves as a member
of the board of directors or compensation committee of any entity that has one
or more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee.

EXECUTIVE COMPENSATION

The following table sets forth in summary form information concerning the
compensation awarded to, earned by, or paid for services rendered to the Company
in all capacities during the year ended December 31, 1995, by (i) the Company's
Chief Executive Officer and (ii) the Company's most highly compensated executive
officers whose salary and bonus for such year exceeded $100,000 (the "Named
Executive Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
FISCAL 1995 -------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY(1) BONUS($)(2) OPTIONS(#) COMPENSATION(3)
- -------------------------------------------- --------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
Robert P. Akins............................. $ 147,611 -- 147,300 $ 1,830
Chairman of the Board, Chief Executive
Officer and President
William A. Angus, III....................... 105,809 -- 75,000 3,524
Chief Financial Officer, Senior Vice
President and Secretary
</TABLE>

- ---------------
(1) Messrs. Lightfoot, Scholler, Dannemiller, MacKnight and Ozarski, who are
currently being compensated at annual rates in excess of $100,000, recently
joined the Company.
(2) The Company did not have a bonus plan in fiscal 1995 but has adopted an
incentive bonus plan for fiscal 1996.
(3) Consists of health insurance premiums paid by the Company.

STOCK OPTION INFORMATION

The following table sets forth certain information with respect to stock
option grants in 1995 to the Named Executive Officers:

OPTION GRANTS IN FISCAL 1995

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR SHARE(2)(3) DATE(4) 5% 10%
- ------------------------------------ --------- ------------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Robert P. Akins..................... 147,300 15.05% $0.50 4/20/00 $20,348 $44,964
William A. Angus, III............... 75,000 7.66 0.50 4/20/00 10,361 22,894
</TABLE>

- ---------------
(1) Potential realizable value is based on the assumption that the Common Stock
of the Company appreciates at the annual rate shown (compounded annually)
from the date of grant until the expiration

44
<PAGE> 45

of the 5-year option term. These numbers are calculated based on Securities
and Exchange Commission requirements and do not reflect the Company's
estimate of future stock price growth.

(2) Options were granted at an exercise price equal to the fair market value of
the Company's Common Stock, as determined by the Board of Directors on the
date of grant.

(3) Exercise price may be paid in cash, check, promissory note, by delivery of
already-owned shares of the Company's Common Stock subject to certain
conditions, or any combination of the foregoing methods of payment or such
other consideration or method of payment to the extent permitted under
applicable law.

(4) Options become exercisable as to 25% of the option shares on the first
anniversary of the vesting commencement date and as to 6.25% of the option
shares at the end of each three-month period thereafter, with full vesting
occurring on the fourth anniversary of the date of the vesting commencement
date.

The following table sets forth certain information regarding the value of
stock options held by the Named Executive Officers on December 31, 1995. There
were no stock option exercises by the Named Executive Officers in 1995.

YEAR END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1995 DECEMBER 31, 1995(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert P. Akins.............................. -- 147,300 $ -- $ 368,250
William A. Angus, III........................ -- 75,000 -- 187,500
</TABLE>

- ---------------
(1) Fair market value of the Common Stock as of December 31, 1995 ($3.00 per
share), as determined by the Company's Board of Directors, minus the
exercise price.

STOCK PLANS

1987 Stock Option Plan

The Company's 1987 Stock Plan (the "1987 Stock Plan"), which originally
provided for the grant of 450,000 shares of Common Stock, was approved by the
Company's Board of Directors and stockholders in 1987. Subsequent amendments
have increased the number of shares subject to the 1987 Stock Plan to 1,500,000
shares. The 1987 Stock Plan provides for the granting to employees (including
officers) of qualified "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), and for the
granting to employees (including officers), consultants and directors of
nonqualified stock options. As of June 30, 1996, options to purchase an
aggregate of 1,191,753 shares of Common Stock were outstanding under the 1987
Stock Plan, 33,268 shares remained available for future grants and options to
purchase 274,979 shares had been exercised.

The 1987 Stock Plan is administered by the Board of Directors or a
committee appointed by the Board. Options generally become exercisable at a rate
of 25% of the shares subject to the option on the first anniversary of the
vesting commencement date and 6.25% of the shares subject to the option at the
end of each three month period thereafter, and generally expire five years from
the date of grant. The 1987 Stock Plan permits employees to pay for the shares
issuable upon exercise of stock options with promissory notes.

The exercise price of incentive stock options granted under the 1987 Stock
Plan must be at least equal to the fair market value of the Company's Common
Stock on the date of grant, and the exercise price of nonstatutory stock options
must equal at least 85% of the fair market value of the Common Stock on the date
of grant. The exercise price of options granted to an optionee who owns more
than 10% of the Company's outstanding voting securities must equal at least 110%
of the fair market value of the Common Stock on the date of grant. Options have
been granted at exercise prices ranging from $0.25 to $6.00. The 1987 Stock Plan
will terminate in October 1997.

45
<PAGE> 46

In the event of a merger of the Company with or into another corporation,
the options will terminate upon the consummation of the merger, unless assumed
or substituted by such successor corporation. Notwithstanding the foregoing, if
the options were granted prior to June 3, 1992, the Board has the discretion to
accelerate the vesting of the options upon the consummation of a merger (unless
assumed or substituted by the successor corporation) so that such options become
fully vested and exercisable.

1996 Stock Option Plan

The Company's 1996 Stock Option Plan (the "1996 Stock Plan") was adopted by
the Board of Directors and approved by the stockholders of the Company in July
1996. A total of 1,500,000 shares of Common Stock have been reserved for
issuance under the 1996 Stock Plan. No options have been granted under this
Plan. The 1996 Stock Plan provides for the grant of "incentive" stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and nonqualified stock options to employees, directors and
consultants of the Company. Incentive stock options may be granted only to
employees. The 1996 Stock Plan is administered by the Board of Directors or by a
committee appointed by the Board of Directors, which determines the terms of
options granted, including the exercise price and the number of shares subject
to the option. The exercise price of incentive stock options granted under the
1996 Stock Plan must be at least equal to the fair market value of the Company's
Common Stock on the date of grant and the exercise price of nonqualified stock
options must be at least equal to 85% of the fair market value of the Company's
Common Stock on the date of grant. The maximum term of options granted under the
1996 Stock Plan is ten years.

In the event of a merger of the Company with or into another corporation,
all outstanding options may be assumed or an equivalent option substituted by
the successor corporation. If the successor corporation does not assume or
substitute equivalent options for the outstanding options, the exercisability of
shares subject to such options will accelerate and become fully vested and
exercisable. In such event, the Company shall notify the holders of outstanding
options that such options are fully exercisable, and all options not exercised
will then terminate 15 days after the date of such notice.

1996 Employee Stock Purchase Plan

The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Company's Board of Directors and approved by the Company's
stockholders in July 1996. The Purchase Plan is intended to qualify under
Section 423 of the Code. The Company has reserved 250,000 shares of Common Stock
for issuance under the Purchase Plan. Under the Purchase Plan, an eligible
employee may purchase shares of Common Stock from the Company through payroll
deductions of up to 10.0% of his or her base compensation (excluding bonuses,
overtime and sales commissions), at a price per share equal to 85.0% of the
lower of (i) the fair market value of the Company's Common Stock as of the first
day of each six-month offering period under the Purchase Plan or (ii) the fair
market value of the Common Stock at the end of the offering period. Each
offering period will commence the first day on which the national stock
exchanges and the Nasdaq National Market are open for trading, on or after May 1
and November 1 of each year, with the first offering period beginning on the
date of this offering and ending on April 30, 1997. In the event of a merger or
asset sale, the offering period then in progress will be shortened so that each
participant's options will be exercised before the date of the merger or sale.
Any employee who is customarily employed for at least 20 hours per week and more
than five months per calendar year and who has been so employed for at least
three consecutive months on or before the commencement date of an offering
period is eligible to participate in the Purchase Plan.

1996 Director Option Plan

The Company's 1996 Director Option Plan (the "Director Option Plan") was
adopted by the Board of Directors and approved by the stockholders of the
Company in July 1996. The Director Option Plan will go into effect upon this
offering. Under the Director Option Plan, the Company reserved 100,000 shares of
Common Stock for issuance to non-employee directors of the Company pursuant to
nonstatutory stock options. Each director who is elected or appointed to the
Board of Directors subsequent to the adoption of the

46
<PAGE> 47

Director Option Plan and who is not an employee of the Company will
automatically receive a nonstatutory option to purchase 10,000 shares of Common
Stock of the Company on the date such person becomes a director. In addition,
each non-employee director shall receive an option to acquire 2,500 shares of
the Company's Common Stock upon such director's reelection at each Annual
Meeting of Stockholders, provided that on such date such director shall have
served on the Board of Directors for at least six months. Each option granted
under the Director Option Plan shall be exercisable at 100% of the fair market
value of the Company's Common Stock on the date such option was granted. Of the
options granted under the Director Option Plan, 6.25% shall vest three months
after their dates of grant, with an additional 6.25% vesting at the end of each
subsequent three month period. The Plan shall be in effect for a term of ten
years unless sooner terminated by the Board.

In the event of a merger of the Company with or into another corporation,
all outstanding options may be assumed or an equivalent option substituted by
the successor corporation. Following such assumption or substitution, if the
director's service terminates other than a voluntary resignation by the
optionee, the option will become fully exercisable. If the successor corporation
does not assume an outstanding option or substitute an equivalent option for
such outstanding option, such option will become fully vested and exercisable.
In such event, the Board will notify the optionee that such optionee has 30 days
from the date of notice to exercise the fully vested option and the option will
terminate at the end of the 30-day period.

INDEMNIFICATION OF DIRECTORS AND OFFICERS AND RELATED MATTERS

The Company's Articles of Incorporation limit, to the maximum extent
permitted by Section 78.751 of Nevada General Corporation Law, the personal
liability of directors and officers for monetary damages for breach of their
fiduciary duties as directors and officers (other than liabilities arising from
acts or omissions which involve intentional misconduct, fraud or knowing
violations of law or the payment of distributions in violation of Nevada General
Corporation Law). The Articles of Incorporation provide further that the Company
shall indemnify to the fullest extent permitted by Nevada General Corporation
Law any person made a party to an action or proceeding by reason of the fact
such person was a director, officer, employee or agent or the Company. Subject
to the Company's Articles of Incorporation, the Bylaws provide that the Company
shall indemnify directors and officers for all costs reasonably incurred in
connection with any action, suit or proceeding in which such director or officer
is made a party by virtue of his being an officer or director of the Company
except where such director or officer is finally adjudged to have been derelict
in the performance of his duties as such director or officer. The Company has
entered into indemnification agreements with its officers and directors
containing provisions which may require the Company, among other things, to
indemnify the officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), and to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified.

At the present time, there is no pending material litigation or proceeding
involving a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened material litigation or proceeding which may result in a claim for
such indemnification.

47
<PAGE> 48

CERTAIN TRANSACTIONS

Beginning in October 1993, the Company conducted a series of interim debt
and warrant financings with its existing stockholders to finance the Company
until it could complete an additional equity financing. In October 1993, the
Company issued and sold at par and for cash $474,010 principal amount of 8%
promissory notes due June 30, 1994 and 5-year warrants to purchase 13,941 shares
of Series E or Series F Preferred Stock with an exercise price of $3.40 per
share to four investors (the "First Bridge Financing"). In June 1994, the
Company issued and sold, to these same four investors in exchange for the
securities they had purchased in the First Bridge Financing, and to them and to
several other stockholders of the Company at par and for cash, a total of
$1,625,010 principal amount of 8% promissory notes due December 31, 1994, and
5-year warrants to purchase 252,914 shares of Series E or Series F Preferred
Stock with an exercise price of $3.40 per share (the "Second Bridge Financing").
In November and December 1994, the Company issued and sold at par and for cash
approximately $2,000,000 principal amount of 8% promissory notes due December
31, 1994 and 5-year warrants to purchase 146,989 shares of Series F Preferred
Stock with an exercise price of $3.40 per share (the "Third Bridge Financing").
On December 31, 1994, the maturity dates of all of the notes issued in these
financings were extended until February 28, 1995. The purchasers of these
securities included the following holders of more than five percent of the
Company's voting securities and other entities affiliated with directors of the
Company:

<TABLE>
<CAPTION>
SECOND BRIDGE
FIRST BRIDGE FINANCING FINANCING THIRD BRIDGE FINANCING
---------------------- ---------------------- ----------------------
SERIES F SERIES F SERIES F
NOTE PREFERRED NOTE PREFERRED NOTE PREFERRED
PRINCIPAL WARRANT PRINCIPAL WARRANT PRINCIPAL WARRANT
INVESTORS AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
- -------------------------------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ventana Growth Fund II,
L.P.(1)....................... $118,878 3,496 $118,878 17,482 $150,000 11,029
InterVen II, L.P.(2)............ -- -- 200,000 29,412 199,000 14,632
Clearwater Ventures............. 200,000 5,882 830,000 122,059 468,000 34,412
Allsop Venture Partners III,
L.P. ......................... -- -- 100,000 14,706 -- --
</TABLE>

- ---------------
(1) F. Duwaine Townsen, a director of the Company, is a managing partner of
Ventana Growth Fund II, L.P.

(2) Kenneth Deemer, a director of the Company, is a general partner of InterVen
II Partners, L.P., which is the general partner of InterVen II, L.P. Mr.
Deemer is also a general partner of InterVen Ventures 1987. InterVen
Ventures 1987 also participated in the Second and Third Bridge Financings.

In February and March 1995, the Company issued and sold a total of
1,900,000 shares of its Series F Preferred Stock (the "Series F Preferred Stock
Financing"). The following holders of more than five percent of the Company's
voting securities and other entities affiliated with a director of the Company
purchased shares of the Company's Series F Preferred Stock, convertible on a
one-to-one basis into the Company's Common Stock, at a purchase price of $3.50
per share:

<TABLE>
<CAPTION>
SERIES F
INVESTORS PREFERRED STOCK PURCHASE PRICE(1)
- -------------------------------------------------------------- --------------- -----------------
<S> <C> <C>
Ventana Growth Fund II, L.P................................... 35,990 $ 125,965
InterVen II, L.P.............................................. 118,465 414,627
Clearwater Ventures........................................... 446,218 1,561,763
Allsop Venture Partners III, L.P.............................. 30,274 105,959
</TABLE>

- ---------------
(1) Consisted of principal and interest from the promissory note issued to the
investor in the Second Bridge Financing, except that Clearwater Ventures
also paid a portion of the purchase price in cash.

Weeden & Co., L.P., which served as the placement agent for the Series F
Preferred Stock Financing (the "Placement Agent"), is an affiliate of Weeden
Capital Partners, L.P., which beneficially owns more than 5% of the Common Stock
of the Company. In lieu of a cash commission, the Placement Agent was granted
five-year warrants to purchase an aggregate of 443,624 shares of Series F
Preferred Stock at an exercise price of $3.50 per share (the "Placement Agent
Warrants"). The Placement Agent also was granted the right to co-manage any
future initial public offering for the Company's Common Stock.

48
<PAGE> 49

In October 1995, as an inducement for holders of its Series F Preferred
Stock warrants to exercise their warrants, the Company offered one new 5-year
warrant to purchase Common Stock with an exercise price of $3.40 per share for
each 10 Series F Preferred Stock warrants exercised. Among the warrantholders
accepting this offer, Clearwater Ventures exercised warrants to purchase 161,618
shares of Series F Preferred Stock for total proceeds of $549,501 and was issued
new warrants to purchase an aggregate of 16,161 shares of Common Stock.

In May 1996, a similar offer was extended to the holders of the Placement
Agent Warrants, which had by then been distributed to various employees and
affiliates of the Placement Agent. Three employees of the Placement Agent
exercised Placement Agent Warrants for 43,395, 69,770 and 16,761 shares of
Series F Preferred Stock for total proceeds of $454,741 and also received
warrants to purchase 4,339, 6,977 and 1,676 shares of Common Stock,
respectively. In connection with this offer, the Placement Agent relinquished
its right to manage the Company's initial public offering and the warrantholders
who exercised their Placement Agent warrants were granted certain registration
rights with respect to the underlying shares. See "Shares Eligible for Future
Sale -- Registration Rights."

INDEMNIFICATION AGREEMENTS

The Company has entered into indemnification agreements with each of its
directors and executive officers pursuant to which the Company is obligated to
indemnify such individuals to the fullest extent permitted by law including
certain liabilities and claims arising under the Securities Act.

49
<PAGE> 50

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of June 30, 1996 and as adjusted to
reflect the sale of the 3,340,000 shares of Common Stock offered hereby, (i) by
each person or entity who is known by the Company to own beneficially more than
5% of the Common Stock, (ii) by ASM Lithography, Canon and Nikon, (iii) by each
of the Named Executive Officers, (iv) by each of the directors of the Company,
(v) by each Selling Stockholder and (vi) by all directors and executive officers
of the Company as a group. Except as otherwise noted, the stockholders named in
the table have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them, subject to applicable
community property laws.

<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO NUMBER OF OWNED AFTER
OFFERING(1) SHARES OFFERING
5% STOCKHOLDERS, NAMED EXECUTIVE OFFICERS AND ----------------- BEING -----------------
DIRECTORS NUMBER PERCENT OFFERED NUMBER PERCENT
- --------------------------------------------------- ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Allsop Venture Partners III, L.P.(2)............... 459,569 5.2% -- 459,569 3.9%
7400 College Boulevard
Overland Park, KS 66210
Clearwater Ventures, L.L.C.(3)..................... 806,827 9.1 2,925 803,902 6.8
c/o Weeden & Co., L.P.
145 Mason Street
Greenwich, CT 06830
Entities affiliated with InterVen II Partners,
L.P.(4)
2401 Pine Avenue
Manhattan Beach, CA 90266........................ 801,949 9.0 -- 801,949 6.7
K-Sun, Inc.(5)..................................... 478,826 5.4 -- 478,826 4.0
6-1 Ohtemachi, 2-chome
Chiyoda-ku
Tokyo, Japan
Entities affiliated with Weeden Securities
Corporation(6)................................... 649,657 7.3 -- 649,657 5.4
145 Mason Street
Greenwich, CT 06830
ASM Lithography Holding N.V. ...................... 403,726 4.6 -- 403,726 3.4
Canon, Inc. ....................................... 403,725 4.6 -- 403,725 3.4
Nikon Corporation.................................. 403,725 4.6 -- 403,725 3.4
Robert P. Akins(7)................................. 302,231 3.4 -- 302,231 2.6
William A. Angus, III(8)........................... 33,438 * -- 33,438 *
Richard Abraham.................................... 27,900 * -- 27,900 *
Kenneth M. Deemer(9)............................... 801,949 9.0 -- 801,949 6.7
Peter Simone(10)................................... 10,000 * -- 10,000 *
F. Duwaine Townsen(11)............................. 423,292 4.8 -- 423,292 3.6
All directors and executive officers as a group
(13 persons)..................................... 699,941 7.8 -- 699,941 5.9
OTHER SELLING STOCKHOLDERS
Herman Alswanger................................... 3,000 * 500 2,500 *
Anglo-American Partnership......................... 29,412 * 14,000 15,412 *
Controlfida B.V.I.(12)............................. 436,205 4.9 130,000 306,205 2.6
Samuel X. Difeo IRA................................ 14,285 * 14,285 -- --
Angelo M. Gregos................................... 15,000 * 15,000 -- --
John D. Lium....................................... 7,142 * 2,500 4,642 *
U.S. Clearing Corp., Custodian for Joseph Mitolo
IRA Rollover Trust............................... 7,141 * 5,000 2,141 *
Uday Sengupta...................................... 286,000 3.2 20,000 266,000 2.2
Joel and Gail Sheriff.............................. 6,000 * 6,000 -- --
Savas C. Tsivicos.................................. 15,000 * 15,000 -- --
Xerox Corporation(13).............................. 428,445 4.8 107,258 321,187 2.7
</TABLE>

- ---------------
* Less than 1%

(1) Applicable percentage of ownership is based on 8,849,396 shares of Common
Stock outstanding as of June 30, 1996 together with applicable options for
such stockholder. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission, and includes voting and
investment power with

50
<PAGE> 51

respect to shares. Shares of Common Stock subject to options or warrants
currently exercisable or exercisable within 60 days after June 30, 1996 are
deemed outstanding for purposes of computing the percentage ownership of
the person holding such options or warrants, but are not deemed outstanding
for computing the percentage of any other stockholder.

(2) Includes 9,442 shares issuable upon exercise of a currently exercisable
warrant. MARK Venture Partners, L.P. is the general partner of Allsop
Venture Partners III, L.P. MARK Venture Partners, L.P. has the following
four general partners: Robert W. Allsop, Paul D. Rhines, Larry C. Maddox
and Robert L. Kuk. Each of these general partners shares voting and
investment power over the shares held by Allsop Venture Partners III, L.P.
Each of Messrs. Allsop, Rhines, Maddox and Kuk disclaims beneficial
ownership of the shares except to the extent of his proportionate
partnership interest.

(3) Includes 16,632 shares issuable upon exercise of currently exercisable
warrants. Does not include 649,657 shares held by the Entities affiliated
with Weeden Securities Corporation. Don Weeden in the managing member of
Clearwater Ventures, L.L.C. and is also the sole shareholder and chairman
of the board of directors of Weeden Securities Corporation. Clearwater
Ventures, L.L.C. disclaims beneficial ownership of 649,657 shares held by
the Entities affiliated with Weeden Securities Corporation.

(4) Includes 770,269 shares held by InterVen II, L.P. and 3,259 shares held by
InterVen Ventures 1987. InterVen II, L.P. and InterVen Ventures 1987 also
hold currently exercisable warrants to purchase 28,280 shares and 141
shares, respectively. InterVen II Partners, L.P. is the general partner of
InterVen II, L.P. InterVen II Partners, L.P. has the following five general
partners: Kenneth M. Deemer, David B. Jones, Jonathan E. Funk, Wayne B.
Kingsley and Keith P. Larson. Each of these general partners shares voting
and investment power over the shares held by InterVen II, L.P. InterVen
Ventures 1987 is a general partnership, of which Messrs. Deemer, Jones,
Funk, Kingsley and Larson are general partners and share voting and
investment power over the shares held by InterVen Ventures 1987. Each of
Messrs. Deemer, Jones, Funk, Kingsley and Larson disclaims beneficial
ownership of the shares except to the extent of his proportionate
partnership interest.

(5) K-Sun, Inc. is a wholly-owned subsidiary of Shintech Incorporated. Shintech
Incorporated is a wholly-owned subsidiary of Shin-Etsu Chemical Co., Ltd.,
a widely-held publicly-traded Japanese corporation.

(6) Includes 527,925 shares held by Weeden Capital Partners, L.P., 12,500
shares held by Weeden Securities Corporation Pension Plan and Trust DTD
1/1/88, 89,232 shares issuable upon exercise of a currently exercisable
warrant held by Weeden & Co., L.P. and 20,000 shares issuable upon exercise
of a currently exercisable warrant held by Weeden Investors Profit Sharing
& Trust. Weeden Capital Management, L.P. is the general partner of Weeden
Capital Partners, L.P. Weeden Capital Management, L.P. has the following
three general partners: Weeden Capital Management, Inc., Richard Abraham
and Tom Flaherty. Each of these general partners shares voting and
investment power over the shares held by Weeden Capital Partners, L.P. Each
of Weeden Capital Management, Inc. and Messrs. Abraham and Flaherty
disclaims beneficial ownership of the shares except to the extent of its or
his proportionate partnership interest. Don Weeden is the Trustee for
Weeden Securities Corporation Pension Plan and Trust. Weeden Securities
Corporation, of which Don Weeden is the sole shareholder, is the general
partner of Weeden & Co., L.P. Robert Cervoni, Don Weeden and Barry Small
are the trustees for Weeden Investors Profit Sharing and Trust. Does not
include 806,796 shares held by Clearwater Ventures, L.L.C. Don Weeden is
the sole shareholder and chairman of the board of directors of Weeden
Securities Corporation and is also the managing member of Clearwater
Ventures, L.L.C. Weeden Securities Corporation disclaims beneficial
ownership of 806,796 shares held by Clearwater Ventures, L.L.C.

(7) Includes 46,031 shares issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of June 30, 1996.

(8) Includes 23,438 shares issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of June 30, 1996.

(9) Includes 770,269 shares held by InterVen II, L.P. and 3,259 shares held by
InterVen Ventures 1987. Also includes 28,280 shares issuable upon exercise
of currently exercisable warrants held by InterVen II, L.P. and 141 shares
issuable upon exercise of currently exercisable warrants held by InterVen
Ventures 1987. Mr. Deemer is a general partner of InterVen II Partners,
L.P., which is the general partner of InterVen II, L.P. Mr. Deemer is also
a general partner of InterVen Ventures 1987. Mr. Deemer disclaims
beneficial ownership of the shares except to the extent of his
proportionate partnership interest.

(10) Includes 10,000 shares issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of June 30, 1996.

(11) Includes 409,823 shares held by Ventana Growth Fund II, L.P. and 13,469
shares issuable upon exercise of currently exercisable warrants held by
Ventana Growth Fund II, L.P., of which Mr. Townsen is a managing general
partner.

(12) Includes 7,353 shares issuable upon exercise of a currently exercisable
warrant.

(13) Includes 27,069 shares issuable upon exercise of currently exercisable
warrants.

51
<PAGE> 52

DESCRIPTION OF CAPITAL STOCK

Upon the closing of this offering, the authorized capital stock of the
Company will consist of 25,000,000 shares of Common Stock, $.001 par value, and
5,000,000 shares of Preferred Stock, $.001 par value, after giving effect to the
reincorporation of the Company into Nevada and the amendment and restatement of
the Company's Articles of Incorporation to change the number of shares of
authorized Common and Preferred Stock and to delete references to Series A
through Series G Preferred Stock following conversion of such Preferred Stock
into Common Stock upon the closing of the offering.

The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and qualified
in its entirety by, the provisions of the Company's Articles of Incorporation,
which is included as an exhibit to the Registration Statement of which this
Prospectus is a part and by the provisions of applicable law.

COMMON STOCK

The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." In the event of a liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior rights of
Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions available to the Common Stock. All outstanding shares of
Common Stock are fully paid and non-assessable, and the shares of Common Stock
to be issued upon completion of this offering will be fully paid and
non-assessable.

At June 30, 1996, 1,202,792 shares of Common Stock were outstanding and
held of record by 67 stockholders, and options to purchase an aggregate of
1,191,753 shares of Common Stock were also outstanding. See "Management -- Stock
Plans."

PREFERRED STOCK

Pursuant to the Company's Articles of Incorporation, the Board of Directors
has the authority, without further action by the stockholders, to issue up to
5,000,000 shares of Preferred Stock in one or more series and to fix the
designations, powers, preferences, privileges, and relative participation,
optional or special rights and the qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be greater than
the rights of the Common Stock. The Board of Directors, without stockholder
approval, can issue Preferred Stock with voting, conversion or other rights that
could adversely affect the voting power and other rights of the holders of
Common Stock. Preferred Stock could thus be issued quickly with terms calculated
to delay or prevent a change in control of the Company or make removal of
management more difficult. Additionally, the issuance of Preferred Stock may
have the effect of decreasing the market price of the Common Stock. Upon the
completion of this offering, there will be no shares of Preferred Stock
outstanding. The Company has no plans to issue any of the Preferred Stock. See
"Risk Factors -- Anti-Takeover Effect of Nevada Law and Charter and Bylaw
Provisions; Availability of Preferred Stock for Issuance."

WARRANTS

As of June 30, 1996 (assuming the conversion of all outstanding shares of
Preferred Stock into Common Stock and the net exercise of certain warrants
immediately prior to the closing of this offering), warrants to purchase an
aggregate of 385,334 shares of the Company's Common at a weighted average
exercise price of $3.42 per share. Generally, the Company's warrants terminate
five years after issuance and provide for certain anti-dilution adjustments.
Certain of the Company's warrants may be exercised pursuant to a "cashless
exercise" procedure in which the warrant holder may, in lieu of paying the
exercise price in cash, exchange the

52
<PAGE> 53

warrant for a number of shares of Preferred Stock determined in accordance with
a formula based on the market value of the Company's stock at the time of
exercise.

REGISTRATION RIGHTS

The holders of an aggregate of 7,555,525 shares of Common Stock will be
entitled to certain rights with respect to the registration of such shares under
the Securities Act. Kenneth M. Deemer and F. Duwaine Townsen, directors of the
Company, are entitled to such registration rights with respect to the shares of
Common Stock indicated as owned by each of them in "Principal and Selling
Stockholders." Under the terms of certain registration rights agreements, if the
Company proposes to register any of its securities under the Securities Act,
either for its own account or for the account of other securityholders
exercising registration rights, such holders are entitled to notice of such
registration and are entitled to include such shares of Common Stock in the
registration. The rights are subject to certain conditions and limitations,
among them the right of the underwriters of an offering subject to the
registration to limit the number of shares included in such registration.
Holders of Common Stock benefiting from these rights may also require the
Company to file a registration statement under the Securities Act at its expense
with respect to their shares of Common Stock, and the Company is required to use
its best efforts to effect such registration, subject to certain conditions and
limitations. Furthermore, such holders may require the Company to file
additional registration statements on Form S-3 subject to certain conditions and
limitations.

NEVADA ANTI-TAKEOVER STATUTES

The Company is subject to the provisions of Sections 78.411 through 78.444
of the General Corporation Law of Nevada. In general, this statute prohibits a
publicly-held Nevada corporation from engaging in a "business combination" with
an "interested stockholder" for a period of three years after the date of the
transaction in which the person becomes an interested stockholder, unless the
business combination is approved in a prescribed manner. An "interested
stockholder" is a person who, directly or indirectly, owns (or within the prior
three years did own) 10% or more of the corporation's voting stock.

Nevada has also adopted a "control shares" statute which limits the
acquisition of a "controlling interest" in the corporation, as defined in the
statute. This statute is designed to prevent an "acquiring person" from gaining
voting control of the corporation without the approval of the corporation's
stockholders. It provides that an acquiring person obtains only such voting
rights in the control shares as are conferred by a resolution of the
stockholders. Nevada's control shares statute applies to any issuing corporation
which has 200 or more stockholders, at least 100 of whom are stockholders of
record and residents of Nevada. The Company did not meet this requirement prior
to this offering.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services.

53
<PAGE> 54

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for the Common
Stock of the Company and no predictions can be made of the effect, if any, that
the sale or availability for sale of shares of additional Common Stock will have
on the market price of the Common Stock. Nevertheless, sales of substantial
amounts of such shares in the public market, or the perception that such sales
could occur, could adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities.

Upon completion of this offering, the Company will have 11,856,928 shares
of Common Stock outstanding assuming the conversion of all outstanding shares of
Redeemable Convertible Preferred Stock into Common Stock, no exercise of the
Underwriters overallotment option, no exercise of options after June 30, 1996,
and no exercise of outstanding warrants (other than the exercise of warrants to
purchase 84,077 shares simultaneously with the closing of this offering). Of
these shares, the 3,340,000 shares sold in this offering will be freely tradable
without restriction or registration under the Securities Act, except that any
shares purchased by "affiliates" of the Company, as that term is defined under
the Securities Act ("Affiliates"), may generally only be sold in compliance with
the limitations of Rule 144 described below.

In addition, the Company has, pursuant to agreements with certain
stockholders, included in the Registration Statement of which this Prospectus is
a part 142,918 shares of Common Stock, to be offered on a continuous basis by
such stockholders beginning 180 days following this offering.

The remaining 8,516,928 shares of outstanding Common Stock are deemed
"Restricted Shares" under Rule 144. The number of shares of Common Stock
available for sale in the public market is limited by restrictions under the
Securities Act and lock-up agreements under which the holders of such shares
have agreed not to sell or otherwise dispose of any of their shares for a period
of 180 days after the date of this Prospectus without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters. Restricted
Shares may be sold in the public market only if registered or if they qualify
for an exemption from Registration under Rules 144, 144(k) or 701 promulgated
under the Securities Act.

As a result of contractual restrictions described below and the provisions
of Rules 144, 144(k) and 701, Restricted Shares will be available for sale in
the public market in the Public market as follows: (i) 170,547 shares will be
available for immediate sale in the public market on the date of this
Prospectus; (ii) 13,795 shares will be eligible for sale 90 days after the date
of this Prospectus; (iii) 80,432 shares will be eligible for sale 120 days after
the date of this Prospectus; (iv) 6,464,692 shares will be eligible for sale 180
days after the date of this Prospectus and (v) 1,787,462 shares will be eligible
for sale thereafter upon expiration of their respective two-year holding
periods.

Upon expiration of the lock-up agreements described below, the holders of
7,555,525 shares of Common Stock, or their transferees, will be entitled to
certain rights with respect to the registration of such shares under the
Securities Act. See "Description of Capital Stock -- Registration Rights."
Registration of such shares under the Securities Act would result in such shares
becoming freely tradeable without restriction under the Securities Act (except
for shares purchased by Affiliates) immediately upon the effectiveness of such
registration.

In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, a person (or persons whose shares are
aggregated) who has beneficially owned "restricted" shares for at least two
years, including a person who may be deemed an Affiliate, is entitled to sell
within any three-month period a number of shares of Common Stock that does not
exceed the greater of 1% of the then outstanding shares of Common Stock of the
Company (approximately 118,569 shares after giving effect to this offering) and
the average weekly trading volume of the Common Stock on the Nasdaq National
Market during the four calendar weeks preceding such sale. Sales under Rule 144
of the Securities Act are subject to certain restrictions relating to manner of
sale, notice, and the availability of current public information about the
Company. A person who is not an Affiliate at any time during the 90 days
preceding a sale, and who has beneficially owned shares for at least three
years, would be entitled to sell such shares immediately following

54
<PAGE> 55

this offering without regard to the volume limitations, manner of sale
provisions, or notice or other requirements of Rule 144 of the Securities Act.

Any employee of the Company who purchased his or her shares of Common Stock
pursuant to a written compensation plan or contract may be entitled to rely on
the resale provisions of Rule 701 under the Securities Act, which permits
nonaffiliates to sell their Rule 701 shares without having to comply with the
current public information, holding period, volume limitation or notice
provision of Rule 144 and permits affiliates to sell their Rule 701 shares
without having to comply with the holding period restrictions of Rule 144.

Notwithstanding the foregoing, in connection with the offering, the
Company, its executive officers and directors and certain existing stockholders
of the Company, have agreed that, without the prior written consent of the
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, they will not
(a) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any share of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock (whether such shares or any such
securities are then owned by such person or are thereafter acquired directly
from the Company), or (b) enter into any swap or similar agreement that
transfers, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (a) or (b) of
this paragraph is to be settled by delivery of such Common Stock or such other
securities, in case or otherwise, for a period of 180 days after the date of
this Prospectus, other than (i) the sale to the Underwriters of the shares of
Common Stock under the Underwriting Agreement or (ii) the issuance of the
Company of shares of Common Stock upon the exercise of an option sold or granted
pursuant to existing benefit plans of the Company and outstanding or reserved
for issuance on the date of this prospectus.

In addition, certain stockholders of the Company have agreed not to sell,
make any short sale of, loan, grant any option for the purchase of, or otherwise
dispose of any shares of Common Stock for a period of 120 days after the
offering without the prior written consent of the Company. The Company has
agreed not to release any of the shares subject to such lock-up agreements
without the prior written consent of Morgan Stanley & Co. Incorporated.

In connection with the offering, the Company intends to file a registration
statement under the Securities Act covering approximately 3,041,753 shares of
Common Stock subject to outstanding options or reserved for the issuance under
the 1987 Stock Option Plan and the 1996 Stock Option Plan, 100,000 shares
reserved for issuance under the Director Stock Option Plan and 250,000 shares of
Common Stock reserved for issuance under the Employee Stock Purchase Plan, in
each case, for the sale of such shares not earlier than 180 days after the date
of this Prospectus. See "Management -- Stock Plans." Accordingly, shares
registered under such registration statement will, subject to Rule 144 volume
limitations applicable to Affiliates and the lapsing of the Company's repurchase
options, be available for sale in the open market, except to the extent that
such shares are subject to vesting restrictions with the Company or the
contractual restrictions described above.

No predictions can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the
prevailing market price for the Common Stock. Sales of substantial amounts of
Common Stock, or the perception that such sales might occur, could adversely
affect prevailing market prices for the Common Stock and could impair the
Company's future ability to obtain capital through an offering of equity
securities.

55
<PAGE> 56

UNDERWRITERS

Under the terms and subject to the conditions contained in an Underwriting
Agreement, the Underwriters named below, for whom Morgan Stanley & Co.
Incorporated, Montgomery Securities and Needham & Company, Inc. are serving as
Representatives, have severally agreed to purchase, and the Company and the
Selling Stockholders have agreed to sell to the Underwriters, the respective
number of shares of Common Stock set forth opposite their names below:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
------------------------------------------------------------------ ---------
<S> <C>
Morgan Stanley & Co. Incorporated................................. 798,334
Montgomery Securities............................................. 798,333
Needham & Company, Inc. .......................................... 798,333
Adams, Harkness & Hill, Inc. ..................................... 45,000
Alex. Brown & Sons Incorporated................................... 90,000
Cowen & Company................................................... 45,000
Donaldson, Lufkin & Jenrette Securities Corporation............... 90,000
EVEREN Securities, Inc. .......................................... 45,000
Hambrecht & Quist LLC............................................. 90,000
Kaufman Bros. Co. ................................................ 45,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................ 90,000
Oppenheimer & Co., Inc. .......................................... 90,000
Robertson, Stephens & Company LLC................................. 90,000
Smith Barney Inc. ................................................ 90,000
SoundView Financial Group, Inc. .................................. 45,000
Sutro & Co. Incorporated.......................................... 45,000
Unterberg Harris, L.P. ........................................... 45,000
-------
Total................................................... 3,340,000
=======
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel
and to certain other conditions. The Underwriters are obligated to take and pay
for all of the shares of Common Stock offered hereby (other than the shares
covered by the over-allotment option described below) if any are taken.

The Underwriters initially propose to offer part of the shares of Common
Stock offered hereby directly to the public at the initial public offering price
set forth on the cover page hereof and part to certain dealers at a price that
represents a concession not in excess of $.40 per share under the initial public
offering price. Any Underwriter may allow, and such dealers may reallow, a
concession not in excess of $.10 per share to other Underwriters or to certain
other dealers.

The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 501,000 additional
shares of Common Stock at the initial public offering price set forth on the
cover page hereof, less underwriting discounts and commissions. The Underwriters
may exercise such option to purchase solely for the purpose of covering
over-allotments, if any, incurred in the sale of the shares of Common Stock
offered hereby.

The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend sales to discretionary accounts to exceed five
percent of the total number of shares of Common Stock offered by them.

The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.

56
<PAGE> 57

Subject to certain limited exceptions, the Company has agreed not to offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock, or any securities convertible into or exercisable or
exchangeable for Common Stock, or enter into any swap or similar agreement that
transfers in whole or in part, the economic risk of ownership of the Common
Stock for a period of 180 days after the date of this Prospectus without the
prior written consent of Morgan Stanley & Co. Incorporated. See "Shares Eligible
for Future Sale" for a description of certain arrangements by which all Selling
Stockholders, officers and directors and substantially all other stockholders
and optionholders have agreed not to sell or otherwise dispose of the Common
Stock or convertible securities of the Company held by them for certain periods
following the date of this Prospectus, without the prior written consent of
Morgan Stanley & Co. Incorporated.

The Underwriters have reserved for sale, at the initial public offering
price, up to 5% of the Common Stock offered hereby for employees and directors
of the Company and certain other individuals who have expressed an interest in
purchasing such shares of Common Stock in the offering. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased will
be offered by the Underwriters to the general public on the same basis as other
shares offered hereby.

PRICING OF THE OFFERING

Prior to this offering, there has been no public market for the Common
Stock of the Company. The initial public offering price was determined by
negotiations among the Company, the Selling Stockholders and the Representatives
of the Underwriters. Among the factors considered in determining the initial
public offering price were the future prospects of the Company and its industry
in general, sales, earnings and certain other financial and operating
information of the Company in recent periods, and the price-earnings ratios,
price-sales ratios, market prices of securities and certain financial and
operating information of companies engaged in activities similar to those of the
Company.

57
<PAGE> 58

LEGAL MATTERS

Certain legal matters relating to the offering will be passed upon for the
Company by Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, Palo
Alto, California. As of June 30, 1996, two members of Wilson, Sonsini, Goodrich
& Rosati, Professional Corporation, and investment partnerships principally
comprised of members of that firm, beneficially owned 22,499 shares of the
Company's Common Stock. The validity of the Common Stock offered hereby will be
passed upon for the Company by Allison, MacKenzie, Hartman, Soumbeniotis &
Russell, Ltd., Carson City, Nevada. Certain legal matters relating to the
offering will be passed upon for the Underwriters by Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, Palo Alto, California.

EXPERTS

The consolidated financial statements as of December 31, 1994 and 1995 and
June 30, 1996 and for each of the three years in the period ended December 31,
1995 and the six months ended June 30, 1996 included in this Prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report (which report contains an explanatory paragraph that describes a change
during 1994 in the Company's method of accounting for the accretion on the
Company's redeemable convertible preferred stock) appearing herein, and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.

The statements in this Prospectus in the fourth paragraph under the caption
"Risk Factors -- Uncertainty Regarding Patents and Protection of Proprietary
Technology" and in the fourth paragraph under the caption
"Business -- Intellectual Property Rights" as such relate to matters referred to
in the correspondence between the Company and Coherent, Inc. described therein
have been reviewed and approved by Townsend and Townsend and Crew, LLP, special
patent counsel for the Company, as experts in such matters, and are included
herein in reliance upon such review and approval.

The statements in this Prospectus in the fifth paragraph under the caption
"Risk Factors -- Uncertainty Regarding Patents and Protection of Proprietary
Technology" and in the fifth paragraph under the caption
"Business -- Intellectual Property Rights" have been reviewed and approved by
Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, special patent
counsel for the Company, as experts in such matters, and are included herein in
reliance upon such review and approval.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1, including amendments
thereto, under the Securities Act with respect to the shares of Common Stock
offered hereby. This Prospectus omits certain information contained in the
Registration Statement, and reference is made to the Registration Statement and
the exhibits and schedules thereto for further information with respect to the
Company and the Common Stock offered hereby. Statements contained herein
concerning the provisions of any documents are not necessarily complete, and in
each instance reference is made to the copy of such document filed as an exhibit
to the Registration Statement. Each such statement is qualified in its entirety
by such reference. The Registration Statement, including exhibits and schedules
filed therewith, may be inspected without charge at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and copies of all or any part thereof may
be obtained from such office upon payment of the prescribed fees. The Commission
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the site is http://www.sec.gov.

58
<PAGE> 59

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996........ F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and
1995 and for the six months ended June 30, 1995 (unaudited) and 1996................ F-4
Consolidated Statements of Stockholders' Deficit for the years ended December 31,
1993, 1994 and 1995 and for the six months ended June 30, 1996...................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and for the six months ended June 30, 1995 (unaudited) and 1996................ F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>

F-1
<PAGE> 60

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Cymer, Inc.:

We have audited the accompanying consolidated balance sheets of Cymer, Inc.
(successor to Cymer Laser Technologies) and its subsidiary (collectively the
"Company") as of December 31, 1994 and 1995 and June 30, 1996, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the three years in the period ended December 31, 1995 and for the six
months ended June 30, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1994 and 1995 and June 30, 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995 and for
the six months ended June 30, 1996 in conformity with generally accepted
accounting principles.

As discussed in Note 10 to the financial statements, during 1994 the
Company changed its method of accounting for the accretion of the 8% per annum
redemption provision on the Company's Redeemable Convertible Preferred Stock.

DELOITTE & TOUCHE LLP
San Diego, California
August 9, 1996 (August 21, 1996 as to the
second paragraph in Note 1 and Note 12)

F-2
<PAGE> 61

CYMER, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
STOCKHOLDERS'
EQUITY
JUNE 30,
-------------
1996
-------------
DECEMBER 31, JUNE 30,
--------------------- -----------
1994 1995 1996
-------- -------- -----------
<S> <C> <C> <C> <C>
ACTUAL
-----------
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 2,326 $ 2,015 $ 1,981
Accounts receivable................................ 2,451 4,832 9,213
Inventories........................................ 2,526 5,315 11,334
Prepaid expenses and other assets.................. 447 306 769
-------- -------- -----------
Total current assets........................ 7,750 12,468 23,297
Property -- net...................................... 1,346 3,053 7,850
Other Assets......................................... 76 98 229
-------- -------- -----------
TOTAL ASSETS................................ $ 9,172 $ 15,619 $ 31,376
========= ========= ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Revolving loan and security agreements............. $ 1,546 $ 2,786 $ 7,250
Advances against commercial drafts................. 1,709 1,305 1,675
Accounts payable................................... 935 2,369 5,099
Accrued liabilities................................ 1,015 1,187 2,243
Deferred revenue................................... 478 951 712
Current portion of capital lease obligations....... 25 185
Income taxes payable............................... 172
Subordinated promissory notes...................... 3,624
-------- -------- -----------
Total current liabilities................... 9,307 8,623 17,336
-------- -------- -----------
Deferred Rent........................................ 327 369 410
-------- -------- -----------
Capital Lease Obligations............................ 48 387
-------- -----------
Commitments and Contingencies (Note 8)...............
Redeemable Convertible Preferred Stock: actual --
authorized 9,834,880 shares; $.01 stated par value,
issued and outstanding 4,325,000, 6,496,000 and
7,527,000 shares (liquidation preference -- $35,234
at June 30, 1996); pro forma -- no shares
authorized, issued or outstanding.................. 19,290 28,409 35,234 $ --
-------- -------- ----------- -------------
Stockholders' Equity (Deficit):
Preferred Stock: actual -- no shares authorized,
issued or outstanding; pro forma -- authorized
5,000,000 shares; $0.001 par value, no shares
issued or outstanding............................ --
Common Stock: actual -- authorized 15,000,000
shares; $.01 stated par value, issued and
outstanding 1,091,000, 1,160,000 and 1,203,000
shares; pro forma -- authorized 25,000,000
shares; $0.001 par value, issued and outstanding
8,849,000 shares................................. 11 12 12 9
Paid-in capital.................................... 164 195 241 27,471
Accumulated deficit................................ (19,898) (21,832) (21,947) (13,940)
Cumulative translation adjustment.................. (29) (205) (297) (297)
-------- -------- ----------- -------------
Total stockholders' equity (deficit)........ (19,752) (21,830) (21,991) $ 13,243
-------- -------- -----------
============
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT................................... $ 9,172 $ 15,619 $ 31,376
========= ========= ===========
</TABLE>

See Notes to Consolidated Financial Statements.

F-3
<PAGE> 62

CYMER, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- -----------------------
1993 1994 1995 1996
------- ------- ------- 1995 -------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Product sales........................ $ 3,393 $ 7,705 $15,576 $ 5,458 $17,768
Other................................ 2,306 1,216 3,244 1,821 1,414
------- ------- ------- ------ -------
Total revenues............... 5,699 8,921 18,820 7,279 19,182
------- ------- ------- ------ -------
COSTS AND EXPENSES:
Cost of product sales................ 2,726 4,797 9,282 3,243 10,929
Research and development............. 2,733 3,283 6,154 2,920 4,249
Sales and marketing.................. 2,154 1,780 2,353 1,011 1,825
General and administrative........... 782 849 1,181 502 1,303
------- ------- ------- ------ -------
Total costs and expenses..... 8,395 10,709 18,970 7,676 18,306
------- ------- ------- ------ -------
OPERATING INCOME (LOSS)................ (2,696) (1,788) (150) (397) 876
------- ------- ------- ------ -------
OTHER INCOME (EXPENSE):
Foreign currency exchange
gain -- net....................... 18 65 506 167 388
Interest and other income............ 27 17 32 21 27
Interest and other expense........... (52) (281) (283) (138) (148)
------- ------- ------- ------ -------
Total other income
(expense) -- net........... (7) (199) 255 50 267
------- ------- ------- ------ -------
Income (Loss) Before Provision for
Income Taxes......................... (2,703) (1,987) 105 (347) 1,143
Provision for Income Taxes............. 221 58 36 36 186
------- ------- ------- ------ -------
NET INCOME (LOSS)...................... $(2,924) $(2,045) $ 69 $ (383) $ 957
======= ======= ======= ====== =======
PRO FORMA EARNINGS (LOSS) PER SHARE
DATA (Note 1):
Pro forma earnings (loss) per
share............................. $ 0.01 $ (0.06) $ 0.10
======= ====== =======
Pro forma weighted average common and
common equivalent shares
outstanding....................... 7,571 6,692 9,666
======= ====== =======
</TABLE>

See Notes to Consolidated Financial Statements.

F-4
<PAGE> 63

CYMER, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE
--------------- PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT TOTAL
------ ------ -------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993................ 1,057 $ 11 $146 $ (9,032) $ (72) $ (8,947)
Exercise of common stock options...... 6 3 3
Net loss.............................. (2,924) (2,924)
Translation adjustment................ 40 40
----- --- ---- -------- ----- --------
BALANCE, DECEMBER 31, 1993.............. 1,063 11 149 (11,956) (32) (11,828)
Exercise of common stock options...... 28 15 15
Net loss.............................. (2,045) (2,045)
Accretion of redemption -- preferred
stock (Note 10).................... (5,897) (5,897)
Translation adjustment................ 3 3
----- --- ---- -------- ----- --------
BALANCE, DECEMBER 31, 1994.............. 1,091 11 164 (19,898) (29) (19,752)
Exercise of common stock options...... 69 1 31 32
Net income............................ 69 69
Accretion of redemption -- preferred
stock.............................. (2,003) (2,003)
Translation adjustment................ (176) (176)
----- --- ---- -------- ----- --------
BALANCE, DECEMBER 31, 1995.............. 1,160 12 195 (21,832) (205) (21,830)
Exercise of common stock options...... 43 46 46
Net income............................ 957 957
Accretion of redemption -- preferred
stock.............................. (1,072) (1,072)
Translation adjustment................ (92) (92)
----- --- ---- -------- ----- --------
BALANCE, JUNE 30, 1996.................. 1,203 $ 12 $241 $ (21,947) $ (297) $(21,991)
===== === ==== ======== ===== ========
</TABLE>

See Notes to Consolidated Financial Statements.

F-5
<PAGE> 64

CYMER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- ----------------------
1993 1994 1995 1996
------- ------- ------- 1995 -------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).................................. $(2,924) $(2,045) $ 69 $ (383) $ 957
Adjustments to reconcile net income (loss) to net
cash used for operating activities:
Depreciation and amortization.................... 826 677 820 410 753
Change in assets and liabilities:
Accounts receivable............................ (653) (207) (2,574) (557) (4,599)
Inventories.................................... 153 (1,205) (2,813) (1,726) (6,059)
Prepaid expenses and other assets.............. (73) (233) 99 52 (614)
Accounts payable............................... 220 424 1,404 513 2,646
Accrued liabilities............................ 125 397 337 (53) 1,172
Income taxes payable........................... 172
Deferred revenue............................... 186 (17) 502 341 (230)
Deferred rent.................................. 80 10 42 (12) 41
------- ------- ------- ------- -------
Net cash used for operating activities...... (2,060) (2,199) (2,114) (1,415) (5,761)
------- ------- ------- ------- -------
INVESTING ACTIVITIES:
Acquisition of property............................ (536) (640) (2,653) (1,105) (5,031)
Disposal of property............................... 126 91 226 150 16
------- ------- ------- ------- -------
Net cash used for investing activities...... (410) (549) (2,427) (955) (5,015)
------- ------- ------- ------- -------
FINANCING ACTIVITIES:
Net (payments) borrowings under revolving loan and
security agreements.............................. 1,588 (42) 1,240 (46) 4,464
Proceeds from issuance of redeemable convertible
preferred stock.................................. 100 404 3,407 2,611 5,752
Proceeds from issuance of common stock............. 3 15 32 35 46
Net advances against (discounting of) commercial
drafts........................................... (487) 945 (390) (1,460) 459
Payments on capital lease obligations.............. (27) (5) (49)
Net proceeds from issuance of subordinated
promissory notes................................. 474 3,150
------- ------- ------- ------- -------
Net cash provided by financing activities... 1,678 4,472 4,262 1,135 10,672
------- ------- ------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS........................................ (30) (113) (32) (207) 70
------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ (822) 1,611 (311) (1,442) (34)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..... 1,537 715 2,326 2,326 2,015
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........... $ 715 $ 2,326 $ 2,015 $ 884 $ 1,981
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid...................................... $ 27 $ 162 $ 219 $ 65 $ 125
======= ======= ======= ======= =======
Income taxes paid.................................. $ 221 $ 58 $ 36 $ 28 $ 11
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Capital lease obligations incurred for furniture
and equipment.................................... $ 100 $ 46 $ 573
======= ======= =======
Net book value of property transferred to inventory
for resale....................................... $ 125 $ 39 $ 177 $ 150
======= ======= ======= =======
Conversion of subordinated promissory notes and
related interest payable to redeemable
convertible preferred stock...................... $ 3,755 $ 3,755
======= =======
</TABLE>

See Notes to Consolidated Financial Statements.

F-6
<PAGE> 65

CYMER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations -- Cymer, Inc. (successor to Cymer Laser Technologies)
and its subsidiary (collectively the "Company") is engaged primarily in the
development, manufacturing and marketing of excimer lasers for sale to
manufacturers of photolithography tools in the semiconductor equipment industry.
The Company sells its product to customers primarily in Japan, the Netherlands
and the United States.

On July 15, 1996, the Company's Board of Directors approved a
reincorporation into the State of Nevada that became effective on August 21,
1996 following approval by the Company's stockholders. In connection with the
reincorporation, the Company increased its authorized common stock to 25,000,000
shares. The Board of Directors and stockholders have also approved the creation
of a new class of 5,000,000 shares of undesignated preferred stock which will
become authorized on the closing of the Company's planned initial public
offering. Consolidated stockholders' equity as of June 30, 1996 has been shown
on an unaudited pro forma basis, assuming conversion of 7,527,000 shares of
redeemable convertible preferred stock then outstanding into 7,563,000 shares of
common stock, the issuance of 84,000 shares of common stock upon the exercise of
certain outstanding warrants, and the reincorporation of the Company into the
State of Nevada at $0.001 par value per common and preferred share (Note 12).

Principles of Consolidation -- The consolidated financial statements
include the accounts of Cymer, Inc. (successor to Cymer Laser Technologies) and
its wholly-owned subsidiary, Cymer Japan, Inc., (collectively, the "Company").
The Company primarily sells its excimer lasers in Japan through Cymer Japan,
Inc. All significant intercompany balances have been eliminated in
consolidation.

Accounting Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles 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
purchased with an original maturity of three months or less.

Inventories -- Inventories are carried at the lower of cost (first-in,
first-out) or market.

Property -- Property is stated at cost. Depreciation is provided using the
straight-line or declining balance methods over the estimated useful lives of
the assets (generally three to five years). Leasehold improvements are
amortized, using the straight-line method, over the shorter of the life of the
improvement or the remaining lease term. Lasers built for internal use are
capitalized and depreciated using the straight-line method over three years.

Revenue Recognition -- Revenue from product sales is generally recognized
at the time of shipment unless customer agreements contain inspection or other
conditions, in which case revenue is recognized at the time such conditions are
satisfied. Product sales includes sales of lasers, replacement parts, and
product service contracts. Other revenue primarily represents revenue earned
from funded development activities and license fees. Such revenue is recognized
on a basis consistent with the performance requirement of the agreements.
Payments received in advance of performance are recorded as deferred revenue.
Long-term contracts are accounted for on the percentage-of-completion method
based upon the relationship of costs incurred to total estimated costs, after
giving effect to estimates of costs to complete.

License fees totaled $2,000,000 for the year ended December 31, 1993.
Research and development revenues totaled $306,000, $1,216,000 and $3,244,000
for the years ended December 31, 1993, 1994 and 1995, respectively, and
$1,821,000 and $1,414,000 for the six months ended June 30, 1995 and 1996,
respectively.

F-7
<PAGE> 66

CYMER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Warranty Expense -- The Company generally warrants its products against
defects for the earlier to occur of 17 months from the date of shipment or 12
months after acceptance by the end-user. The Company accrues a provision for
warranty expense for all products sold. The amount of the provision is based on
actual historical expenses incurred and estimated probable future expenses
related to current sales. Warranty costs incurred are charged against the
provision.

Stock-Based Compensation -- Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.

Foreign Currency Translation -- Gains and losses resulting from foreign
currency translation are accumulated as a separate component of consolidated
stockholders' deficit. Gains and losses resulting from foreign currency
transactions are included in the consolidated statements of operations.

Foreign Exchange Contracts -- The Company enters into foreign currency
exchange contracts to hedge purchase commitments by Cymer Japan, Inc. Net
realized gains or losses are recorded on the contract settlement date and are
included in the consolidated statements of operations.

The Company recognized net gains from the above foreign currency exchange
contracts of $480,000, $0 and $552,000 for the year ended December 31, 1995 and
the six months ended June 30, 1995 and 1996, respectively. The face amount of
the underlying contracts was $4,048,000, $500,000 and $7,351,000, respectively.
The Company also had forward foreign exchange contracts at June 30, 1996 to buy
$25.4 million for Y2.6 billion under foreign currency exchange facilities with a
Japanese bank. Such contracts expire on various dates through February 1997. As
of June 30, 1996, there were $799,000 of deferred foreign currency gains under
such contracts.

Concentration of Credit Risk -- The Company invests its excess cash in
money market accounts. The Company has not experienced any losses on its cash
accounts. The Company has a small number of significant customers (see "Major
Customers and Related Parties"). The Company does not expect any credit losses
and therefore, no provision for credit losses has been made.

Major Customers and Related Parties -- Revenues from major customers are
detailed as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- -------------------------
CUSTOMER 1993 1994 1995 1995 1996
--------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
A................. $1,563,000 $2,134,000 $5,035,000 $2,112,000 $3,910,000
B................. 3,557,000 1,148,000 7,009,000
C................. 1,472,000 3,395,000 4,304,000
D................. 1,293,000
E................. 2,271,000
F................. 1,320,000 1,954,000 1,630,000
G................. 1,231,000 709,000
</TABLE>

Receivables from these customers totaled $218,000, $2,576,000 and
$5,575,000 at December 31, 1994 and 1995 and June 30, 1996, respectively.

Revenues from Japanese customers, generated primarily by the Company's
subsidiary, accounted for 68%, 33%, and 50% of revenues for the years ended
December 31, 1993, 1994, and 1995, respectively, and 47% and 60% for the six
months ended June 30, 1995 and 1996, respectively. Revenues from a customer in
the

F-8
<PAGE> 67

CYMER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Netherlands accounted for 8%, 17% and 18% of revenues for the years ended
December 31, 1993, 1994, and 1995, respectively, and 8% and 22% for the six
months ended June 30, 1995 and 1996, respectively.

Revenues from stockholders totaled $3,857,000, $2,917,000 and $9,085,000
for the years ended December 31, 1993, 1994 and 1995, respectively, and
$3,961,000 and $15,908,000 for the six months ended June 30, 1995 and 1996,
respectively.

Pro Forma Earnings Per Share -- Pro forma earnings (loss) per share is
computed based on the weighted average number of common and common equivalent
shares outstanding during the year using the treasury stock method and assumes
conversion of all outstanding redeemable convertible preferred stock and the
exercise of all outstanding warrants. Stock options, redeemable convertible
preferred stock and warrants are considered to be common stock equivalents,
except for the six months ended June 30, 1995, where the stock options are not
assumed converted as such conversion would be antidilutive. All shares of common
stock and common stock equivalents issued within twelve months of an initial
public offering at a price per share less than the estimated offering price are
considered to be outstanding for all periods presented in the same manner as a
stock split. Accordingly, all shares of common stock and common stock
equivalents issued subsequent to August 1995 at a price per share below the
estimated offering price are considered to be outstanding for all periods
presented.

Unaudited Interim Financial Data -- The interim financial data relating to
the six months ended June 30, 1995 is unaudited; however, in the opinion of the
Company's management, the interim data includes all adjustments, consisting of
only normal recurring accruals, necessary for a fair presentation of the results
of operations for such period. The audited results for the six months ended June
30, 1996 are not necessarily indicative of the results to be expected for the
full year or for any other interim period.

Reclassifications -- Certain amounts in the prior years' financial
statements have been reclassified to conform to current period presentation.

2. BALANCE SHEET DETAILS

<TABLE>
<CAPTION>
DECEMBER 31, JUNE
------------------- 30,
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
INVENTORIES:
Raw materials....................................... $ 773 $ 2,114 $ 4,438
Work-in-progress.................................... 1,171 2,232 5,633
Finished goods...................................... 582 969 1,263
------- ------- -------
Total....................................... $ 2,526 $ 5,315 $11,334
======= ======= =======
PROPERTY -- at cost:
Furniture and equipment............................. $ 2,753 $ 4,113 $ 6,962
Capitalized lasers.................................. 1,423 1,788 2,338
Leasehold improvements.............................. 151 245 1,671
Construction in process............................. 24 587 1,091
------- ------- -------
4,351 6,733 12,062
Less accumulated depreciation and amortization...... (3,005) (3,680) (4,212)
------- ------- -------
Total....................................... $ 1,346 $ 3,053 $ 7,850
======= ======= =======
</TABLE>

F-9
<PAGE> 68

CYMER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. BORROWING FACILITIES

Revolving Loan Facility -- At June 30, 1996, the Company had a revolving
loan facility ("Loan Facility") providing for borrowings of up to $1,000,000.
Borrowings under the facility bear interest at prime plus 1.5% (9.75%), payable
quarterly, due on the earlier of March 31, 1997 or the completion of the
Company's planned initial public offering, and are guaranteed by a preferred
stockholder of the Company (Note 9). In connection with the guarantee, the
Company has granted the preferred stockholder a security interest in the
Company's lasers located in Japan. At June 30, 1996, $1,000,000 was borrowed
against the Loan Facility.

Loan and Security Agreement -- The Loan and Security Agreement (the
"Agreement") provides for three revolving loan facilities and a loan with a bank
to provide for combined borrowings of up to a maximum of $11,000,000 with
interest on outstanding borrowings ranging from prime plus 0.75% to prime plus
1.5% (9.0% and 9.75%, respectively, at June 30, 1996). Borrowings under the
Agreement are secured by substantially all the Company's assets. The Agreement
provides for the following: (i) $2,000,000 bank loan which is secured by the
Company's assets, bears interest at a rate of prime plus 1.5% per annum, is due
September 30, 1996, (ii) a $1,000,000 revolving bank line of credit which is
also secured by the Company's assets, bears interest at a rate of prime plus
0.75% per annum, is due March 5, 1997 and (iii) $8,000,000 under lines of credit
secured by the Companys foreign receivables and inventory and guaranteed by the
U.S. Export-Import Bank, which bear interest at a rate of prime plus 0.75% per
annum, and are due March 5, 1997 (as to $3,000,000) and June 27, 1997 (as to
$5,000,000). The Agreement requires the Company to maintain compliance with
certain financial statement and other covenants including, among other items,
limitation on additional debt, total liabilities to tangible net worth and
minimum tangible net worth. As of June 30, 1996, the Company was in compliance
with all such covenants. There was $6,250,000 outstanding under the Agreement at
June 30, 1996.

In connection with the original Agreement, the Company issued the bank a
five-year warrant to purchase 15,000 shares of the Company's Series D Redeemable
Convertible Preferred Stock at $8.50 per share. In February 1995, warrants to
purchase 16,000 shares of the Company's Series E Redeemable Convertible
Preferred Stock at $4.00 per share were exchanged for the 15,000 Series D
warrants (Note 5).

In addition to the loan facilities, in 1995, the Agreement was modified to
include a foreign exchange contract facility. The facility provides up to
$3,500,000 to be utilized for spot and future foreign exchange contracts. The
total gross amount to be settled within 2 business days is not to exceed
$1,000,000 (settlement limit) at any one time. The settlement limit may be
increased against the revolving credit line availability or advance payment
arranged prior to delivery of the foreign currency overseas. There were no
foreign exchange contracts outstanding under the Agreement at December 31, 1995
and June 30, 1996.

Advances Against Commercial Drafts -- Advances against commercial drafts
represent funds advanced by a Japanese bank in connection with the discounting
of certain commercial drafts received from customers as payment for the purchase
of merchandise. The advances against commercial drafts are for a maximum of Y500
million (approximately $4,500,000 at June 30, 1996), are discounted at the bill
discount rate plus 1.0% (1.875% at June 30, 1996) and generally mature within
120 days. The bank reserves the right to call for repayment on demand.

4. CONVERSION OF SUBORDINATED PROMISSORY NOTES -- STOCKHOLDERS

During 1995, principal totalling $3,622,000 plus accrued interest of
$133,000 relating to loans obtained from certain stockholders in 1994 were
converted into 1,073,000 fully-paid and non-assessable shares of Series F
Redeemable Convertible Preferred Stock of the Company at $3.50 per share. In
connection with the original loan, the Company also issued warrants to purchase
shares of Series F Redeemable Convertible Preferred Stock (Note 5).

F-10
<PAGE> 69

CYMER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. REDEEMABLE CONVERTIBLE PREFERRED STOCK

The Redeemable Convertible Preferred Stock ("Preferred Stock") will
automatically convert to the Company's common stock upon completion of the
Company's planned initial public offering and is summarized as follows (in
thousands, except per share data):

<TABLE>
<CAPTION>
SHARES ISSUED AND OUTSTANDING AT REDEMPTION/
-------------------------------- LIQUIDATION
PREFERENCE AT
DECEMBER 31, JUNE 30, 1996
SHARES --------------------- JUNE 30, -------------------
SERIES AUTHORIZED 1993 1994 1995 1996 PER SHARE TOTAL*
------------------------------ ---------- ----- ----- ----- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Series A...................... 2,269 2,264 2,269 2,269 2,269 $1.60 $ 6,002
Series B...................... 1,310 1,296 1,310 1,310 1,310 $3.40 6,952
Series C...................... 200 200 200 200 200 $7.00 2,086
Series D...................... 486 470 470 470 470 $8.50 5,463
Series E...................... 1,670 76 76 76 $5.00 449
Series F...................... 3,000 2,171 2,302 $3.50 8,711
Series G...................... 900 900 $6.00 5,571
----- ----- ----- ----- ----- -------
Total............... 9,835 4,230 4,325 6,496 7,527 $35,234
===== ===== ===== ===== ===== =======
</TABLE>

- ---------------
* Includes accretion of 8% cumulative from issuance, less previously paid
dividends.

Conversion -- The Preferred Stock is convertible by the holder at any time
into common stock and is automatically convertible into common stock in the
event of a firm commitment public offering of the Company's common stock with
gross proceeds of at least $10 million and a price of at least $6 per share of
common stock. The conversion of the Preferred Stock to common stock is generally
on a 1 for 1 basis, subject to adjustments for stock splits, stock dividends and
other items, except for the Series E Preferred Stock that is converted on an
approximate 1 for 1.5 basis. Based on such conversion ratios, the 7,527,000
shares of Preferred Stock outstanding as of June 30, 1996 will convert to
7,563,000 shares of common stock upon the completion of the Company's planned
initial public offering. Upon the conversion of the Preferred Stock, the
dividends and other rights discussed below cease.

Dividends -- The holders of Preferred Stock are entitled to receive
dividends in preference to common stock at the rate of 8% per annum when, if and
as declared by the Company's Board of Directors. If the Board of Directors shall
elect to pay additional dividends, such dividends shall be distributed to the
holders of common stock and Preferred Stock as if the Preferred Stock had been
converted to common stock prior to the payment of the additional dividends.
Dividends on the Preferred Stock are not cumulative. Upon liquidation,
dissolution, merger or sale of substantially all of the assets of the
corporation, the holders of the Preferred Stock shall be entitled to receive in
preference to the holders of common stock the per share liquidation preference
indicated in the table above, plus 8% per annum of the liquidation value from
date of original issue less any dividends paid.

Voting Rights -- The holders of Preferred Stock are entitled to notice of
any shareholders meeting in accordance with the bylaws of the Company. The
holders of shares of Series A Preferred Stock, voting separately as a class,
shall elect two members of the Board of Directors and the holders of shares of
Series B Preferred Stock, voting separately as a class, shall elect one member
of the Board of Directors. Any additional directors shall be elected by the
holders of Preferred Stock and common stock voting together as a single class.

Registration Rights -- The holders of outstanding shares of Preferred Stock
and warrants to purchase Preferred Stock are entitled to certain rights with
respect to the registration of the common stock issuable upon conversion of
their shares of Preferred Stock under the Securities Act.

F-11
<PAGE> 70

CYMER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Redemption Rights -- Certain redemption and sinking fund provisions are
applicable to the Preferred Stock. On each of March 15, 1997, March 15, 1998 and
March 15, 1999, the Company is required to offer to redeem one-third of the
outstanding shares of each series of Preferred Stock which are outstanding as of
March 15, 1997 for an amount equal to the redemption preference indicated in the
table above, plus 8% per annum of such amount from the date of the first
issuance of each such series less any dividends actually paid on such shares to
the date of redemption. The Company is required to deposit a sum equal to the
aggregate redemption price due on a redemption date, as set forth above, with a
bank or trust company on or prior to each redemption date. The Company has the
right to redeem all or any portion of any series of its Preferred Stock provided
that it shall have received the prior written consent of holders of at least
two-thirds of the outstanding shares of each series of Preferred Stock, with
each series voting separately as a class.

Preferred Stock Warrants -- At June 30, 1996, the Company had warrants
outstanding to purchase 22,000, 131,000, and 306,000 shares of Series E, Series
F and Series F Preferred Stock, respectively, at a price of $4.00, $3.40 and
$3.50 per share, respectively, expiring in 1999. In lieu of exercise, certain
warrants may be surrendered for stock based upon a formula. The number and
exercise price of the warrants is subject to adjustment as defined in the
warrants. The $3.40 Series F warrants must be exercised prior to an initial
public offering of the Company's stock. The conversion of such warrants
simultaneously with the Company's planned initial public offering will result in
the issuance of 84,000 shares of common stock. The other warrants convert to
common stock warrants upon such an offering.

6. STOCKHOLDERS' EQUITY (DEFICIT)

Common Stock -- Holders of common stock are entitled to one vote. They are
subject to prior rights of the preferred stockholders (Note 5).

Common Stock Warrants -- At June 30, 1996, the Company had warrants
outstanding to purchase 40,000 shares of its common stock at a price of $3.40
per share. The warrants expire in 2000 and 2001. These warrants and the Series E
and $3.50 Series F Preferred Stock warrants discussed in Note 5, have a weighted
average exercise price of $3.42 per share and are issuable into 385,000 shares
of common stock, assuming completion of the Company's planned initial public
offering.

Stock Option Plan -- The Company's 1987 Stock Plan, as amended through June
1995, (the Plan) provides that incentive and nonstatutory options to purchase up
to 1,500,000 shares of common stock may be granted to employees and consultants
at prices that are not less than 100% (85% for nonstatutory options) of fair
market value on the date the options are granted. The Plan also provides for
various restrictions regarding option terms, prices, transferability and other
matters. Options issued under the Plan expire five to ten years after the
options are granted and generally become exercisable ratably over a four-year
period following the date of grant. Stock option transactions are summarized as
follows (in thousands, except per share data):

<TABLE>
<CAPTION>
NUMBER OF
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Outstanding, January 1, 1993............................... 490 $ 0.50 - $0.85
Granted.................................................. 64 $ 0.85 - $1.00
Exercised................................................ (6) $ 0.50 - $0.85
Terminated............................................... (56) $ 0.50 - $0.85
---------
Outstanding, December 31, 1993............................. 492 $ 0.50 - $1.00
Granted.................................................. 67 $ 0.50
Exercised................................................ (28) $ 0.50 - $1.00
Terminated............................................... (107) $ 0.50 - $0.85
---------
</TABLE>

F-12
<PAGE> 71

CYMER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
NUMBER OF
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Outstanding, December 31, 1994............................. 424 $ 0.50 - $1.00
Granted.................................................. 979 $ 0.50 - $3.00
Exercised................................................ (59) $ 0.50 - $1.00
Terminated............................................... (383) $ 0.50 - $0.85
---------
Outstanding, December 31, 1995............................. 961 $ 0.50 - $3.00
Granted.................................................. 305 $ 4.00 - $6.00
Exercised................................................ (43) $ 0.50 - $1.00
Terminated............................................... (31) $ 0.50 - $5.00
---------
Outstanding, June 30, 1996................................. 1,192 $ 0.50 - $6.00
========
Exercisable, June 30, 1996................................. 198 $ 0.50 - $5.00
========
</TABLE>

The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its plan. Accordingly, no compensation expense has been recognized for its
stock-based compensation plan. Had compensation cost been determined based upon
the fair value at the grant date for awards under the plan consistent with the
methodology prescribed under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," the Company's net income and pro
forma earnings per share for the six month period ended June 30, 1996 would have
been reduced by approximately $111,000, or $0.01 per share. The fair value of
the options granted during 1996 is estimated as $375,000 on the date of grant
using the Black-Scholes option-pricing model with the following assumptions: no
dividend yield or volatility, risk-free interest rate of 5.33% to 7.54%, assumed
forfeiture rate of 3.0%, and an expected life of five years.

The following table summarizes information as of June 30, 1996 concerning
currently outstanding and exercisable options:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- ------------------------------------
WEIGHTED AVERAGE NUMBER
RANGE OF REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES CONTRACTUAL LIFE EXERCISE PRICE --------------- EXERCISE PRICE
- --------------- ---------------- ---------------- (IN THOUSANDS) ----------------
NUMBER (YEARS)
OUTSTANDING
--------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$ 0.25 - $1.00 774 3.68 $ 0.60 197 $ 0.60
$ 1.50 - $3.00 114 4.19 $ 1.55 0 $ 0.00
$ 4.00 - $6.00 304 4.68 $ 5.06 1 $ 5.00
------ ------ ---
1,192 198
=========== ===========
</TABLE>

Common Shares Reserved -- As of June 30, 1996, the Company had reserved the
following number of shares of common stock for issuance:

<TABLE>
<CAPTION>
JUNE 30, 1996
--------------
(IN THOUSANDS)
<S> <C>
Conversion of outstanding preferred stock to common stock.............. 7,563
Issuance under stock plan.............................................. 33
Exercise of common stock purchase warrants............................. 40
Exercise of preferred stock purchase warrants.......................... 459
------
Total.................................................................. 8,095
===========
</TABLE>

Unaudited Pro Forma Stockholders' Equity as of June 30, 1996 -- See Note 1.

F-13
<PAGE> 72

CYMER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. INCOME TAXES

The Company adopted Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," effective January 1, 1993. This Statement
supersedes Accounting Principles Board Opinion No. 11, which had been in use by
the Company. There was no cumulative effect of adopting SFAS No. 109.

Income taxes in the statement of operations for each of the three years in
the period ended December 31, 1995 and for the six months ended June 30, 1995
primarily represent taxes paid in Japan for research and development revenues
generated from agreements with Japanese companies (Note 9).

The components of the provision for income taxes are summarized as follows
for the six month period ended June 30, 1996 (in thousands):

<TABLE>
<S> <C>
Current income taxes:
Federal.................................................................... $ 183
Foreign.................................................................... 3
-----
Total.............................................................. 186
-----
Deferred income taxes:
Federal.................................................................... 288
State...................................................................... 211
Foreign.................................................................... (38)
-----
Total.............................................................. 461
-----
Reduction in valuation allowance............................................. (461)
-----
Provision for income taxes................................................... $ 186
=====
</TABLE>

The provision for income taxes is different from that which would be
obtained by applying the statutory Federal income tax rate (34%) to income
before provision for income taxes. The items causing this difference for the six
month period ended June 30, 1996 are as follows:

<TABLE>
<S> <C>
Provision at statutory rate................................................ 34.0%
Foreign provision in excess of Federal statutory rate...................... 3.7
State income taxes, net of Federal benefit................................. 4.8
Reduction in valuation allowance........................................... (26.5)
-----
Provision at effective rate................................................ 16.0%
=====
</TABLE>

F-14
<PAGE> 73

CYMER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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
the Company's net deferred tax assets are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE
------------------- 30,
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net operating loss carryforwards...................... $ 3,608 $ 3,195 $ 2,279
Tax credit carryforwards.............................. 1,241 1,829 1,570
Capitalized research and development costs............ 298 359 307
Reserves and accruals not currently deductible........ 254 339 170
Differences between book and tax basis of inventory
and
fixed assets........................................ 242 450 1,294
Unearned revenues..................................... 199 307 308
Deferred rent......................................... 141 159 177
State taxes........................................... (351) (427) (355)
------- ------- -------
Net deferred tax assets before valuation allowance.... 5,632 6,211 5,750
Valuation allowance................................... (5,632) (6,211) (5,750)
------- ------- -------
Total....................................... $ -- $ -- $ --
======= ======= =======
</TABLE>

The Company has provided a valuation allowance equal to the net deferred
tax assets recorded due to uncertainties as to their ultimate realization.

The Company's net operating loss carryforwards of $6,592,000 and credit
carryforwards of $1,570,000 as of June 30, 1996 expire at various dates through
2010. The Tax Reform Act of 1986 and the California Conformity Act of 1987
impose substantial restrictions on the utilization of net operating losses in
the event of an "ownership change" as defined by Section 382 of the Internal
Revenue Code of 1986. There may have been, and there may be in the future,
ownership changes, such as the issuance of the Company's preferred and common
stock, which may significantly limit the Company's ability to immediately
utilize the stated net operating loss carryforwards.

8. COMMITMENTS AND CONTINGENCIES

Leases -- The Company leases its primary facilities under non-cancelable
operating leases. The lease term is through January 1, 2010. The leases also
provide for certain rent abatements and minimum annual increases. The Company
also leases certain other facilities and equipment under capital and short-term
operating lease agreements. The capital leases expire on various dates through
2000.

Rent expense under operating leases, including common area maintenance
charges, is recognized on a straight-line basis over the life of the related
leases and totaled approximately $530,000, $555,000, and $736,000 for the years
ended December 31, 1993, 1994 and 1995, respectively, and $301,000 and $507,000
for the six months ended June 30, 1995 and 1996, respectively.

The net book value of assets under capital leases at December 31, 1995 and
June 30, 1996 was approximately $85,000 and $613,000 net of accumulated
amortization of approximately $16,000 and $61,000, respectively.

F-15
<PAGE> 74

CYMER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Total future minimum lease commitments under operating leases, including
common area maintenance charges, and capital leases, are as follows (in
thousands):

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, OPERATING CAPITAL
------------------------------------------ --------- -------
<S> <C> <C>
1996 (six months)......................... $ 384 $ 128
1997...................................... 776 183
1998...................................... 777 152
1999...................................... 784 148
2000...................................... 793 93
Thereafter................................ 8,099
-------
Total................................... $11,613 704
=======
Less amount representing interest......... 132
Present value of minimum lease payments... 572
Less current portion...................... 185
Long-term obligations under capital
leases.................................. $ 387
</TABLE>

Patent License Agreement -- The Company has a patent license agreement for
a non-exclusive worldwide license to certain patented laser technology. Under
the terms of the agreement, the Company is required to pay royalties ranging
from 0.25% to 5% of gross sales and leases as defined depending on the total
amounts attained. Royalty fees totaled $13,000, $30,000 and $64,000 for the
years ended December 31, 1993, 1994 and 1995, respectively, and $24,000 and
$66,000 for the six months ended June 30, 1995 and 1996, respectively.

Employee Savings Plan -- The Company has a 401(k) plan that allows
participating United States employees to contribute 1% to 20% of their salary,
subject to annual limits. The Company is not required to make contributions and
through June 30, 1996, no contributions have been made.

Retirement Plan -- During the six months ended June 30, 1996, Cymer Japan,
Inc. adopted a retirement benefit plan for all Cymer Japan, Inc. 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.

The multi-employer retirement plan pays each employee a defined benefit of
$45,000 upon mandatory retirement at age 60. The employee has the option to
receive the payment in installments. In the case of termination of employment
prior to age 60, benefits are paid in the amounts predetermined by the plan.
Total expense for the six months ended June 30, 1996 amounted to $1,000.

The insurance policies pay each employee $91,000 and the Japanese directors
from $255,000 to $319,000 at death or upon mandatory retirement at age 60 for
employees and age 65 for the Japanese directors. In the case of termination of
employment prior to age 60, the policy's cash surrender value is to be paid to
each participant. Total expense for the six months ended June 30, 1996 amounted
to $13,000.

Contingency -- The Company has been notified of alleged infringements of
certain patents related to its manufacture and sale of laser systems. The
Company believes, based upon the advice of counsel, that the Company's products
do not infringe any valid claim of the asserted patents.

9. RELATED PARTY TRANSACTIONS

Collaborative Arrangement -- The Company has a collaborative arrangement
with a Japanese company that is also a stockholder of the Company. Pursuant to
such arrangement entered into in August 1992, the stockholder and the Company
entered into a (i) stock purchase agreement, (ii) research and development

F-16
<PAGE> 75

CYMER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

agreement, (iii) product license agreement, and (iv) contract manufacturing
agreement. The general provisions of these agreements are as follows:

Stock Purchase Agreement -- The stockholder purchased 235,295 shares of the
Company's Series D Redeemable Convertible Preferred Stock at $8.50 per share and
net proceeds to the Company of $1,909,000.

Research and Development Agreement -- The stockholder will reimburse the
Company 50% of the Company's total research and development expenses under
annual sub-agreements, as defined, to a maximum of $500,000 per year.
Reimbursements of $375,000, $375,000 and $250,000 were received under the
Agreement for the years ended December 31, 1993, 1994 and 1995, respectively. Of
the total received, $195,000, $47,000 and $0 was recorded as deferred revenue at
December 31, 1993, 1994 and 1995, respectively. This agreement expired in June
1995.

Product License Agreement -- The Company granted to the stockholder the
exclusive right in Japan and the non-exclusive right outside Japan to
manufacture and sell one of the Company's products and subsequent enhancements
thereto. The Company 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, the Company received up-front
license fees of $3,000,000, of which the Company received $1,000,000 in 1992 and
$2,000,000 in 1993. The Company is also entitled to royalties of 5% on related
product sales through September 1999, after which the royalty rate is subject to
renegotiation. The license agreement also provides that product sales between
the Company and the stockholder will be at a 15% discount from the respective
companies' list price. The agreement terminates in August 2012.

Contract Manufacturing Agreement -- The stockholder has agreed to
manufacture for the Company another of its products. The Company will be
required to purchase a specified percentage of its total annual product, as
defined. The agreement expires in August 2001, and will automatically renew for
two-year terms unless one year's notice is given by either party. No purchases
were made under the agreement during 1993, 1994, 1995 and 1996.

Design and Development Agreements -- During 1995, the Company entered into
design and development agreements with certain of its major customers who are
also stockholders. Such agreements generally provide, among other things,
discounts to these customers on future sales of the related lasers. Revenues
from such agreements are a not material component of 1996 revenues.

Service Agreement -- The Company has a service agreement with another
Japanese company who is also a preferred stockholder of the Company. The general
provisions of the service agreement are as follows:

Sales and Marketing -- The Japanese company is to assist the Company in
establishing sales, marketing, manufacturing, and maintenance capabilities in
exchange for consideration equal to a percentage of net sales of certain
products in Japan. The agreement initially expired in March 1996 and
automatically extends until the total consideration paid under the agreement
aggregates $2,000,000. Under certain conditions, if the agreement is terminated,
the Company may be required to pay liquidated damages equal to $2,000,000 less
the aggregate of previous consideration plus other eligible consideration paid
to the Japanese company as defined in the agreement. Consideration expensed
under the agreement for the years ended December 31, 1993, 1994 and 1995,
totaled $52,000, $67,000 and $211,000, respectively, and $53,000 and $350,000,
for the six months ended June 30, 1995 and 1996, respectively.

Business Strategy -- In addition, the Japanese company has agreed to assist
the Company in establishing a business strategy for the Japanese market,
evaluating third party contractors, preparing and negotiating the terms and
conditions of a license proposal with third party contractors, and finding new
investors. In exchange for such assistance, the Company agreed to pay the
Japanese company a percentage of any: (i) up-front license fees, (ii) royalties
received on certain sales, and (iii) funding received from new investors.
Payments made under the agreement for the year ended December 31, 1993 totaled
$100,000.

F-17
<PAGE> 76

CYMER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Royalties -- The Company has also agreed to pay the Japanese company
additional royalties on net sales of certain products manufactured by the third
party contractor as well as a fee for each laser chamber refurbished by the
third party contractor. Such royalties are applicable only for the period
subsequent to the expiration of the original agreement.

10. ACCOUNTING CHANGE

In 1994, the Company changed its method of accounting for the 8% per annum
accretion of the redemption price for the Company's redeemable convertible
preferred stock (Note 5). Prior to 1994, the Company did not record the
accretion, as it was not probable that funds would be available for redemption.
However, in 1994, the Company's prospects improved, justifying the change in
method in accounting for the accretion. The impact of the change was to increase
the balance of redeemable convertible preferred stock by $5,897,000 with a
respective increase in the accumulated deficit in stockholders' deficit as of
December 31, 1994.

11. GEOGRAPHIC INFORMATION

Presented below is information regarding sales, income (loss) from
operations, and identifiable assets, classified by operations located in the
United States and Japan. The Company sells its excimer lasers in Japan through
Cymer Japan, Inc. All significant intercompany balances are eliminated in
consolidation. The majority of consolidated costs and expenses are incurred in
the United States and are reflected in the operating income (loss) from the
United States operations.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales:
United States.......................... $ 4,114 $ 6,661 $11,303 $ 4,693 $ 9,431
Japan.................................. 1,585 2,260 7,517 2,586 9,751
------- ------- ------- ------- -------
Total.......................... $ 5,699 $ 8,921 $18,820 $ 7,279 $19,182
======= ======= ======= ======= =======
Operating income (loss):
United States.......................... $(2,838) $(2,312) $(3,425) $(1,465) $(4,064)
Japan.................................. 142 524 3,275 1,068 4,940
------- ------- ------- ------- -------
Total.......................... $(2,696) $(1,788) $ (150) $ (397) $ 876
======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Identifiable assets:
United States.......................... $ 3,706 $ 6,414 $10,876 $ 7,956 $24,875
Japan.................................. 2,099 2,758 4,743 2,996 6,501
------ ------ ------- ------- -------
Total.......................... $ 5,805 $ 9,172 $15,619 $10,952 $31,376
====== ====== ======= ======= =======
</TABLE>

12. SUBSEQUENT EVENTS

Recapitalization -- The Company's Board of Directors and stockholders'
approved a reincorporation of the Company that became effective on August 21,
1996. In addition, all outstanding shares of redeemable convertible preferred
stock will automatically convert to the Company's common stock upon the
satisfaction of certain conditions, including the closing of a firm commitment
public offering of the Company's common stock at a minimum offering price of $6
per share of common stock with net proceeds to the Company of not less than
$10,000,000. See Note 1.

F-18
<PAGE> 77

CYMER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Employee Stock Plans -- Subsequent to June 30, 1996, the Company's Board of
Directors adopted the 1996 Stock Plan, the 1996 Employee Stock Purchase Plan and
the 1996 Director Option Plan. These plans are subject to stockholder approval.
The Company has reserved 1,500,000, 250,000, and 100,000 shares of common stock
for issuance under the respective plans.

* * * * * *

F-19
<PAGE> 78

APPENDIX -- (DESCRIPTION OF GRAPHICS)

GATEFOLD FOLLOWING INSIDE FRONT COVER

[Graphic: The graphic depicts in the left panel a photograph of the Company's
5,000 Series excimer laser product, the front panel of which is transparent,
revealing the components of the laser.]

GRAPHIC CAPTION: ABOVE PHOTOGRAPH: CYMER IS THE LEADING PROVIDER OF EXCIMER
LASER ILLUMINATION SOURCES FOR USE IN DEEP UV PHOTOLITHOGRAPHY SYSTEMS.

GRAPHIC CAPTION: BELOW PHOTOGRAPH: CYMER: ENABLING DEEP UV SEMICONDUCTOR
PHOTOLITHOGRAPHY FOR THE NEXT GENERATION AND BEYOND.

[Graph: Right panel: This graph illustrates the adoption of illumination
technologies used to produce semiconductors with decreases in critical feature
sizes. The vertical axis depicts microns (from 0.0 microns to 1.2 microns); the
horizontal axis depicts time (from 1986 to 2001). Three downward sloping curved
arrows cascade down the graph representing each of the three illumination
technologies and show the critical feature sizes the technologies are used to
produce as well as their date of initial use.]

GRAPHIC CAPTION: ABOVE GRAPH: ENABLING MOORE'S LOW WITH DEEP UV
PHOTOLITHOGRAPHY.

[Graphic Captions: BELOW GRAPH: Deep ultraviolet (DUV) photolithography is a
next-generation technology designed for semiconductor manufacturing below 0.35
microns. G-line and i-line photolithography systems, which have generally been
used for critical feature sizes above 0.35 microns, have primarily used mercury
arc lamps as their illumination source. Cymer's excimer lasers have been
selected as an illumination source by all five of the world's DUV
photolithography system manufacturers, and photolithography systems
incorporating Cymer's excimer lasers have been purchased by each of the world's
ten largest semiconductor manufacturers.]

PAGE 27

[Graphic: This graph illustrates the reduction in critical feature sizes in
DRAMs over time. The vertical axis depicts microns (from 0.0 microns to 1.2
microns); the horizontal axis depicts time (from 1986 to 2001). A downward
sloping curve connects six points in the graph, each of which depicts the
critical feature sizes of DRAM devices at three year intervals.]

[Graphic caption: Reduction in critical feature size over time.]

PAGE 28

[Graphic: The graph on the right panel of the gatefold following inside front
cover is reproduced here.]

GRAPHIC CAPTION: CRITICAL FEATURE SIZE AND ILLUMINATION TECHNOLOGIES.

PAGE 34

[Graphic: This diagram depicts one of the Company's photolithography lasers,
with arrows labelling certain subassemblies.]
<PAGE> 79

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<PAGE> 80

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