CYMER LASER TECHNOLOGIES, S-1/A, 1996-07-22

CYMER LASER TECHNOLOGIES
S-1/A, 1996-07-22
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 19, 1996

REGISTRATION NO. 333-08383

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 1

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

CYMER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
NEVADA 3845 33-0175463
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

16275 TECHNOLOGY DRIVE
SAN DIEGO, CALIFORNIA 92127
(619) 487-2442
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------

DR. ROBERT P. AKINS
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND PRESIDENT
CYMER, INC.
16275 TECHNOLOGY DRIVE
SAN DIEGO, CALIFORNIA 92127
(619) 487-2442
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------

COPIES TO:

<TABLE>
<S> <C>
HENRY P. MASSEY, JR., ESQ. JAY K. HACHIGIAN, ESQ.
DAVID C. DRUMMOND, ESQ. RALPH L. ARNHEIM III, ESQ.
GREGORY T. COX, ESQ. NANCY S. KIM, ESQ.
WILSON SONSINI GOODRICH & ROSATI GUNDERSON DETTMER STOUGH VILLENEUVE
PROFESSIONAL CORPORATION FRANKLIN & HACHIGIAN, LLP
650 PAGE MILL ROAD 600 HANSEN WAY, SECOND FLOOR
PALO ALTO, CALIFORNIA 94304-1050 PALO ALTO, CALIFORNIA 94304
(415) 493-9300 (415) 843-0500
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effect registration statement for the same
offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
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CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
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Common Stock, $0.001 par value................................ $34,500,000 $11,897
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</TABLE>

(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o). In addition to the shares to be sold by the Underwriters,
this Registration Statement covers 142,918 shares to be offered on a
continuous basis by certain stockholders of the Company (including 12,992
shares underlying certain warrants held by such stockholders).

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2

CYMER, INC.

CROSS REFERENCE SHEET

PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF PART I ITEMS OF FORM S-1

<TABLE>
<CAPTION>
ITEM AND HEADING IN FORM S-1
REGISTRATION STATEMENT PROSPECTUS LOCATION IN PROSPECTUS
- ------------------------------------------------ --------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............. Prospectus Summary; The Company; Risk
Factors
4. Use of Proceeds............................ Prospectus Summary; Use of Proceeds
5. Determination of Offering Price............ Outside Front Cover Page; Underwriters
6. Dilution................................... Dilution
7. Selling Security Holders................... Principal and Selling Stockholders
8. Plan of Distribution....................... Outside and Inside Front Cover Pages;
Underwriters; Outside Back Cover Page
9. Description of Securities to be
Registered............................... Description of Capital Stock; Dividend
Policy
10. Interests of Named Experts and Counsel..... Legal Matters; Experts
11. Information with Respect to the
Registrant............................... Outside and Inside Front Cover Pages;
Prospectus Summary; The Company; Risk
Factors; Dividend Policy; Capitalization;
Dilution; Selected Consolidated Financial
Data; Management's Discussion and Analysis
of Financial Condition and Results of
Operations; Business; Management; Certain
Transactions; Principal and Selling
Stockholders; Description of Capital
Stock; Shares Eligible for Future Sale;
Consolidated Financial Statements; Outside
Back Cover Page
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Not applicable
</TABLE>
<PAGE> 3

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH STATE.

PROSPECTUS (Subject to Completion)

Issued July 18, 1996

Shares
LOGO
COMMON STOCK

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

OF THE SHARES OF COMMON STOCK OFFERED HEREBY, SHARES ARE BEING
SOLD BY THE COMPANY AND 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. IT IS CURRENTLY
ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE
BETWEEN $ AND $ PER SHARE. SEE
"UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE
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 $ 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............................ $ $ $ $
Total(3)............................. $ $ $ $
</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 $ .

(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
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
$ , $ and $ , 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 , 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.
, 1996
<PAGE> 4

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 , 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
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<S> <C>
Prospectus Summary.................... 3
The Company........................... 4
Risk Factors.......................... 5
Use of Proceeds....................... 14
Dividend Policy....................... 14
Capitalization........................ 15
Dilution.............................. 16
Selected Consolidated Financial
Data................................ 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 26

<CAPTION>
PAGE
----
<S> <C>
Management............................ 40
Certain Transactions.................. 47
Principal and Selling Stockholders.... 49
Description of Capital Stock.......... 51
Shares Eligible for Future Sale....... 53
Underwriters.......................... 56
Legal Matters......................... 57
Experts............................... 57
Additional Information................ 57
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 to be effected prior
to completion of the offering and a change in the number of authorized shares of
Common Stock and Preferred Stock effected in connection therewith; (ii) assumes
no exercise of the Underwriters' over-allotment option, (iii) reflects the
conversion of all outstanding shares of Preferred Stock into 7,562,527 shares of
Common Stock upon the closing of this offering and (iv) assumes the issuance
simultaneously with the offering of 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> 5

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 comprise 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 equipment incorporating the
Company's excimer laser has 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 extendable 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................................... ________ shares, including
________ shares by the Company(1) and
________ shares by the Selling Stockholders
Common Stock to be outstanding after the offering...... ________ shares(1)(2)
Use of proceeds........................................ Repayment of indebtedness and general corporate
purposes, including working capital
Proposed 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 (3)............................. 8,319 6,718 9,745
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------
ACTUAL AS ADJUSTED(4)
------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................................................................... $ 1,981
Working capital................................................................................ 5,961
Total assets................................................................................... 31,376
Total debt (5)................................................................................. 9,497
Redeemable convertible preferred stock......................................................... 35,234
Stockholders' equity (deficit)................................................................. (21,991)
</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 shares of Common Stock
upon the anticipated exercise of outstanding warrants. Excludes 1,191,983
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. Also
excludes 100,000 shares reserved for issuance under the Company's 1996
Director Stock Option Plan and 250,000 shares of Common Stock reserved for
issuance under the Company's 1996 Employee Stock Purchase Plan. Also
excludes 377,225 shares of Common Stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $3.42 per
share. See "Management -- Employee 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.
(4) Adjusted to reflect the conversion of all outstanding shares of Preferred
Stock into 7,562,527 shares of Common Stock upon the closing of this
offering, the assumed issuance of shares of Common Stock upon the
exercise of certain outstanding warrants, the sale by the Company of
shares of Common Stock offered hereby at an assumed initial public
offering price of $ per share and 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> 6

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 extendable 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 light 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 will be
reincorporated in Nevada prior to the completion of this offering. 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> 7

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> 8

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 it is possible 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 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 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."

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<PAGE> 9

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. 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 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 has entered into a long-term agreement requiring it to
purchase 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 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.

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<PAGE> 10

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, such as 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. The Company believes
that both companies are aggressively seeking to gain larger positions in the
market for excimer laser systems for photolithography applications. 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."

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,

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<PAGE> 11

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 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.

While 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

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<PAGE> 12

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, two of which have
been allowed. The Company also has filed 21 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.

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,
although there are no pending lawsuits involving any such claims. 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 R & D, one of the
Company's competitors, that certain aspects of the Company's lasers might
infringe the two patents owned by Coherent and that the Company might wish to
procure a license with respect to these patents. The Company has been advised by
its patent counsel, Townsend and Townsend and Crew, LLP, that in the opinion of
such firm the Company's products do not infringe the patents that have been
asserted by Coherent to the Company or that the Company would have other
defenses to a claim of infringement of certain of these patents in the event of
litigation. However, there can be no assurance that, if it elects to do so, the
Company will be able to negotiate a license with respect to these patents at all
or on reasonable terms, that litigation will not ensue with respect to these
patents or that the Company would ultimately be successful in any such
litigation. Any such litigation would at a minimum be costly and would divert
the efforts and attention of the Company's management and technical personnel,
which would 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 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

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<PAGE> 13

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 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

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<PAGE> 14

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. 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. 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 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.

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 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. 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. 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,
shares in addition to the shares offered hereby will be
eligible for sale; an additional shares will be eligible for sale 90
days after the date of this Prospectus; an additional shares will be
eligible for sale 180 days after the date of this Prospectus; and an additional
shares will be eligible for sale thereafter upon expiration of their
respective two-year holding periods. In addition, the Company intends to
register on the effective date of this offering a total of 3,350,000 shares of

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<PAGE> 15

Common Stock subject to outstanding options or reserved for issuance under the
Company's 1996 Stock Plan, 100,000 shares reserved for issuance under the
Company's 1996 Director Stock Option Plan and 250,000 shares of Common Stock
reserved for issuance under its Employee Stock Purchase Plan. 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 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 will be 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 stock market
has 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 Charter and Bylaw Provisions; Availability
of Preferred Stock for Issuance. 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 -- Anti-Takeover Measures" and "-- Preferred
Stock."

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USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of
Common Stock offered by the Company hereby are estimated to be $
million ($ million if the Underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $ per share
and after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company. The Company expects to use
approximately $12.0 million of such proceeds to retire outstanding indebtedness,
which the Company anticipates will consist of the following:

(i) $11.0 million under line of credit agreements with a bank that
provide for the following facilities: (a) a $2.0 million 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 and was incurred to support the
expansion of the Company's manufacturing capacity; (b) a $1.0 million
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 was incurred for general working capital purposes; and
(c) $8.0 million under lines of credit which are guaranteed by the U.S.
Export Import Bank, bear interest at a rate of prime plus 0.75% per annum,
are due March 5, 1997 and June 27, 1997 and were incurred to finance
inventory and receivables for export sales; and

(ii) a $1.0 million term loan from Mitsubishi International
Corporation which is due on the earlier of December 31, 1996 or the
completion of this offering and bears interest at a rate of prime plus
1.5%.

The Company also anticipates that approximately $4.0 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.

14
<PAGE> 17

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 Preferred Stock into
Common Stock, which will occur upon the closing of this offering, (b) the
assumed issuance of 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 and Preferred
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
shares of Common Stock offered by the Company at an assumed initial
public offering price of $ per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses 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 (including short-term indebtedness
for borrowed money and current portion of capital
leases)(1).............................................. $ 9,110 $ $--
======== ======== ========
Capital leases (excluding current portion)(1)............. $ 387 $-- $--
-------- -------- ---- ----
Redeemable convertible preferred stock, $0.01 par value:
actual -- 9,834,880 shares authorized, 7,527,000 shares
issued and outstanding; pro forma and as adjusted -- 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, 1,203,000 shares issued and
outstanding; pro forma and as adjusted -- $0.001 par
value, 25,000,000 shares authorized; pro
forma -- shares issued and outstanding; as
adjusted -- shares issued and
outstanding(2)....................................... 12
Additional paid-in capital................................ 241
Accumulated deficit....................................... (21,947)
Cumulative translation adjustment......................... (297)
-------- -------- ---- ----
Total stockholders' equity (deficit)................. (21,991)
-------- -------- ---- ----
Total capitalization................................. $ 13,630 $ $
======== ======== ========
</TABLE>

- ---------------
(1) See Notes 3 and 8 to 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 1,191,983 shares were subject
to outstanding options at a weighted average exercise price of $1.83 per
share as of June 30, 1996. Also excludes 377,225 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 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 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."

15
<PAGE> 18

DILUTION

The pro forma net tangible book value of the Company as of June 30, 1996
was $ , or approximately $ 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 Preferred Stock
into Common Stock and the assumed issuance of 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 shares of Common Stock in
this offering at an assumed initial public offering price of $ per
share (after deducting estimated underwriting discounts and commissions and
estimated offering expenses) the pro forma net tangible book value of the
Company at June 30, 1996 would have been $ , or $ per share.
This represents an immediate increase in pro forma net tangible book value of
$ per share to existing stockholders and an immediate dilution in pro
forma net tangible book value of $ 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.................. $
Pro forma net tangible book value per share as of June 30,
1996........................................................ $
Increase in pro forma net tangible book value per share
attributable to new investors...............................
-------
Pro forma net tangible book value per share after the offering...
-------
Dilution per share to new investors.............................. $
=======
</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 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 of shares of
Common Stock at an initial public offering price of $ per share (before
deduction of estimated underwriting discounts and commissions and estimated
offering expenses):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)......... % $ % $
New investors....................
------- ----- -------- -----
Total.................. 100.0% $ 100.0%
======= ===== ======== =====
</TABLE>

- ---------------
(1) Sales by the Selling Stockholders in the offering will reduce the number of
shares held by existing stockholders to shares, or %
of the total number of shares outstanding after the offering, and will
increase the number of shares held by new investors to shares,
or % of the total number of shares outstanding after the offering.
See "Principal and Selling Stockholders."

The foregoing tables assume no exercise of outstanding options. As of June
30, 1996, 1,191,983 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 33,038 shares remained available for future grant. Subsequent to June
30, 1996, the Company adopted the 1996 Stock Plan to replace 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.

16
<PAGE> 19

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 consolidated balance sheet data at December 31, 1994 and
1995 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 and 1996 and the consolidated balance
sheet data at June 30, 1996 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
periods. 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 net income (loss) per share(1)... $ 0.01 $(0.06) $ 0.10
======== ====== ========
Pro forma weighted average common and
common equivalent shares(1).............. 8,319 6,718 9,745
======== ====== ========
</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 pro forma net income (loss) per share.
(2) Total debt includes indebtedness for borrowed money and capital lease
obligations.

17
<PAGE> 20

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 Company
anticipates that international sales will continue to account for a significant
portion of its net sales.

18
<PAGE> 21

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).................. (.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 (3 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.

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

19
<PAGE> 22

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.

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

20
<PAGE> 23

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 10 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.

21
<PAGE> 24

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>

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

22
<PAGE> 25

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).

23
<PAGE> 26

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 $8.9 million in bank and other
debt.

Net cash used in operating activities was approximately $2.1 million, $2.2
million, $2.1 million and $5.7 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 $5.1 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 Preferred Stock and received approximately $945,000 in
net advances against commercial drafts in Japan. In 1995, the Company sold
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 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 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

24
<PAGE> 27

domestic accounts receivable; and (iv) a $2.0 million bridge loan facility from
a bank which is due September 30, 1996. At June 30 1996, $6.3 million was
outstanding under these credit lines. The Company also has a $1 million loan
facility which is guaranteed by Mitsubishi International Corporation, is due on
the earlier December 31, 1996 or the completion of this offering and was fully
utilized at June 30, 1996. See Notes 3 and 13 of Notes to Consolidated Financial
Statements. The Company intends to repay all outstanding indebtedness under the
above facilities from the net proceeds of this offering. See "Use of Proceeds."
The Company also has the following credit arrangements through its subsidiary in
Japan: (i) a Y500 million credit facility for the discounting of customer
promissory notes, (ii) a $15.8 million foreign exchange line for the conversion
of yen to dollars and (iii) a $20.0 million dollar foreign exchange line for
conversion of yen to dollars. At June 30, 1996, the amounts outstanding under
such facilities were Y184 million, $9.9 million and $15.5 million respectively.
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."

25
<PAGE> 28

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 (millionth of a
meter or "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 0.5 m 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 DRAM CRITICAL FEATURE SIZE OVER TIME

26
<PAGE> 29

Semiconductor Photolithography Process

Integrated circuits ("ICs") are complex integrations of 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 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 for 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 (0.436), 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:

DRAM CRITICAL FEATURE SIZE AND LIGHT SOURCE TECHNOLOGY

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

27
<PAGE> 30

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 generally requires 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 wavelengths 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 extendable 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 its 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
photomasking 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 for use in
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
equipment which incorporates the Company's excimer laser has been purchased by
the world's 10 largest semiconductor manufacturers: Intel, NEC, Toshiba,
Hitachi, Motorola, Samsung, Texas Instruments, Mitsubishi, Fujitsu and Philips.

28
<PAGE> 31

STRATEGY

Cymer's objective is to maintain its position as the leading supplier of
DUV light 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. 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.

PRODUCTS

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

29
<PAGE> 32

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 248 nm 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>

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 250 Hz
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

30
<PAGE> 33

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." The Company
has entered into OEM agreements with ASM Lithography, Canon and Nikon that set
the terms of product purchases but do not contain any minimum purchase
requirements. 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.

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

31
<PAGE> 34

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 separate 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.

SCHEMATIC DIAGRAM

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<PAGE> 36

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.

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. 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 manufactur-

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<PAGE> 37

ing 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 industrial laser
product.

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, such as 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

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<PAGE> 38

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 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, two of which have been allowed. The
Company also has filed 21 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

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<PAGE> 39

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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<PAGE> 40

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 a Patent License 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,
as defined, depending on total revenues earned. During 1995 and the first six
months of 1996, royalty fees totaled $63,630 and $66,150, 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 R&D 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. The Company believes that both companies are
aggressively seeking to gain larger positions in the market for excimer laser
photolithography systems. 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 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

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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.

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 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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<PAGE> 42

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
Thomas C. Dannemiller........ 36 Vice President of Manufacturing
Dr. Richard L. Sandstrom..... 45 Vice President of Advanced Research
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, 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

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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.

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 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

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<PAGE> 44

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 Director
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."

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(#)(3) COMPENSATION(4)
- -------------------------------------------- --------- ----------- ------------- ---------------
<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, Dannemiller and Scholler, who are currently being
compensated at an annual rate 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.

42
<PAGE> 45

(3) Consists of health insurance premiums paid by the Company as follows: Dr.
Akins: $1,830; Mr. Angus: $3,524.

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 4/20/05 $20,348 $44,964
William A. Angus, III............... 75,000 7.66% $0.50 4/20/05 $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 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.

43
<PAGE> 46

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.

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

44
<PAGE> 47

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
January 1 and July 1 of each year, with the first offering period beginning on
the date of this offering. 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 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.

45
<PAGE> 48

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.

46
<PAGE> 49

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.

47
<PAGE> 50

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.

48
<PAGE> 51

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 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. ................. 459,832 5.2% -- 459,832
7400 College Boulevard
Overland Park, KS 66210
Clearwater Ventures................................ 806,840 9.1% 2,925 803,915
c/o Weeden & Co., L.P.
145 Mason Street
Greenwich, CT 06830
Entities affiliated with Interven II Partners,
L.P.(2)
2401 Pine Avenue
Manhattan Beach, CA 90266........................ 802,741 9.0% 802,741
K-Sun, Inc. ....................................... 478,826 5.4% -- 478,826
6-1 Ohtemachi, 2-chome
Chiyoda-ku
Tokyo, Japan
Entities affiliated with Weeden Securities
Corporation(3)................................... 649,657 7.25% -- 649,657
145 Mason Street
Greenwich, CT 06830
ASM Lithography Holding N.V. ...................... 403,726 4.6% -- 403,726
Canon, Inc. ....................................... 403,725 4.6% -- 403,725
Nikon Corporation.................................. 403,725 4.6% -- 403,725
Robert P. Akins(4)................................. 302,231 3.4% -- 302,231
William A. Angus, III(5)........................... 33,438 * -- 33,438
Richard Abraham.................................... 27,900 * -- 27,900
Kenneth M. Deemer(6)............................... 802,741 9.0% -- 802,741
Peter Simone(7).................................... 10,000 * -- 10,000
F. Duwaine Townsen(8).............................. 423,668 4.8% -- 423,668
All directors and executive officers as a group
(11 persons)..................................... 697,195 7.8% --
OTHER SELLING STOCKHOLDERS
Herman Alswanger................................... 3,000 * 500 2,500
Anglo-American Partnership......................... 29,412 * 14,000 15,412
Controlfida B.V.I. ................................ 436,205 4.9% 130,000 306,205
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
Ellsworth R. Roston................................ 23,438 * 4,000 19,438
Charles Schwartz................................... 7,812 * 1,500 6,312
Uday Sengupta...................................... 286,000 3.2% 20,000 266,000
Joel and Gail Sheriff.............................. 6,000 * 6,000 --
Savas C. Tsivicos.................................. 15,000 * 15,000 --
Xerox Corporation(9)............................... 443,535 4.9% 107,258 336,277
</TABLE>

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

49
<PAGE> 52

(1) Applicable percentage of ownership is based on 8,851,740 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 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 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 warrants to purchase 29,068 shares and 145 shares, respectively.

(3) 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 purchasable upon exercise of a warrant held by Weeden & Co.,
L.P. and 20,000 shares purchasable upon exercise of a warrant held by Weeden
Investors Profit Sharing & Trust.

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

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

(6) Includes 770,269 shares held by InterVen II, L.P. and 3,259 shares held by
InterVen Ventures 1987. Also includes 29,068 shares purchasable upon
exercise of a warrant held by InterVen II, L.P. and 145 shares purchasable
upon exercise of a warrant 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.

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

(8) Includes 409,823 shares held by Ventana Growth Fund II, L.P. and 13,845
shares exercisable under a warrant held by Ventana Growth Fund II, L.P., of
which Mr. Townsen is a managing general partner.

(9) Includes 42,159 shares issuable upon exercise of warrants that are currently
exercisable or exercisable within 60 days of June 30, 1996.

50
<PAGE> 53

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 -- Employee 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 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 377,225 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

51
<PAGE> 54

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.

NEVADA BUSINESS COMBINATIONS STATUE

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.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is .

52
<PAGE> 55

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 shares of
Common Stock outstanding assuming the conversion of all outstanding shares of
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
shares simultaneously with the closing of this offering). Of these shares, the
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 (the "Registered Shares") of Common Stock, to be offered
on a continuous basis by such stockholders beginning 180 days following this
offering.

The remaining 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, Registered Shares and Restricted Shares will be
available for sale in the public market in the Public market as follows: (i)
shares will be available for immediate sale in the public market on the
date of this Prospectus, (ii) shares will be eligible for sale 90 days
from the date of this Prospectus; (iii) shares will be eligible for sale
upon expiration of the lock-up agreements 180 days after the date of this
Prospectus and (iv) shares will be eligible for sale thereafter upon
expiration of their respective two-year holding periods.

Upon completion of this offering, 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 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

53
<PAGE> 56

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 Rule 144's holding period restrictions.

Notwithstanding the foregoing, in connection with the offering, the
Company, its executive officers and directors and certain existing stockholders
of the Company, who will own an aggregate of approximately Registered
Shares and Restricted Shares after the offering, 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, (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 on the date of
this prospectus, (iii) the transfer of shares of Common Stock in a bona fide
charitable donation or in any estate planning disposition provided that the
transferee in any such transaction agrees to be bound by the terms of the
"lock-up" agreement or (iv) the transfer of shares of Common Stock due to the
death or disability of a stockholder provided that such transferee agrees to be
bound by the terms of the "lock-up" agreement.

In addition, the holders of shares of Common Stock 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 without the prior written
consent of the Representatives of the Underwriters.

In connection with the offering, the Company intends to file a registration
statement under the Securities Act covering approximately shares of
Common Stock subject to outstanding options or reserved for the issuance under
the 1987 Stock Option Plan and the 1996 Stock 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 Purchase Plan. See "Management -- Employee 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.

REGISTRATION RIGHTS

The holders of an aggregate of shares of Common Stock, assuming the
exercise of warrants to purchase shares of preferred stock and the
automatic conversion thereof immediately following this offering, will be
entitled to certain rights with respect to the registration of such shares under
the Securities Act. 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,

54
<PAGE> 57

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.

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> 58

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
NAME OF SHARES
------------------------------------------------------------------- ---------
<S> <C>
Morgan Stanley & Co. Incorporated..................................
Montgomery Securities..............................................
Needham & Company, Inc. ...........................................
-------
Total....................................................
=======
</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 $ per share under the initial
public offering price. Any Underwriter may allow, and such dealers may reallow,
a concession not in excess of $ 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 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.

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 a period of 180
days after the date of this Prospectus, without the prior written consent of
Morgan Stanley & Co. Incorporated.

56
<PAGE> 59

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 will be determined by
negotiations among the Company, the Selling Stockholders and the Representatives
of the Underwriters. Among the factors to be considered in determining the
initial public offering price will be 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. The estimated initial public offering price range set forth on the
cover page of this Preliminary Prospectus is subject to change as a result of
market conditions and other factors.

LEGAL MATTERS

The validity of the Common Stock offered hereby 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. 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
for each of the three years in the period ended December 31, 1995 included in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report 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.

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.

57
<PAGE> 60

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
(unaudited)......................................................................... 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 and 1996 (unaudited)................ 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 (unaudited).......... 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 and 1996 (unaudited)................ F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>

F-1
<PAGE> 61

The accompanying consolidated financial statements reflect an increase in
the number of authorized shares of common and preferred stock to 25,000,000 and
5,000,000, respectively, which is to be effected prior to the closing of the
Company's initial public offering. The following opinion is in the form that
will be signed by Deloitte & Touche LLP upon consummation of the above event,
which is described in the second paragraph of Note 1 of Notes to Consolidated
Financial Statements, and assuming that, from March 22, 1996 to the date of such
event, no other events shall have occurred that would affect the accompanying
consolidated financial statements and notes thereto.

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 the related consolidated
statements of operations, stockholders' deficit, and cash flows for each of the
three years in the period ended December 31, 1995. 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 the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1995 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.

San Diego, California
March 22, 1996 ( , 1996 as to the
second paragraph in Note 1 and Note 12)

F-2
<PAGE> 62

CYMER INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------- -------------------------
1994 1995 1996
-------- -------- -------------------------
<S> <C> <C> <C> <C>
ACTUAL
-----------
(UNAUDITED)
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' EQUITY (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)................ PRO FORMA
(NOTE 1)
---------
Redeemable Convertible Preferred Stock, authorized --
9,834,880 shares; $.01 stated par value, issued and
outstanding 4,325,000, 6,496,000 and 7,527,000 19,290 28,409 35,234 --
shares (liquidation preference -- $35,234)..........
-------- -------- ----------- ---------
Stockholders' Equity (Deficit):
Preferred Stock:
-- authorized -- 5,000,000 shares; $0.001 par
value, no shares issued or outstanding.......... -- -- -- --
Common Stock:
-- authorized -- 15,000,000 shares; $.01 stated
par value, issued and outstanding 1,091,000,
1,160,000 and 1,203,000 shares.................. 11 12 12 --
-- authorized -- 25,000,000 shares; $0.001 par
value, issued and outstanding shares...... -- -- --
Paid-in capital..................................... 164 195 241
Accumulated deficit................................. (19,898) (21,832) (21,947)
Cumulative translation adjustment................... (29) (205) (297)
-------- -------- ----------- ---------
Total stockholders' equity (deficit)......... (19,752) (21,830) (21,991) $ --
-------- -------- -----------
==========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY... $ 9,172 $ 15,619 $ 31,376
========= ========= ===========
</TABLE>

See Notes to Consolidated Financial Statements.

F-3
<PAGE> 63

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 1995 1996
------- ------- ------- ------ -------
(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.......................... 8,319 6,718 9,745
======= ====== =======
</TABLE>

See Notes to Consolidated Financial Statements.

F-4
<PAGE> 64

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)
Unaudited:
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 (unaudited)...... 1,203 $ 12 $241 $ (21,947) $ (297) $(21,991)
===== === ==== ======== ===== ========
</TABLE>

See Notes to Consolidated Financial Statements.

F-5
<PAGE> 65

CYMER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(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 (535)
Accounts payable................................... 220 424 1,404 513 2,646
Accrued liabilities................................ 125 397 337 (53) 1,173
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) (5,681)
------- ------- ------- ------- -------
INVESTING ACTIVITIES:
Acquisition of property................................ (536) (640) (2,653) (1,105) (5,121)
Disposal of property................................... 126 91 226 150 2
------- ------- ------- ------- -------
Net cash used for investing activities.......... (410) (549) (2,427) (955) (5,119)
------- ------- ------- ------- -------
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) (25)
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 10,696
------- ------- ------- ------- -------
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:
Net book value of property transferred to inventory for
resale............................................... $ 125 $ 39 $ 177 $ 150
======= ======= ======= =======
Capital lease obligations incurred for furniture and
equipment............................................ $ 46 $ 526
======= =======
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> 66

CYMER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 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
recapitalization to become effective prior to the closing of the Company's
planned initial public offering. Under the recapitalization, the Company
reincorporated in the State of Nevada as Cymer, Inc. and increased the number of
authorized shares of common and preferred stock to 25,000,000 and 5,000,000,
respectively. Consolidated stockholders' equity as of December 31, 1995 has been
shown on a 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 shares of common stock upon the exercise
of certain outstanding warrants, and the reincorporation of the Company in 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> 67

CYMER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Warranty Expense -- The Company generally warrants its products against
defects for the earliar 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 stockholders'
equity (deficit). Gains and losses resulting from foreign currency transactions
are included in the 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 statement 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. Such contracts expire on various dates through
February 1997.

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 -- Two customers individually accounted
for 40% and 27%, respectively, of 1993 revenues, four customers individually
accounted for 24%, 17%, 15% and 14%, respectively, of 1994 revenues, four
customers individually accounted for 27%, 19%, 18% and 10%, respectively, of
1995 revenues, and four customers individually accounted for 22%, 37%, 20% and
7%, respectively, of the six months ended June 30, 1996 revenues. Receivables
from these customers totaled $218,000, $2,576,000 and $5,254,000 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 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

F-8
<PAGE> 68

CYMER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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
June 30, 1996 and the six months ended June 30, 1995 and 1996 are 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 financial position and results of operations for such
periods. The 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 year's 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>

3. BORROWING FACILITIES

Revolving Loan Facility -- At December 31, 1995 and 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
1.0% and 1.5% at December 31, 1995 and June 30, 1996, respectively (9.5% and
9.75% at December 31, 1995 and June 30, 1996, respectively), payable quarterly,
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 December 31,
1995 and June 30, 1996, $1,000,000 was borrowed against the Loan Facility.

Loan and Security Agreement -- On September 27, 1995, the Company amended
its Loan and Security Agreement (the "Agreement") originally dated in October
1993. The Agreement provides for three revolving loan agreements with a bank to
provide for combined borrowings of up to a maximum of $2,666,000 with interest
on outstanding borrowings at prime plus 1.25% (9.75% at December 31, 1995). The
Agreement is

F-9
<PAGE> 69

CYMER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

secured by substantially all the Company's assets and provides for the
following: (i) borrowings up to $500,000 against eligible accounts receivable
(expires September 27, 1996), (ii) borrowings up to $1,666,000 (secured by
foreign accounts receivable, is partially guaranteed by the California Export
Finance Office and expired April 5, 1996), and (iii) borrowings up to $500,000
(secured by foreign account receivable, is partially guaranteed by the U.S.
Export-Import Bank and expires September 27, 1996). The agreements require the
Company to maintain certain financial statement ratios including, among other
items, limitation on additional debt, total liabilities to tangible net worth of
not more than 1.75 to 1 and minimum tangible net worth of not less than
$4,750,000 plus 50% of the Company's net income after taxes beginning with the
quarter ended September 30, 1995. As of December 31, 1995, the Company was in
compliance with all such covenants. There was $1,786,000 outstanding under the
Agreement at December 31, 1995.

On May 1 and June 14, 1996, the Company again amended its Loan and Security
Agreement (the "Agreement") originally dated in October 1993. The Agreement
provides for three revolving loan agreements 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). The Agreement is secured by
substantially all the Company's assets and 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
and June 27, 1997. 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).

Foreign Exchange Contract Facility -- In addition to the three revolving
loan agreements, a Foreign Exchange Contract facility was put into place in
1995. The Agreement 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 commercial drafts are discounted at the bill discount rate
plus 1.0% (1.875% at December 31, 1995 and 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> 70

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 4,934
Series D...................... 486 470 470 470 470 $8.50 2,615
Series E...................... 1,670 76 76 76 $5.00 449
Series F...................... 3,000 2,171 2,284 $3.50 8,711
Series G...................... 900 900 $6.00 5,571
----- ----- ----- ----- ----- -------
Total............... 9,835 4,230 4,325 6,496 7,509 $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. 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 (the "Holders") are entitled to certain
rights with respect to the registration of the common stock issuable upon
conversion of their shares of Preferred Stock ("Conversion Stock") under the
Securities Act.

F-11
<PAGE> 71

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 21,514, 130,951, and 305,590 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 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 39,997 shares of its common stock at a price of $3.40
per share. The warrants expire in 2000 and 2001.

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
---------
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
---------
</TABLE>

F-12
<PAGE> 72

CYMER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
NUMBER OF
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
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
earnings per share for the six month period ended June 30, 1996 would have been
reduced by approximately $ , or $ per share. The fair value of
the options granted during 1996 is estimated as $ on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
dividend yield , volatility of , risk-free interest rate of
, assumed forfeiture rate of %, and an expected life of 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 3.65 $ 0.60 197 $ 0.60
$ 1.00 - $3.00 114 4.19 $ 1.55 0 $ 0.00
$ 3.00 - $6.00 304 4.66 $ 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.......................... 458
------
Total.................................................................. 8,094
===========
</TABLE>

Pro Forma Stockholders' Equity -- See the second paragraph of Note 1.

F-13
<PAGE> 73

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 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> 74

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............................... 5,632 6,211 5,750
Valuation allowance for net deferred tax assets....... (5,632) (6,211) (5,750)
------- ------- -------
Total....................................... $ 0 $ 0 $ 0
======= ======= =======
</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 and credit carryforwards 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 $487,000
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> 75

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)......................... $ 368 $ 128
1997...................................... 748 183
1998...................................... 755 152
1999...................................... 777 148
2000...................................... 793 93
Thereafter................................ 8,099
-------
Total................................... $11,540 $ 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 as a
percentage 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 $63,630 and $66,150 for the
six months ended June 30, 1995 and 1996, respectively.

Employee Savings Plan -- The Company has a 401(k) plan that allows
participating 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.

Contingency -- The Company has been notified of an alleged infringement of
a patent in their manufacture and sale of laser systems. The Company has
reviewed the matter and concluded there is no basis for the allegation. The
Company has received proposed licensing terms and is considering the proposal.

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
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

F-16
<PAGE> 76

CYMER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 $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 in 1996 are a not material component of revenues.

SERVICE AGREEMENT -- The Company has a service agreement with a 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.

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 accretion of
the 8% per annum redemption on the redeemable convertible preferred stock (Note
5). The impact of that 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.

F-17
<PAGE> 77

CYMER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. GEOGRAPHIC INFORMATION

Sales and operating income (loss), and identifiable assets, classified by
geographic area, were as follows :

<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
Asia................................... 1,585 2,260 7,517 2,586 9,751
------- ------- ------- ------- -------
Total.......................... $ 5,699 $ 8,921 $18,820 $ 7,279 $19,182
======= ======= ======= ======= =======
Income (loss) from operations:
United States.......................... $(2,838) $(2,312) $(3,425) $(1,465) $(4,064)
Asia................................... 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
Asia................................... 2,100 2,758 4,743 2,996 6,501
------ ------ ------- ------- -------
Total.......................... $ 5,806 $ 9,172 $15,619 $10,952 $31,376
====== ====== ======= ======= =======
</TABLE>

12. SUBSEQUENT EVENTS

Sale of Preferred Stock -- During January and February of 1996, the Company
completed a financing which included the sale of 900,000 shares of Series G
Redeemable Convertible Preferred Stock for net proceeds of $5,342,000. The pro
forma effect on the December 31, 1995 consolidated balance sheet was to increase
Redeemable Convertible Preferred Stock outstanding to 7,396,000 shares and the
following:

<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------
PRO FORMA
AS
CONSOLIDATED BALANCE SHEET DATA ACTUAL PRO FORMA ADJUSTED
---------------------------------------------------- ------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Working capital..................................... $ 3,845 $ 5,342 $ 9,187
Total assets........................................ $15,619 $ 5,342 $20,961
Redeemable convertible preferred stock.............. $28,409 $ 5,342 $33,751
</TABLE>

Recapitalization -- The Company's Board of Directors approved a
recapitalization which is anticipated to become effective prior to the closing
of the Company's planned initial public offering. See the second paragraph in
Note 1. In addition, the Company obtained consents to convert automatically all
outstanding shares of redeemable convertible preferred 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.

Employee Stock Plans -- Subsequent to June 30, 1996, the Company's Board of
Directors adopted the 1996 Stock Plan to succeed the 1987 Stock Plan and adopted
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-18
<PAGE> 78

APPENDIX -- (DESCRIPTION OF GRAPHICS)

GATEFOLD FOLLOWING INSIDE FRONT COVER

[Graphic: The graphic depicts in the top panel certain subassemblies of the
Company's photolithography laser.]

GRAPHIC CAPTION: TOP PANEL:

A. State of the art solid state pulse power utilizes advanced proprietary
switching technology to significantly extend the lifetime of the module,
reducing cost of ownership.

B. The system gas flow has been engineered for high pulse repetition rate and
high power.

C. The gas life of the laser discharge chamber has been extended to 100 million
pulses and the time between servicing of the chamber window has been
extended to 1 billion pulses, reducing maintenance costs.

[Graphic: The graphic depicts in the bottom panel an exterior view of the
Company's photolithography laser connected to a photolithography tool.]

GRAPHIC CAPTION: BOTTOM PANEL, LEFT SIDE OF PAGE:

Excimer Laser Illumination Sources for Use in Deep Ultraviolet Photolithography
Systems for the Manufacture of Advanced Semiconductor Systems.

GRAPHIC CAPTION: BOTTOM PANEL, RIGHT SIDE OF PAGE:

- -- The 5000 Series combines high pulse repetition rate, high power and stability
for higher throughput and improved process yields.

- -- Cymer has successfully combined gas chamber, power source and wavelength
compression technology to provide reliable production-caliber manufacturing
equipment for the semiconductor industry.

PAGE 26

[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.]

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

PAGE 27

[Graphic: The graph on page 26 is reproduced here, with three added horizontal
lines representing the adoption of new illumination technologies with decreases
in critical feature sizes. The first line, at 0.436 microns on the vertical
axis, runs from 1986 to approximately 1990, and is labeled "g-line (436 nm)."
The second line, at 0.365 microns on the vertical axis, runs from approximately
1988 to approximately 1995, and is labeled "i-line (365 nm)." The third line, at
0.248 microns on the vertical axis, runs from approximately 1994 to 2001.]

GRAPHIC CAPTION: DRAM CRITICAL FEATURE SIZE AND LIGHT SOURCE TECHNOLOGY.

PAGE 33

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the registration fee and the NASD filing fee.

<TABLE>
<CAPTION>
AMOUNT
TO BE
PAID
-------
<S> <C>
Registration Fee........................................................... $11,897
NASD Filing Fee............................................................ 4,350
Nasdaq National Market Listing fee.........................................
Printing...................................................................
Legal Fees and Expenses....................................................
Accounting Fees and Expenses...............................................
Blue Sky Fees and Expenses.................................................
Transfer Agent Fees........................................................
Director and Officer Insurance.............................................
Miscellaneous..............................................................
Total............................................................
-------
$
=======
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 78.751 of the Nevada General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act"). The Registrant's Bylaws provide that the Registrant shall indemnify its
directors and officers to the fullest extent permitted by Nevada law, including
circumstances in which indemnification is otherwise discretionary under Nevada
law. The Registrant has entered into indemnification agreements with its
directors and officers containing provisions which are in some respects broader
than the specific indemnification provisions contained in the Nevada General
Corporation Law. The indemnification agreements may require the Registrant,
among other things, to indemnify its directors and officers 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), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain directors' and
officers' insurance if available on reasonable terms. Article [ ] of the
Registrant's Restated Articles of Incorporation (Exhibit [ ] hereto)
provides for indemnification of its directors and officers to the maximum extent
permitted by the Nevada General Corporation Law and Section [ ] of the
Registrant's Amended and Restated Bylaws (Exhibit [ ] hereto) provides for
indemnification of its directors, officers, employees and other agents to the
maximum extent permitted by the Nevada General Corporation Law. Reference is
also made to Section [ ] of the Underwriting Agreement contained in Exhibit
[ ] hereto, which contains provisions with respect to the indemnification of
the officers and directors of the Registrant against certain liabilities.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

(1) In October 1993, the Company issued and sold 8% promissory notes in
the aggregate principal amount of $474,010 and warrants for the purchase of
13,941 shares of Series E or F Preferred Stock at an exercise price of $3.40 per
share to two venture funds, one corporation and one individual. Each of the

II-1
<PAGE> 80

investors was an existing security holder of the Company, with the exception of
the individual, who was an accredited investor.

(2) In February 1994, the Company sold 75,600 shares of its Series E
Preferred Stock, $.01 par value, to two Japanese companies, each of which was an
existing security holder and customer of the Company, for aggregate
consideration of $378,000.

(3) In June 1994, the Company exchanged the 8% promissory notes and
warrants described in note (1) above into a subsequent bridge loan financing
whereby the Company issued and sold convertible promissory notes in the
aggregate principal amount of $1,625,010 and warrants for the purchase of
252,914 shares of the Company's Series E or F Preferred Stock at an exercise
price of $3.40 per share to five venture funds, four individuals and one
corporation. All of the investors were existing security holders of the Company,
with the exception of three of the individuals, who were each accredited
investors.

(4) In November and December 1994, the Company sold additional convertible
promissory notes in the aggregate principal amount of $1,999,052 and warrants
for the purchase of 146,989 shares of the Company's Series E or F Preferred
Stock at an exercise price of $3.40 per share to four venture funds and one
domestic and one foreign corporation, all of which were existing security
holders of the Company.

(5) In February 1995, the Company exchanged a warrant for the purchase of
15,000 shares of Series D Preferred Stock at an exercise price of $8.50 per
share, which had been issued in May 1992 to a financial institution in
connection with a loan and security agreement, for warrants for the purchase of
16,000 shares of Series E Preferred Stock at an exercise price of $4.00 per
share.

(6) In February and March 1995, the Company issued and sold a total of
1,900,000 shares of its Series F Preferred Stock for aggregate consideration of
$6,650,000, of which $2,895,092 was in cash and $3,754,908 was the principal and
interest from the conversion of the promissory notes described in (3) and (4)
above, to eight venture funds, two foreign corporations, one domestic
corporation, forty-five individuals, four trusts and one investment club. Of
these investors, twelve were existing security holders of the Company and the
remainder were all accredited investors. In connection with this financing, the
Company issued to Weeden & Co., L.P., an existing security holder of the
Company, as Placement Agent, in lieu of a cash commission, five-year warrants to
purchase 443,624 shares of Series F Preferred Stock at a per share exercise
price of $3.50.

(7) In December 1995, the Company issued warrants for the purchase of
27,005 shares of Common Stock, at an exercise price of $3.40 per share, to one
venture fund, one foreign corporation and three individuals, all existing
security holders of the Company which had concurrently exercised warrants for
the purchase of 270,074 shares of Series F Preferred Stock at an exercise price
of $3.40 per share.

(8) In January and February 1996, the Company issued and sold a total of
900,000 shares of its Series G Preferred Stock to three of its customers two of
which were existing security holders of the Company and one of which was an
accredited investor for an aggregate consideration of $5,400,000.

(9) In May and June 1996, the Company issued warrants for the purchase of
12,992 shares of Common Stock, at an exercise price of $3.40 per share, to three
individuals affiliated with the Placement Agent who had concurrently exercised
warrants for the purchase of 129,926 shares of Series F Preferred Stock at an
exercise price of $3.50 per share.

(10) Since June 1993, the Company has issued and sold shares of Common
Stock to employees at prices ranging from $.50 to $1.00, upon exercise of stock
options pursuant to the Company's 1987 Stock Plan.

The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated
under Section 3(b) of the Securities Act as transactions by an issuer not
involving a public offering or transactions pursuant to the compensatory benefit
plans and contracts relating to compensation as provided under such Rule 701.
The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any

II-2
<PAGE> 81

distribution thereof and appropriate legends were attached to the share
certificates issued in such transactions. All recipients had adequate access to
information about the Registrant.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) EXHIBITS

<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Articles of Incorporation of Registrant
*3.2 Bylaws of Registrant
4.1 Form of Lock-Up Agreement
*5.1 Opinion of Wilson, Sonsini, Goodrich & Rosati, P.C.
*10.1 Form of Indemnification Agreement with Directors and Officers
10.2 1987 Stock Option Plan
10.3 1996 Stock Option Plan
10.4 1996 Employee Stock Purchase Plan
10.5 1996 Director Option Plan
*10.6 Series A Preferred Stock Purchase Agreement
*10.7 Series B Preferred Stock Purchase Agreement
*10.8 Series C Preferred Stock Purchase Agreement
*10.9 Series D Preferred Stock Purchase Agreement
*10.10 Series E Preferred Stock Purchase Agreement
*10.11 Series F Preferred Stock Purchase Agreement
*10.12 Series G Preferred Stock Purchase Agreement
*10.13 Patent License Agreement, by and between the Company and Patlex Corporation
*10.14 Loan Agreement, by and between Mitsubishi International Corporation and the Company
*10.15 Standard Industrial Lease -- Multi-Tenant, by and between Frankris Corporation and
the Company
*10.16 Contract Manufacturing Agreement -- Lithography Laser, by and between the Company
and Seiko Instruments Inc.
*10.17 Product License and Manufacturing Agreement -- High Power Laser, by and between the
Company and Seiko Instruments Inc.
*10.18 Amendments to Loan Agreement between Silicon Valley Bank and Cymer Laser
Technologies
*10.19 Agreement between the Company and EO Technics Co., Ltd.
*10.20 Master Lease Agreement between Tokai Financial Services and the Company
21.1 Subsidiaries of the Registrant
23.1 Form of Independent Auditors' Consent
*23.2 Consent of Counsel (included in Exhibit 5.1)
23.3 Consent of Townsend and Townsend and Crew
24.1 Power of Attorney (see page II-5)
</TABLE>

- ---------------
* To be supplied by amendment.

(B) FINANCIAL STATEMENT SCHEDULES

Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

II-3
<PAGE> 82

Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-4
<PAGE> 83

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant, Cymer, Inc., a corporation organized and existing under the laws of
the State of Nevada, has duly caused this Registration Statement on Form S-1 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Diego, State of California, on this 18th day of July 1996.

CYMER, INC.

By: /s/ ROBERT P. AKINS

------------------------------------
Robert P. Akins
President, Chief Executive Officer
and
Chairman of the Board

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, jointly and severally, Dr. Robert
P. Akins and William A. Angus, III, and each of them acting individually, as his
attorney-in-fact, each with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this Registration Statement
(including post-effective amendments), and any and all Registration Statements
to be filed pursuant to Rule 462 under the Securities Act of 1933, as amended,
in connection with or related to the offering contemplated by this Registration
Statement, if any, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming our signatures as they may be signed by our said
attorney to any and all amendments to said Registration Statement.

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------ -------------------
<C> <S> <C>
/s/ ROBERT P. President, Chief Executive July 18, 1996
AKINS Officer and Chairman of the
- ------------------------------------------ Board
Robert P. Akins
/s/ WILLIAM A. ANGUS, Senior Vice President and July 18, 1996
III Chief Financial Officer
- ------------------------------------------
William A. Angus, III
/s/ NANCY Controller, Chief Accounting July 18, 1996
BAKER Officer
- ------------------------------------------
Nancy J. Baker
/s/ RICHARD P. ABRAHAM Director July 18, 1996
- ------------------------------------------
Richard P. Abraham
/s/ KENNETH M. DEEMER Director July 18, 1996
- ------------------------------------------
Kenneth M. Deemer
/s/ PETER J. Director July 18, 1996
SIMONE
- ------------------------------------------
Peter J. Simone
/s/ F. DUWAINE TOWNSEN Director July 18, 1996
- ------------------------------------------
F. Duwaine Townsen
</TABLE>

II-5