CYMER INC, 424B4, 1997-04-11

CYMER INC
424B4, 1997-04-11
PHOTOGRAPHIC EQUIPMENT & SUPPLIES

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<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-08383

PROSPECTUS

142,918 SHARES

CYMER, INC.
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COMMON STOCK
($.001 PAR VALUE)

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This Prospectus relates to the public offering, which is not being
underwritten, of shares of the common stock ("Common Stock") of Cymer, Inc., a
Nevada corporation (together with its consolidated subsidiaries, "Cymer" or the
"Company") offered from time to time by any or all of the Selling Stockholders
named herein (the "Selling Shareholders") for their own benefit. It is
anticipated that the Selling Stockholders will generally offer shares of Common
Stock for sale at prevailing prices in the over-the-counter market on the date
of sale. The Company will receive no part of the proceeds of sales made
hereunder. Of the 142, 918 shares of Common Stock to which this Prospectus
relates, 129,926 shares were acquired by the Selling Stockholders in May and
June 1996 upon exercise of certain warrants and 12,992 shares may be issued to
the Selling Stockholders upon exercise of outstanding warrants. All expenses of
registration incurred in connection with this offering, are being borne by the
Company. None of the shares offered pursuant to this Prospectus have been
registered prior to the filing of the Registration Statement of which this
Prospectus is a part.

The Common Stock of the Company is traded in the over-the-counter market
on the NASDAQ National Market System. On April 2, 1997, the closing price of
the Company's Common Stock was $36 7/8 (NASDAQ Symbol: CYMI).

SEE "RISK FACTORS" COMMENCING ON PAGE 4 HEREOF FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.

Each Selling Stockholder and any broker executing selling orders on behalf
of the Selling Stockholders may be deemed to be an "underwriter" within the
meaning of the Securities Act. Commissions received by any such broker may be
deemed to be underwriting commissions under the Securities Act.

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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.

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The date of this Prospectus is April 11, 1997.
<PAGE> 2
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING
STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF,
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.

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<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
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<S> <C>
Prospectus Summary........................................................................ 3
Risk Factors.............................................................................. 4
Use of Proceeds........................................................................... 13
Dividend Policy........................................................................... 13
Price Range of Common Stock............................................................... 13
Selected Consolidated Financial Data...................................................... 14
Management's Discussion and Analysis of Financial Condition and Results of Operations..... 15
Business.................................................................................. 20
Management................................................................................ 29
Certain Transactions...................................................................... 35
Principal and Selling Stockholders........................................................ 37
Description of Capital Stock.............................................................. 39
Plan of Distribution...................................................................... 40
Legal Matters............................................................................. 41
Experts................................................................................... 41
Additional Information.................................................................... 41
Index to Consolidated Financial Statements................................................ F-1
</TABLE>

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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.

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<PAGE> 3
PROSPECTUS SUMMARY

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

THE COMPANY

The Company was incorporated in Nevada in 1996. The Company's predecessor,
Cymer Laser Technologies, was incorporated in California in 1986 and was
reincorporated in Nevada in 1996. The Company's principal offices are located at
16750 Via Del Campo Court, San Diego, California 92127, and it telephone number
at that location is (619) 451-7300. Unless the context otherwise requires, the
terms "Cymer" and the "Company" as used in this Prospectus refer to Cymer, Inc.
and Cymer, Inc.'s wholly-owned subsidiary, Cymer Japan, Inc.

SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------

<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues................................. $ 9,131 $ 5,699 $ 8,921 $ 18,820 $ 64,995
Operating income (loss)........................ (1,117) (2,696) (1,788) 346 7,884
Net income (loss).............................. (1,268) (2,924) (2,045) 69 6,510
Primary earnings (loss) per share (1).......... $ 0.58
Weighted average common and
common equivalent shares outstanding(1)...... 11,210
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996
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<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................................... 55,405
Working capital................................................ 84,743
Total assets................................................... 129,467
Total debt..................................................... 2,217
Stockholders' equity .......................................... 98,820
</TABLE>

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(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing earnings per share for
1996.
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<PAGE> 4
RISK FACTORS

This Prospectus contains forward-looking statements that involve risks and
uncertainties. The statements contained in this Prospectus that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including without limitation statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in the
following risk factors and elsewhere in this Prospectus. In evaluating the
Company's business, prospective investors should consider carefully the
following factors in addition to the other information set forth in this
Prospectus.

Likely Fluctuations in Operating Results. 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, 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 December 31, 1996 of approximately $98
million for shipment during the next 12 months. 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.

The Company believes that semiconductor manufacturers are currently
developing capability for pilot production of 0.25um 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 0.25um 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.

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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 December 31, 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 would 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.

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 eight quarters, the Company has incurred annual operating
losses from inception through 1994 and incurred an operating loss in the
quarters ended March 31, 1995 and 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.

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

In addition to increasing manufacturing capacity at its facilities in San
Diego, California, the Company is also seeking to qualify Seiko Instruments,
Inc. ("Seiko") of Japan as a contract manufacturer of its photolithography
lasers. While Seiko began 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.

Seiko has been advised by Komatsu, Ltd. ("Komatsu"), a competitor of the
Company, that certain aspects of the Company's lasers might infringe a patent
that has been issued to Komatsu in Japan and that Komatsu intends to enforce its
rights under that patent against Seiko if Seiko engages in manufacturing
activities for the Company. Cymer has been advised by its patent counsel that in
the opinion of such firm the Company's products do not infringe any valid claims
included in the Komatsu patent. In the event that, notwithstanding its
manufacturing agreement with

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the Company, Seiko should determine not to commence or continue manufacturing
the Company's products until resolution of the matter with Komatsu, the
Company's ability to meet the anticipated demand for its products could be
materially adversely affected.

Dependence on Key Suppliers. Certain of the components and subassemblies
included in the Company's products are obtained from a single supplier or a
limited group of suppliers. In particular, there are no alternative sources for
certain of the components and subassemblies, including certain optical
components and 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. The
Company believes that its recent manufacturing expansion has significantly
strained the production capacity of certain key suppliers, including suppliers
of optical components and pre-ionizer tubes. 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.

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

Risk of Excessive Inventory Buildups by Photolithography Tool
Manufacturers. Substantially all of the Company's customers are photolithography
tool manufacturers, which in turn sell their systems to semiconductor
manufacturers. Over the past year, the Company's customers have substantially
increased their forecasted shipments of DUV photolithography tools. The Company
believes that the increase in demand for DUV photolithography tools coupled with
the dependence of the manufacturers of these tools on a limited number of laser
suppliers may have caused a degree of over-ordering of the Company's products.
The Company is working with its customers to better understand end user demand
for DUV photolithography tools. However, there can be no assurance that the
Company will be successful in this regard, or that is 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.

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 laser 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

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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 90% of the
Company's total revenues in 1995 and 1996, respectively. Sales to ASM
Lithography, Canon, Nikon and SVG Lithography accounted for approximately 19%,
30%, 31% and 10%, respectively, of total revenues in 1996 and 18%, 19%, 27%and
1%, respectively, of total revenues in 1995. The Company expects that sales of
its systems to these customers will continue to account for substantially all of
its revenues in the foreseeable future. None of the Company's customers is
obligated to purchase a minimum number of the Company's products. Loss of any
significant business from any one of these customers or a significant reduction
in orders from any one of these customers, including reductions caused by
changes in a customer's competitive position, a decision to purchase
illumination sources from other suppliers or economic conditions in the
semiconductor and photolithography tool industries, would have a material
adverse effect on the Company's business, financial condition and results of
operations.

Need to Manage a Changing Business. The Company recently has dramatically
expanded the scope of its operations and the number of employees inmost of its
functional areas. For example, the Company increased the number of its employees
from 136 to 336 between December 31, 1995 and 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, procedures and control, delivery and field service
and customer support capabilities. The Company will also be required to manage
effectively its expanding international 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.

Balanced Production between Systems and Replacement Parts. The Company
expects that the demand for replacement parts and component modules will
increase as the installed base of lasers increases. As a result, the Company
will be required to rapidly expand its production of component modules, which
are also required for new laser systems.

Because the Company prioritizes the reliable operation of its installed
units at semiconductor manufacturers above all other requirements, the failure
to rapidly expand the production of component modules could necessitate the
delay in shipment of new laser systems as component modules would be utilized
first to support existing systems in the field. Such delays in system shipments
could have a material adverse effect on 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

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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.

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.

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

Rapid Technological Change; New Product Introductions. Semiconductor
manufacturing equipment and processes are subject to rapid technological change.
The Company believes that its future success will depend in part upon its
ability to continue to enhance its excimer laser products and their process
capabilities and to develop and manufacture new products with improved
capabilities. In order to enhance and improve its products and develop new
products, among other things, the Company must work closely with its customers,
particularly in the product development stage, to integrate its lasers with its
customer's photolithography tools. There can be no assurance that future
technologies, such as X-ray, electron beam and ion projection processes, will
not render the Company's excimer

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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.

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 ability, than on patents,
copyrights, trade secrets and other intellectual property rights. Nevertheless,
the success of the Company may depend in part on patents, and as of December 31,
1996, the Company owned 17 United States patents covering certain aspects of
technology associated with excimer lasers which expire from January 2008 to
December 2013 and had applied for 12 additional patents in the United States,
two of which have been allowed. As of December 31, 1996, the Company had filed
57 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 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.

In July 1996, the Company's prospective Japanese manufacturing partner,
Seiko, was notified by Komatsu, one of the Company's competitors, that certain
aspects of the Company's lasers might infringe certain claims furnished by
Komatsu to Seiko that Komatsu advised Seiko were included in a patent
application filed by Komatsu in Japan (the "Patent Claims"). Seiko in turn
notified the Company of this claim. In connection with its manufacturing
agreement with Seiko, the Company has agreed to indemnify Seiko against such
claims under certain circumstances. A patent has now been issued by the Japanese
Patent Office covering the Patent Claims and Komatsu has advised Seiko of its
intention to enforce its rights under that patent against Seiko if Seiko engages
in manufacturing activities for the Company. The Company has been advised by its
patent counsel in this matter, Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation, which is relying in part on the opinion of the Company's Japanese
patent counsel, that in the opinion of such firm the Company's products do not
infringe any valid Patent Claims. However, there can

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be no assurance that litigation will not ensue with respect to these claims or
that the Company and Seiko would ultimately prevail in any such litigation.

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

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

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 services 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
operations.

Risks of International Sales and Operations. Approximately 54%, 69% and
81% of the Company's revenues in 1994, 1995 and 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

-10-
<PAGE> 11
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.

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

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 or hazardous substances could subject
the Company to future liability or could cause its manufacturing operations to
be curtailed or suspended.

Risks 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.

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

-11-
<PAGE> 12
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 production
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.

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

-12-
<PAGE> 13
USE OF PROCEEDS

The Company will receive no part of the proceeds of sales made by the
Selling Stockholders hereunder.

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.

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is publicly traded over-the-counter on the
Nasdaq National Market under the symbol CYMI. The following table lists the high
and low closing sales prices of the Company's Common Stock since its initial
public offering on September 18, 1996.

HIGH LOW
<S> <C> <C>
Third quarter of 1996.................................... $17 3/4 $13 5/8
Fourth quarter of 1996................................... $48 1/8 $15 3/4
</TABLE>

-13-
<PAGE> 14
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 Annual Report on
Form 10-K. The consolidated statement of operations data for the years ended
December 31, 1994, 1995, and 1996 and the consolidated balance sheet data at
December 31, 1995 and 1996 are derived from, and are qualified by reference to,
the consolidated financial statements included elsewhere in this Annual Report
on Form 10-K, which have been audited by Deloitte & Touche LLP. The consolidated
statement of operations data for the years ended December 31, 1992 and 1993 and
the consolidated balance sheet data at December 31, 1992, 1993, and 1994 are
derived from consolidated financial statements not included in this Annual
Report on Form 10-K, which have also been audited by Deloitte & Touche LLP.
These historical results are not necessarily indicative of the results to be
expected in the future.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------

1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
CONSOLIDATED STATEMENT OF OPERATIONS DATA: (in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales................................. $ 7,423 $ 3,393 $ 7,705 $ 15,576 $ 62,510
Other......................................... 1,708 2,306 1,216 3,244 2,485
-------- -------- -------- -------- --------
Total revenues ........................... 9,131 5,699 8,921 18,820 64,995
-------- -------- -------- -------- --------
Costs and expenses:
Cost of product sales......................... 4,404 2,726 4,797 8,786 35,583
Research and development...................... 2,673 2,733 3,283 6,154 11,742
Sales and marketing........................... 2,182 2,154 1,780 2,353 5,516
General and administrative.................... 989 782 849 1,181 4,270
-------- -------- -------- -------- --------
Total costs and expenses................. 10,248 8,395 10,709 18,474 57,111
-------- -------- -------- -------- --------
Operating income (loss)......................... (1,117) (2,696) (1,788) 346 7,884
Other income (expense).......................... (51) (7) (199) (241) (183)
-------- -------- -------- -------- --------
Income (loss) before income taxes............... (1,168) (2,703) (1,987) 105 7,701
Provision for income taxes...................... 100 221 58 36 1,191
-------- -------- -------- -------- --------
Net income (loss)............................... $ (1,268) $ (2,924) $ (2,045) $ 69 $ 6,510
======== ======== ======== ======== ========

Primary earnings per share(1)................... $ 0.58
========
Weighted average common and common
equivalent shares outstanding(1)............. 11,210
========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------

1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents................... $ 1,537 $715 $2,326 $2,015 $55,405
Working capital............................. 2,289 (122) (1,557) 3,845 84,743
Total assets................................ 6,265 5,805 9,172 15,619 129,467
Total debt.................................. 1,026 2,717 6,879 4,164 2,217
Redeemable convertible preferred stock...... 12,889 12,989 19,290 28,409 --
Stockholders' equity (deficit).............. (8,947) (11,828) (19,752) (21,830) 98,820
</TABLE>

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

(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing earnings per share for
1996.

-14-
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Prospectus contains forward-looking statements that involve risks and
uncertainties. The statements contained in this Prospectus that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including without limitation statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth below,
under "Risk Factors" and elsewhere in this Prospectus.

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>
YEARS ENDED DECEMBER 31,
------------------------------------------

1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Product sales 86.4% 82.8% 96.2%
Other 13.6 17.2 3.8
----- ----- -----
Total revenues 100.0 100.0 100.0
Cost and expenses:
Cost of product sales 53.8 46.7 54.7
Research and development 36.8 32.7 18.1
Sales and marketing 20.0 12.5 8.5
General and administrative 9.5 6.3 6.6
----- ----- -----
Total costs and expenses 120.1 98.2 87.9
----- ----- -----
Operating income (loss) (20.1) 1.8 12.1
Other income (expense) - net (2.2) (1.3) (0.3)
----- ----- -----
Income (loss) before provision for income taxes (22.3) 0.5 11.8
Provision for income taxes 0.7 0.2 1.8
----- ----- -----
Net income (loss) (23.0)% 0.3% 10.0%
===== ===== =====
Gross margin on product sales 37.7% 43.6% 43.1%
===== ===== =====
</TABLE>

YEARS ENDED DECEMBER 31, 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, and
other revenues, which primarily include revenue 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 for
costs to complete the development project.

-15-
<PAGE> 16
Product sales increased 301% from $15.6 million in 1995 to $62.5 million
in 1996, primarily due to increased sales of DUV photolithography laser systems.
A total of 145 laser systems were sold in 1996 compared to 34 laser systems in
1995. Funded development revenues decreased 23% from $3.2 million in 1995 to
$2.5 million in 1996, primarily due to the completion in 1995 of a laser
research project sponsored by SEMATECH.

The Company's sales are generated primarily by shipments to customers in
Japan, the Netherlands, and the United States. Approximately 54%, 69% and 81% of
the Company's sales in 1994, 1995, and 1996, respectively, were derived from
customers outside 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
33%, 50% and 61% of revenues in 1994, 1995, and 1996, respectively. The
activities of the Company's Japanese subsidiary are limited to sales and service
of products purchased by the subsidiary from the parent corporation. All costs
of development and production of the Company's products, including costs of
shipment to Japan, are recorded on the books of the parent company. The Company
anticipates that international sales will continue to account for a significant
portion of its net sales.

Cost of Product Sales. Cost of product sales includes direct material and
labor, warranty expenses, license fees, manufacturing and service overhead, and
foreign exchange gains and losses on foreign currency exchange contracts
associated with purchases of the Company's inventories by the Japanese
subsidiary for resale under firm third-party sales commitments. Net gains or
losses from foreign currency exchange contracts are recorded on the date the
inventories are received by the Japanese subsidiary and are included in cost of
product sales in the consolidated statements of operations as the related sales
are consummated. The Company recognized net gains on such contracts of$496,000
and $1.9 million for the years ended December 31, 1995 and 1996, respectively.
Cost of product sales rose 305% from $8.8 million in 1995 to $35.6 million in
1996 due to the increase in sales volume. The gross margin on these sales
remained relatively consistent at approximately 43% in 1995 and 1996.

Research and Development. Research and development expenses include costs
of internally-funded and customer-funded projects as well as continuing research
support expenses which primarily include employee and material costs,
depreciation of equipment and other engineering related costs. Research and
development expenses increased 91% from $6.2 million in 1995 to $11.7 million in
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 32.7% to 18.1% 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 134% from $2.4 million in 1995 to $5.5
million in 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 expense declined from 12.5% to
8.5% 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 262% from
$1.2 million in 1995 to $4.3 million in 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, in addition to a $705,000
receivable reserve recorded in 1996. As a percentage of total revenue, such
expenses excluding the receivable reserve decreased from 6.3% to 5.5% in the
respective periods. Overall, total expenses increased to 6.6% of revenue in
1996.

-16-
<PAGE> 17
Other Income (Expense). Net other income (expense) consists primarily of
interest income and expense and foreign currency exchange gains and losses
associated with the fluctuations in the value of the Japanese yen against the
U.S. dollar. Net other expense decreased from $241,000 in 1995 to $183,000 in
1996, primarily due to the increase in interest income associated with the
investment of excess cash during the period, larger exchange gains against the
yen, offset by higher interest expense reflective of borrowing requirements for
the first nine months of 1996. Foreign currency exchange gains totaled $10,000,
interest income totaled $32,000, and interest expense totaled $283,000 for 1995,
compared to $161,000, $347,000, and $691,000, respectively, for 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.
The gains or losses from these contracts are recorded as a component of cost of
product sales, while the remaining foreign currency exposure is recorded as
other income (expense) in the consolidated statements of operations. Gains and
losses resulting from foreign currency translation are accumulated as a separate
component of consolidated stockholders' equity(deficit).

Provision for Income Taxes. The provision for income taxes was
insignificant in 1995 and primarily represented taxes in Japan for research and
development revenues generated from agreements with Seiko. The tax provision of
$1.2 million in 1996 was primarily attributable to the substantial growth in the
Company's pretax income. As of December 31, 1996, the Company had Federal and
state tax business credit carryforwards available to offset future tax
liabilities of $1,833,000 and $293,000, respectively. Such Federal and state tax
credit carryforwards expire at various dates beginning with the year 1997 and
2003, respectively.

YEARS ENDED DECEMBER 31, 1994 AND 1995

Revenues. Product sales increased 102% from $7.7 million in 1994 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 10 and 26 DUV
photolithography systems in 1994 and 1995, respectively, and sold seven and
eight industrial laser systems during the same periods. Funded development
revenues increased 167%, from $1.2 million in 1994, to $3.2 million in 1995.
This increase was 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 83% from $4.8
million in 1994 to $8.8 million in 1995, as the Company's product sales
increased. Gross margin on product sales increased from 37.7% in 1994 to 43.6%
in 1995. This increase was due primarily due to economies of scale realized as
the Company's sales volume increased.

Research and Development. Research and development expenses increased 87%
from $3.3 million in 1994 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 36.8% to 32.7% in
1994 and 1995 due to the growth in the Company's revenues in those periods.

Sales and Marketing. Sales and marketing expenses increased 32% from $1.8
million in 1994 to $2.4 million in 1995. This increase was primarily the result
of increased industry interest in DUV photolithography and

-17-
<PAGE> 18
the associated sales and marketing expenses, including sales commissions
incurred to support the interest. As a percentage of total revenues, these
expenses declined from 20.0% to 12.5% in 1994 and 1995, respectively.

General and Administrative. General and administrative expenses increased
39% from $849,000 in 1994 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 9.5% to 6.3% in 1994 and 1995, respectively, reflecting
economies of scale as total revenues increased.

Other Income (Expense). In 1994, the Company reported other net expense of
$199,000 primarily reflecting increased interest expense on bridge financing
obtained from the Company's investors to support is expanding operations. This
debt financing was subsequently converted into equity by the investors in
February 1995. The Company reported other expense of $241,000 in 1995 due to
interest expense of $283,000, partially offset by foreign exchange gains of
$10,000 and interest income of $32,000.

Provision for Income Taxes. The Company's provision for income taxes,
which primarily represented taxes paid in Japan for license fees and research
and development revenues generated from agreements with Seiko, decreased from
$58,000 to $36,000 in 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.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary source of liquidity has been the cash flow generated
from the Company's September 18, 1996 initial public offering, resulting in net
proceeds to the Company of approximately $29.7 million and the public offering
on December 12, 1996, resulting in net proceeds of approximately $50.0 million,
the private sale of equity securities over the Company's ten year history
totaling approximately $27.1 million and short term bank borrowings. As of
December 31, 1996, the Company had approximately $55.4 million in cash and cash
equivalents, $10.4 million in short term investments, $84.7 million in working
capital and $1.8 million in bank debt.

Net cash used in operating activities was approximately $2.1 million in
1995 and $8.0 million in 1996. The increase in cash used in operations during
1996 was primarily attributable to an increase in accounts receivable and
inventory as the working capital requirements of the Company increased due to
the business expanding during the period.

Net cash used for investing activities was approximately $2.4 million in
1995 as compared to $22.9 million in 1996. The increase in cash used for
investing activities during 1996 primarily reflects the investment of funds
received through the Company's public offerings, and the purchase of computer
equipment, test equipment, research and development tools, manufacturing process
machinery and tenant improvements in the manufacturing area in order to
accommodate the business expansion for the period.

The Company's financing activities provided net cash of approximately $4.3
million and $83.6 million for 1995 and 1996, respectively. During 1995, the
Company sold Redeemable Convertible Preferred Stock for approximately $3.4
million, and increased its bank borrowings by $1.2 million. In 1996, the Company
received net proceeds of approximately $6.1 million from the sale of Redeemable
Convertible Preferred Stock and received net proceeds of approximately $79.7
million from its public offerings. Upon the Company's initial public offering in
September 1996, all Redeemable Convertible Preferred Stock (approximately 7.7
million shares) and Redeemable Convertible Preferred Stock warrants (to purchase
283,000 shares of such stock) were automatically converted into the Company's
common stock or warrants to purchase common stock.

-18-
<PAGE> 19
The Company has a $2.0 million term loan facility from a bank that is
secured by certain of the Company's assets. The Company also has through its
subsidiary in Japan a 2.1 billion yen (approximately $18.1 million) facility for
the receipt of funds from a bank in Japan, without recourse, in connection with
the discounting of certain commercial drafts received from customers as payment
for merchandise. As of December 31, 1996, 1.2 billion yen (approximately $10.4
million) was being utilized under the facility. The Company also has three
foreign currency exchange facilities. The Company had forward foreign exchange
contracts at December 31, 1996 to buy $43.2 million for 4.7 billion yen. The
total unrecorded deferred gain and premium on these contracts as of December 31,
1996 was $1.8 million.

The Company requires substantial working capital to fund its business,
particularly to finance inventories and accounts receivable and for capital
expenditures. 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 believes that it has sufficient working
capital and available bank credit to sustain operations and provide for the
future expansion of its business during the next fiscal year.

-19-
<PAGE> 20
BUSINESS

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

PRODUCTS

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

Photolithography Laser Products

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

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

The Company's 5000 series KrF excimer lasers, introduced in the first
quarter of 1996, are offered in both narrowb and, 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 wave meter 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 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.

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<PAGE> 21
Industrial High Power Laser Products

The Company's HPL-100K/110K series KrF excimer lasers are designed to meet
the rigors of high duty cycle industrial usage, such as microdrilling,
micromachining and annealing applications. The laser operates at a 200 to 250Hz
pulse repetition rate and provides average power output of 100 watts for the
HPL-100K and 110 watts for the HPL-110K. The pulse repetition rate and high
power makes these lasers well suited for micro-fabrication processes. The
Company is currently focusing its development and marketing efforts on its
photolithography laser products, and the Company's total revenues from
industrial laser products in 1996 were $1.2 million. Sales of industrial lasers
to Tamarack Scientific Co., Inc., a supplier of equipment used by
Hewlett-Packard to manufacture InkJet print heads, accounted for 1.5% of the
Company's total revenues in 1996.

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:

ASM Lithography Nikon
Canon SVG Lithography
Integrated Solutions

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.
Sales to ASM Lithography, Canon and Nikon accounted for 19%, 30% and 31%,
respectively, of total revenue in 1996. ASM Lithography, Canon and Nikon are
stockholders of the Company.

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<PAGE> 22
The following semiconductor manufacturers have purchased one or more DUV
photolithography tools incorporating the Company's laser:

UNITED STATES JAPAN KOREA
- -------------------------------- ---------------------- --------------------
Advanced Micro Devices Fujitsu Hyundai
Digital Equipment Corporation Hitachi Lucky Goldstar
IBM Mitsubishi Electric Samsung
Integrated Device Technology NEC EUROPE
Intel Corporation NTT --------------------
Micron Technology Oki Electric C-Net
Motorola Sharp IMEC
Rockwell Sony LETI
SEMATECH* Toshiba Philips
Texas Instruments SGS Thompson
Siemens
TAIWAN
- -----------------------
ERSO/ITRI
ProMOS
TSMC
UMC
Vanguard International
- ----------------------

*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
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 December 31, 1996, the Company had a backlog of
approximately $98 million, compared with a backlog of $28.5 million at December
31, 1995.

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.

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. In order to accomplish this objective, the
Company intends to continue to hire and train additional manufacturing
personnel, improve its assembly and test processes in order to reduce cycle
time, invest in additional manufacturing tooling and implement a multi-shift
testing schedule. This increase would follow a nearly seven-fold increase in the
manufacturing rate from December 1995 to December 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

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<PAGE> 23
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 December 1996, the Company leased an additional 100,000 square feet of
manufacturing facilities in San Diego. 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.
Seiko began limited production of lasers in 1996.

Certain of the components and subassemblies included in the Company's
products are obtained from a single supplier or a limited group of suppliers. In
particular, there are no alternative sources for certain of the components and
subassemblies, including certain optical components and pre-ionizer tubes used
in the Company's lasers. To date, the Company has been able to obtain adequate
supplies of its components and subassemblies from existing sources to meet its
current manufacturing schedule; however, suppliers of such components and
subassemblies have recently been unable to fully satisfy the Company's orders
for such products. The Company has only recently commenced volume production of
its laser systems and the Company believes that its recent manufacturing
expansion is likely to further strain the production capacity of certain key
suppliers, including suppliers of optical components and pre-ionizer tubes. For
example, the supplier of one of the key optical components for the Company's
lasers has recently experienced diminished manufacturing yields of the
component. While the Company is working actively with the supplier to increase
production of the component, there can be no assurance that the supplier will be
able to increase its production capacity in time to satisfy the Company's
increasing requirements. Moreover, the Company is increasingly outsourcing the
manufacture of various other subassemblies. 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.

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.

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<PAGE> 24
SERVICE AND SUPPORT

The Company supports its customers with field service, technical service
engineers and training programs, and in some cases provides ongoing on-site
technical support at the customer's manufacturing facility. Prior to shipment,
the Company's support personnel typically assist the customer in site
preparation and inspection and provide customers with training at the Company's
facilities or at the customer's location. Customers and end users are also
provided with a comprehensive set of manuals, including operations, maintenance,
service, diagnostic and safety manuals.

The Company's field engineers and technical support specialists are based at
its San Diego headquarters, its field service office near Boston and its
Japanese facility. Support in Korea is provided by EO Technics, a contractor
trained and supported by the Company. As part of its customer service, the
Company maintains an inventory of spare parts at each of its service facilities.
As the Company's installed base grows so does the demand for replacement parts
to satisfy world wide support requirements for customers' support organizations
as well as the companies' own logistics organization. As the Company rapidly
expands its production of new systems, it must even more rapidly expand its
production of component modules which are required not only for systems but also
for support and warranty requirements.

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,
establish a joint service and support capability with an independent firm to
serve Korea, 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.

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 December 31, 1996, the
Company had 93 employees engaged in research and development. Research and
development expenses for 1994, 1995 and 1996 were approximately $3.3 million,
$6.2 million and $11.7 million, respectively.

-24-
<PAGE> 25
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 $1.2 million, $3.2 million and $2.5 million during 1994, 1995,
and 1996, respectively.

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
17 United States patents covering certain aspects of technology associated with
excimer lasers which expire from January 2008 to December 2013 and has applied
for 12 additional patents in the United States, two of which have been allowed.
As of December 31, 1996, the Company also has filed 57 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.

The Company has in the past been, and may in the future be, notified that it
may be infringing intellectual property rights possessed by third parties. In
November 1993, the Company was notified by Coherent, the parent corporation of
Lambda Physik, one of the Company's competitors, that certain aspects of the
Company's products might infringe upon a patent owned by Coherent. In June 1996,
the Company was notified by Coherent that certain aspects of its products might
infringe a second patent owned by Coherent. In September 1996, Coherent and
Lambda-Physik commenced a patent infringement action against the Company with
respect to the first patent in the United States District Court for the Northern
District of California. On November 1,1996, the Company entered into a
settlement agreement with Coherent and Lambda Physik. Under the terms of the
settlement, Coherent and Lambda-Physik agreed to (i) dismiss the patent
infringement action with prejudice and (ii) release the Company from any claims
either may have with respect to the two disputed patents. In return, the Company
agreed to make annual

-25-
<PAGE> 26
payments to Coherent over a 13-year period. Such annual payments are not
material to the Company's financial position or results of operations.

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

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

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

Effective August 1, 1989 and lasting until the expiration of the licensed
patents, the Company entered into an agreement for a nonexclusive worldwide
license to certain patented laser technology with Patlex Corp., a patent holding
company ("Patlex"). Under the terms of the agreement, the Company is required to
pay royalties ranging from 0.25% to 5% of gross sales and leases of its lasers,
as defined, based on total revenues earned. During 1995 and 1996, royalty fees
totaled $64,000 and $226,000, respectively.

-26-
<PAGE> 27
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.

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

FACILITIES

Cymer's headquarters are located at 16750 Via Del Campo Court in an
approximate 37,000 square foot facility and a manufacturing facility is housed
in an approximately 66,000 square foot building located in San Diego, California
which the Company leases under leases 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 404 square meters of
facilities in Ichikawa, Japan under four renewable one and two year leases
expiring at various times but cancelable by the Company upon three months
notice. The Company intends to add additional field service offices as necessary
to service its customers. In December 1996, the Company leased the 37,000
building housing the corporate headquarters and an additional 100,000 square
feet of manufacturing facilities in San Diego.

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<PAGE> 28
EMPLOYEES

On December 31, 1996, there were 336 persons employed by the Company,
including 18 in Japan. No employees are currently covered by collective
bargaining agreements or are members of any labor organization as far as the
Company is aware. The Company has not experienced any work stoppages and
believes that its employee relations are good.

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<PAGE> 29
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company, and their ages as of
December 31, 1996, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- ------------------------------------------------------------

<S> <C> <C>
Dr. Robert P. Akins............ 45 Chairman of the Board, Chief Executive Officer and President
William A. Angus, III.......... 50 Senior Vice President, Chief Financial Officer and Secretary
G. Scott Scholler.............. 46 Senior Vice President of Operations
Dr. Richard L. Sandstrom....... 46 Vice President of Advanced Research
Thomas C. Dannemiller.......... 36 Vice President of Manufacturing
Robert B. MacKnight, III....... 47 Vice President and General Manager, After Market Operations
Robert G. Ozarski.............. 49 Vice President of Engineering
Louis A. Kaplan................ 54 Vice President, Human Resources
Nancy J. Baker................. 34 Director, Corporate Finance and Treasurer
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 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.

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 telephone 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 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.

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<PAGE> 30
DR. RICHARD L. SANDSTROM, a co-founder of the Company, has served as its
Vice President of Advanced Research since June 1994. From February 1986 to June
1994, Dr. Sandstrom served as Vice President of Technology for the Company. Dr.
Sandstrom received a B.A. in Physics in 1972 and a Ph.D. in Engineering Physics
in 1979 from the University of California, San Diego.

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

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

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

LOUIS A. KAPLAN joined the Company in December 1996 as Vice President, Human
Resources. From July 1995 to November 1996, Mr. Kaplan served as Director, Human
Resources and Organizational Development for Advanced Micro Devices, a
manufacturer of integrated circuits for the personal and networked computer and
communications markets. From June 1986 to July 1995, he was a principal in
Consulting About Management, a consulting firm primarily oriented toward
turnaround situations in the high technology, health care and printing
industries. From 1981 to 1986, Mr. Kaplan served as Vice President,
Administration and Human Resources for North Star Computers, a manufacturer of
micro computers. Mr. Kaplan received a B.S. in Vocational Rehabilitation
Counseling from Pennsylvania State University in 1963 and an M.S. in Industrial
Relations in 1977 from Loyola University, Chicago.

NANCY J. BAKER has served as Director, Corporate Finance and Treasurer since
October 1996. From August 1992 to October 1996, she served as Controller of the
Company. From March 1987 to April 1992, Ms. Baker was

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<PAGE> 31
Accounting Manager at International Totalizer 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 since 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.
From December 1992 to November 1996, Mr. Simone 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.

BOARD OF DIRECTORS MEETINGS AND COMMITTEES

The Board of Directors of the Company held a total of twelve meetings during
1996. No director attended fewer than 75% of the total number of meetings of the
Board of Directors or committees of the Board of Directors held in 1996 during
the period in which such directors were members of the Board of Directors. The
Board of Directors has a Compensation Committee and an Audit Committee.

The Audit Committee currently consists of Messrs. Simone and Townsen and met
twice during 1996. This committee is primarily responsible for approving the
services performed by the Company's independent auditors and for reviewing and
evaluating the Company's accounting principles and its system of internal
accounting controls.

The Compensation Committee currently consists of Messrs. Abraham and Deemer
and met two times during 1996. This committee reviews and approves the Company's
executive compensation policy and options plans.

DIRECTOR COMPENSATION

Directors receive $2,500 per meeting for their services as members of the
Board of Directors, and they are reimbursed for their expenses in attending
out-of-town meetings. The Company's Director Option Plan (the "Director Option
Plan") was approved by the Board of Directors and the stockholders in July 1996.
Under the Director Option Plan, the Company reserved 100,000 shares of Common
Stock for issuance to non-employee directors of the

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<PAGE> 32
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.

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

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<PAGE> 33
EXECUTIVE COMPENSATION

The following table sets forth the compensation earned in each of the last
two fiscal years by the Chief Executive Officer and the four other executive
officers who earned over $100,000 in salary and bonus for services rendered in
all capacities to the Company during 1996 (the "Named Executive Officers"):

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) OPTIONS (#) COMPENSATION($)(2)
- ------------------------------------ ---- ---------- ----------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
Robert P. Akins........................ 1996 $ 175,497 $ 87,748 50,000 $ 1,845
Chairman of the Board of Directors, 1995 $ 147,611 -- 147,300 $ 1,830
Chief Executive Officer and President
William A. Angus, III.................. 1996 $ 128,942 $ 38,683 25,000 $ 3,184
Chief Financial Officer, Senior 1995 105,809 -- 75,000 $ 3,524
Vice President and Secretary
G. Scott Scholler...................... 1996 $ 121,154 $ 36,346 120,000 $ 3,949
Senior Vice President of Operations
Richard L. Sandstrom................... 1996 $ 114,615 $ 34,385 25,000 $ 4,317
Vice President of Advanced Research 1995 $ 95,000 -- 58,800 $ 4,101

Kurt J. Lightfoot(3)................... 1996 $ 150,000 $ 45,000 -- $ 4,739
1995 $ 46,731 $ -- 120,000 $ 1,876
</TABLE>

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

(1) Bonus amounts earned in fiscal year 1996 were paid in February 1997.
(2) Consists of health insurance premiums paid by the Company.
(3) Mr. Lightfoot is no longer an officer of the Company. During fiscal 1996,
he served as Senior Vice President of Market Operations for the Company.

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<PAGE> 34
OPTION GRANTS

The following table sets forth each grant of stock options made during the
fiscal year ended December 31, 1996 to each of the Named Executive Officers:

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED (#) 1996 ($/SH)(2)(3) DATE(4) 5%($) 10%($)
- ---------------------------- ------------- ------------- ------------ ----------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Robert P. Akins ............ 50,000 7% $5.00 3/07/01 69,000 152,500
William A. Angus, III ...... 25,000 4% $5.00 2/22/01 34,500 76,250
G. Scott Scholler .......... 120,000 17% $5.00 2/22/01 165,600 366,000
Richard L. Sandstrom ....... 25,000 4% $5.00 3/07/01 34,500 76,250
Kurt J. Lightfoot .......... -- -- -- -- -- --
</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.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES

The following table provides certain information concerning the exercises
of options during the fiscal year ended December 31, 1996, and the unexercised
options held as of December 31, 1996 by each of the Named Executive Officers:

NUMBER OF SECURITIES VALUE OF UNEXERCISED
NO. OF UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FY-END(#): OPTIONS-AT-FY-END($)(2)
ACQUIRED ON VALUE --------------------------- --------------------------------
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert P. Akins........... -- -- 55,237 142,063 2,630,958 6,541,461
William A. Angus, III..... 10,000 $ 55,000 18,125 71,875 863,294 3,310,906
G. Scott Scholler......... -- -- -- 120,000 -- 5,175,600
Richard L. Sandstrom...... -- -- 25,725 58,075 1,225,282 2,653,612
Kurt J. Lightfoot......... -- -- 37,500 82,500 1,776,750 3,908,850
</TABLE>

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

(1) Market value of underlying securities on date of exercise, minus the
exercise price multiplied by the number of shares.

(2) Market value of underlying securities at fiscal year end, minus the exercise
price multiplied by the number of shares.

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<PAGE> 35
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 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, 1996, and 5-year warrants to
purchase 252,914 shares of 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 a director of the Company:

<TABLE>
<CAPTION>
First Bridge Financing Second Bridge Financing
------------------------------------ ----------------------------------
Note Principal Series F Preferred Note Principal Series F Preferred
Investors Amount Warrant Shares Amount Warrant Shares
- ----------------------------------------- -------------- ------------------ -------------- ------------------
<S> <C> <C> <C> <C>
Ventana Growth Fund II, L.P.(1) ......... $ 118,878 3,496 $ 118,878 17,482
InterVen II, L.P. (2) ................... $ -0- -0- $ 200,000 29,412
Clearwater Ventures (3) ................. $ 200,000 5,882 $ 830,000 122,059
Allsop Venture Partners III, L.P ........ $ -0- -0- $ 100,000 14,706
</TABLE>

<TABLE>
<CAPTION>
Third Bridge Financing
-----------------------------------
Note Principal Series F Preferred
Investors Amount Warrant Shares
- ----------------------------------------- -------------- ------------------
<S> <C> <C>
Ventana Growth Fund II, L.P.(1) ......... $ 150,000 11,029
InterVen II, L.P. (2) ................... $ 199,000 14,632
Clearwater Ventures (3) ................. $ 468,000 34,412
Allsop Venture Partners III, L.P ........ -0- -0-
</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 at InterVen
II, L.P. ("InterVen") and InterVen Ventures 1987 ("InterVen Ventures").
InterVen Ventures 1987 also participated in the Second and Third Bridge
Financings.

(3) Clearwater Ventures, a partnership ("Clearwater"), is affiliated with
Weeden & Co., L.P., which was the placement agent for the Series F
Preferred Stock Purchase Agreement, dated February 28, 1995. Richard P.
Abraham, a director of the Company, is a partner, stockholder and officer
in certain entities which are affiliates of Weeden & Co., L.P., including
among others, Clearwater and Weeden Capital Partners, L.P.

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 Series F Preferred Stock was offered through a private
placement in connection with which Weeden & Co., L.P. acted as the placement
agent for the shares of Series F Preferred Stock sold. The following beneficial
owners of more than five percent of the Company's capital stock purchased shares
of the Company's Series F Preferred Stock, convertible on a 1:1 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 Partners II, L.P.................... 118,465 414,627
Clearwater Ventures.......................... 446,218 1,561,763
Allsop Venture Partners III, L.P............. 30,274 105,959

(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.
</TABLE>

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<PAGE> 36
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.

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 warrant holders
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 holders 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 1,671 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 warrant
holders who exercised their Placement Agent warrants were granted certain
registration rights with respect to the underlying shares.

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 of 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.

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<PAGE> 37
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of March 10, 1997, (i) by each
person or entity who is known by the Company to own beneficially more than 5% of
the Common Stock, (ii) by each of the Named Executive Officers, (iii) by each
director of the Company, (iv) by all directors and executive officers of the
Company as a group, and (v) by each Selling Stockholder. 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 BENEFICIALLY
OWNED NUMBER OF
PRIOR TO OFFERING(1) SHARES
NAME AND ADDRESS OF ------------------------ BEING
DIRECTORS, NAMED EXECUTIVE OFFICERS AND 5% STOCKHOLDERS NUMBER PERCENT OFFERED
- --------------------------------------------------------------- ------------ --------- -----------
<S> <C> <C> <C>
Entities affiliated with InterVen II Partners, L.P............. 772,317 5.6% --
2401 Pine Avenue
Manhattan Beach, CA 90266
Robert P. Akins(3)............................................. 283,150 2.0% --
William A. Angus, III(4)....................................... 43,750 * --
Richard Sanstrom(5)............................................ 273,150 2.0% --
G. Scott Scholler(6)........................................... 29,999 * --
Kurt J. Lightfoot(7)........................................... 46,000 * --
Richard Abraham(8)............................................. 33,700 * --
Kenneth M. Deemer(9)........................................... 780,317 5.6% --
Peter Simone(10)............................................... 13,125 * --
F. Duwaine Townsen(11)......................................... 408,550 3.0% --
All directors and executive officers as a group
(14 persons)................................................ 1,941,490 13.8% --
SELLING STOCKHOLDERS:
Stephen Gladstone.............................................. 76,747 * 76,747
Steven Goldman ................................................ 47,734 * 47,734
Richard Sharp ................................................. 18,437 * 18,437
</TABLE>

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

* Less than 1%
(1) Applicable percentage of ownership is based on 13,810,072 shares of Common
Stock outstanding as of March 10, 1997 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 are
deemed outstanding for computing the percentage ownership of the person
holding such options or warrants, but are not deemed outstanding for
computing the percentage of any other person.

(2) Includes 769,064 shares held by InterVen II, L.P. and 3,253 shares held by
InterVen Ventures 1987. InterVen II Partners, L.P. is the general partner of
InterVen II, L.P. InterVen II Partners, L.P., has five general partners:
Kenneth M. Deemer, David B. Jones, Jonathan E. Funk, Wayne B. Kingsley and
Keith P. Larson. These five individuals share voting and investment power
over the shares held by InterVen II, L.P. and InterVen 1987. Mr. Deemer
disclaims beneficial ownership except to the extent of his proportionate
partnership interest. (3)Includes 86,150 shares issuable upon exercise of
options that are currently exercisable or exercisable within 60 days of
March 10, 1997.

(4) Includes 33,750 shares issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of March 10, 1997.

(5) Includes 35,650 shares issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of March 10, 1997.

(6) Includes 29,999 shares issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of March 10, 1997.

(7 Includes 45,000 shares issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of March 10, 1997.

(8) Includes 6,177 shares issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of March 10, 1997.

(9) Includes 8,000 shares held of record by InterVen Partners, Inc. Retirement
Plan, FBO Kenneth M. Deemer, over which Mr. Deemer exerts both voting and
investment power. Also includes 769,064 shares held by InterVen II, L.P. and
3,253 shares 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 held by InterVen II,
L.P. and InterVen Ventures 1987, except to the extent of his proportionate
partnership interest.

-37-
<PAGE> 38
(10) Includes 13,125 share issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of March 10, 1997.

(11) Includes 408,550 shares held by Ventana Growth Fund II, L.P., of which Mr.
Townsen is a managing general partner.

-38-
<PAGE> 39
DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 25,000,000 shares
of Common Stock, $.001 par value, and 5,000,000 shares of Preferred Stock, $.001
par value.

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.

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."

NEVADA BUSINESS COMBINATIONS STATUTE

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.

-39-
<PAGE> 40
TRANSFER AGENT AND REGISTRAR

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

PLAN OF DISTRIBUTION

The Company has been advised by the Selling Stockholders that they may
sell all or a portion of the shares offered hereby from time to time in the
over-the-counter market and that sales will be made at prices prevailing at the
times of such sales. In addition, the Selling Stockholders may participate in
transactions in put or call options or other rights (whether exchange-listed or
otherwise). The Selling Stockholders may also make private sales directly or
through a broker or brokers, who may act as agent or as principal. In connection
with any sales, the Selling Stockholders and any brokers participating in such
sales may be deemed to be underwriters within the meaning of the Securities Act.
The Company will receive no part of the proceeds of sales made hereunder.

Any broker-dealer participating in such transactions as agent may receive
commissions from the Selling Stockholders (and, if they act as agent for the
purchaser of such shares, from such purchaser). Usual and customary brokerage
fees will be paid by the Selling Stockholders. Broker-dealers may agree with the
Selling Stockholders to sell a specified number of shares at a stipulated price
per share, and, to the extent such a broker-dealer is unable to do so acting as
agent for the Selling Stockholders, to purchase as principal any unsold shares
at the price required to fulfill the broker-dealer commitment to the Selling
Stockholders. Broker-dealers who acquire shares as principal may thereafter
resell such shares from time to time in transactions (which may involve crosses
and block transactions and which may involve sales to and through other
broker-dealers, including transactions of the nature described above) in the
over-the-counter market, in negotiated transactions or otherwise at market
prices prevailing at the time of sale or at negotiated prices, and in connection
with such resales may pay to or receive from the purchasers of such shares
commissions computed as described above.

The Company has advised the Selling Stockholders that the
anti-manipulative rules of Regulation M under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), may apply to their sales in the market,
has furnished each Selling Stockholder with a copy of these Rules and has
informed them of the need for delivery of copies of this Prospectus. The Selling
Stockholders may indemnify any broker-dealer that participates in transactions
involving the sale of the shares against certain liabilities, including
liabilities arising under the Securities Act. Any commissions paid or any
discounts or concessions allowed to any such broker-dealers, and any profits
received on the resale of such shares, may be deemed to be underwriting
discounts and commissions under the Securities Act if any such broker-dealers
purchase shares as principal.

Upon notification by a Selling Stockholder to the Company that any
material arrangement has been entered into with a broker-dealer for the sale of
shares through a cross or block trade, a supplemental prospectus will be filed
under Rule 424(c) under the Securities Act setting forth the name of the
participating broker-dealer(s), the number of shares involved, the price at
which such shares were sold by the Selling Stockholder, the commissions paid or
discounts or concessions allowed by the Selling Stockholder to such
broker-dealer(s), and where applicable, that such broker-dealer(s) did not
conduct any investigation to verify the information set out in this Prospectus.

Any securities covered by this Prospectus which qualify for sale pursuant
to Rule 144 under the Securities Act may be sold under that Rule rather than
pursuant to this Prospectus.

There can be no assurance that any of the Selling Stockholders will sell
any or all of the shares of Common Stock offered by them hereunder.

-40-
<PAGE> 41
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 December 31, 1996, two members of Wilson, Sonsini,
Goodrich & Rosati, Professional Corporation, and investment partnerships
principally comprised of members of that firm, beneficially owned not more than
23,000 shares of the Company's Common Stock.

EXPERTS

The consolidated financial statements as of December 31, 1995 and 1996 and
for each of the three years in the period ended December 31, 1996 included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report (which report expresses an unqualified
opinion and includes an explanatory paragraph referring to a change during 1994
in the Company's method of accounting for the accretion on the Company's
Redeemable Convertible Preferred Stock) appearing herein, and have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.

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.

-41-
<PAGE> 42

INDEX TO FINANCIAL STATEMENTS

Page
----
<S> <C>
Independent Auditors' Report....................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 ...... F-3
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996................................ F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1994, 1995 and 1996.................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996................................ F-6
Notes to Consolidated Financial Statements......................... F-8
</TABLE>

F-1

<PAGE> 43
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, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1995
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.

As disclosed in Note 6 to the consolidated financial statements, during 1994
the Company changed its method of accounting for the accretion of the 8% per
annum redemption provision on the Company's Redeemable Convertible Preferred
Stock.

DELOITTE & TOUCHE LLP
San Diego, California
January 29, 1997

F-2
<PAGE> 44

CYMER, INC.
CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
DECEMBER 31,
------------------------
1995 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,015 $ 55,405
Short-term investments 10,449
Accounts receivable - net 4,832 18,833
Foreign exchange contracts receivable 9,317
Inventories 5,315 15,678
Deferred income taxes 1,432
Prepaid expenses and other 306 1,880
-------- --------
Total current assets 12,468 112,994
PROPERTY - net 3,053 11,707
OTHER ASSETS 98 4,766
-------- --------
TOTAL ASSETS $ 15,619 $129,467
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
Revolving loan and security agreements $ 2,786 $ 1,750
Advances against commercial drafts 1,305
Accounts payable 2,369 7,095
Accrued and other liabilities 2,163 8,401
Foreign exchange contracts payable 8,396
Income taxes payable 2,609
-------- --------
Total current liabilities 8,623 28,251
-------- --------
OTHER LIABILITIES 417 2,396
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 9)
REDEEMABLE CONVERTIBLE PREFERRED STOCK - authorized
9,834,880 shares; $.01 stated par value; issued and outstanding 6,496,000
shares (liquidation preference - $28,409,000) at December 31, 1995 28,409
--------

STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock - authorized 5,000,000 shares; $.001 par value,
no shares issued or outstanding
Common stock - authorized 25,000,000 shares; $.001 par value,
issued and outstanding 13,780,000 shares at December 31, 1996 14
Common stock - authorized 15,000,000 shares; $.01 stated par
value, issued and outstanding 1,160,000 shares at December 31, 1995 12
Paid-in capital 195 106,672
Accumulated deficit (21,832) (7,421)
Cumulative translation adjustment (205) (445)
-------- --------
Total stockholders' equity (deficit) (21,830) 98,820
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 15,619 $129,467
======== ========
</TABLE>

See Notes to Consolidated Financial Statements.

F-3

<PAGE> 45

CYMER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------
1994 1995 1996
<S> <C> <C> <C>
REVENUES:
Product sales $ 7,705 $15,576 $62,510
Other 1,216 3,244 2,485
------- ------- -------
Total revenues 8,921 18,820 64,995
------- ------- -------
COSTS AND EXPENSES:
Cost of product sales 4,797 8,786 35,583
Research and development 3,283 6,154 11,742
Sales and marketing 1,780 2,353 5,516
General and administrative 849 1,181 4,270
------- ------- -------
Total costs and expenses 10,709 18,474 57,111
------- ------- -------
OPERATING INCOME (LOSS) (1,788) 346 7,884
------- ------- -------
OTHER INCOME (EXPENSE):
Foreign currency exchange gain - net 65 10 161
Interest and other income 17 32 347
Interest and other expense (281) (283) (691)
------- ------- -------
Total other income (expense) - net (199) (241) (183)
------- ------- -------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (1,987) 105 7,701
PROVISION FOR INCOME TAXES 58 36 1,191
------- ------- -------
NET INCOME (LOSS) $(2,045) $ 69 $ 6,510
======= ======= =======
EARNINGS PER SHARE:
Primary:
Earnings per share $0.58
=======
Weighted average common and common equivalent shares 11,210
=======
Fully Diluted:
Earnings per share $0.56
=======
Weighted average common and common equivalent shares 11,566
=======
</TABLE>

See Notes to Consolidated Financial Statements.

F-4

<PAGE> 46
CYMER, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK STOCKHOLDERS'
---------------- PAID-IN ACCUMULATED TRANSLATION EQUITY
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT (DEFICIT)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 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 (5,897) (5,897)
Cumulative 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)
Cumulative translation adjustment (176) (176)
------ ----- -------- -------- ------- ---------
BALANCE, DECEMBER 31, 1995 1,160 12 195 (21,832) (205) (21,830)

Change in par value due to reincorporation (10) 10
Exercise of common stock options 127 93 93
Issuance of common stock under consulting
agreement 10 100 100
Initial public offering of common stock,
net of issuance costs 3,509 3 29,737 29,740
Conversion of preferred stock and warrants to
common stock 7,704 8 26,550 26,558
Secondary public offering of common stock,
net of issuance costs 1,270 1 49,987 49,988
Net income 6,510 6,510
Reversal of accretion of redemption upon
conversion of preferred stock 7,901 7,901
Cumulative translation adjustment (240) (240)
------ ----- -------- -------- ------- ---------

BALANCE, DECEMBER 31, 1996 13,780 $14 $106,672 $(7,421) $(445) $98,820
====== ===== ======== ======== ======= =========
</TABLE>

See Notes to Consolidated Financial Statements.

F-5
<PAGE> 47
CYMER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
------- ------ -------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(2,045) $ 69 $ 6,510
Adjustments to reconcile net income
(loss) to net cash used for operating
activities:
Depreciation and amortization 677 820 2,284
Loss on disposal of property 223
Change in assets and liabilities:
Accounts receivable (207) (2,574) (15,436)
Foreign exchange contracts receivable (9,317)
Inventories (1,205) (2,813) (10,512)
Deferred income taxes (1,432)
Prepaid expenses and other assets (233) 99 (4,919)
Accounts payable 424 1,404 5,501
Foreign exchange contracts payable 8,396
Accrued and other liabilities 407 379 8,769
Income taxes payable 2,609
Other (17) 502 (674)
------- ------ -------
Net cash used for operating
activities (2,199) (2,114) (7,998)
------- ------ -------

INVESTING ACTIVITIES:
Acquisition of property (640) (2,653) (11,090)
Disposal of property 91 226 16
Purchases of investments (13,715)
Sales of investments 1,900
------- ------ -------
Net cash used for investing
activities (549) (2,427) (22,889)
------- ------ -------

FINANCING ACTIVITIES:
Net (payments) borrowings under revolving
loan and security agreements (42) 1,240 (1,036)
Proceeds from issuance of redeemable
convertible preferred stock 404 3,407 6,050
Proceeds from issuance of common stock 15 32 79,935
Net advances against (discounting of)
commercial drafts 945 (390) (1,240)
Payments on capital lease obligations (27) (159)
Net proceeds from issuance of subordinated
promissory notes 3,150
------- ------ -------
Net cash provided by financing
activities 4,472 4,262 83,550
------- ------ -------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS (113) (32) 727
------- ------ -------
</TABLE>
(continued)

F-6
<PAGE> 48

Year Ended December 31,
---------------------------------------
1994 1995 1996
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS 1,611 (311) 53,390
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 715 2,326 2,015
------ ------ -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $2,326 $2,015 $55,405
====== ====== =======
SUPPLEMENTAL DSCLOSURE OF CASH FLOW INFORMATION:
Interest paid $162 $219 $467
====== ====== =======
Income taxes paid $58 $36 $14
====== ====== =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of Redeemable Convertible
Preferred Stock to common stock upon
initial public offering $26,558
=======
Capital lease obligations incurred for furniture
and equipment $100 $573
====== =======
Net book value of property transferred to
inventory for resale $39 $177
====== ======
Conversion of subordinated promissory notes and
related interest payable to Redeemable
Convertible Preferred Stock $3,755
======
</TABLE>

See Notes to Consolidated Financial Statements.
(concluded)

F-7
<PAGE> 49
CYMER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

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.

REINCORPORATION AND RECAPITALIZATION - The Company's Board of Directors
and stockholders approved a reincorporation into the State of Nevada
that became effective on August 21, 1996. In connection with the
reincorporation, the Company increased its authorized common stock to
25,000,000 shares. The Board of Directors and stockholders also
approved the creation of a new class of 5,000,000 shares of
undesignated preferred stock which was authorized on the closing of
the Company's initial public offering.

The Company completed its initial public offering of 3,509,000 shares
of common stock on September 18, 1996, resulting in net proceeds to the
Company of approximately $29.7 million. In connection with the offering,
all outstanding Redeemable Convertible Preferred Stock and related
outstanding warrants, were converted into 7,704,000 shares of common
stock (see Note 6). On December 12, 1996, the Company completed a
secondary public offering of 1,270,000 shares of common stock,
resulting in net proceeds to the Company of approximately $50 million.

PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Cymer, Inc. and its wholly-owned subsidiary,
Cymer Japan, Inc. The Company sells its excimer lasers in Japan
primarily 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, commercial paper and other highly liquid investments
purchased with an original maturity of three months or less.

INVESTMENTS - The Company's investments are composed primarily of
government and corporate fixed income securities. While it is the
Company's general intent to hold such securities until maturity,
management will occasionally sell particular securities for cash flow
purposes. Therefore, the Company's investments are classified as
available-for-sale and are carried at fair value. Gains and losses on
these investments were not material in 1996. See Note 3.

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

F-8

<PAGE> 50

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.

IMPAIRMENT OF LONG-LIVED ASSETS - Effective January 1, 1996, the Company
adopted Financial Accounting Standards Board Statement No. 121 (FAS 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." FAS 121 requires that long-lived assets be reviewed for
impairment and written down to fair value whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Under
the provisions of FAS 121, impairment losses are recognized when expected
future cash flows are less than the assets' carrying value. In 1996, the
Company recorded expense related to impairment losses totaling $223,000.

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 include 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.

Research and development revenues totaled $1,216,000, $3,244,000 and $2,485,000
for the years ended December 31, 1994, 1995, and 1996 respectively.

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

STOCK-BASED COMPENSATION - Effective January 1, 1996, the Company adopted
Financial Accounting Standards Board Statement No. 123 (FAS 123), "Accounting
for Stock-Based Compensation." FAS 123 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 (APB 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. See Note 7.

FOREIGN CURRENCY TRANSLATION - Gains and losses resulting from foreign currency
translation are accumulated as a separate component of consolidated
stockholders' equity (deficit). Gains and losses resulting from foreign
currency transactions are included in the consolidated statements of
operations.

FOREIGN EXCHANGE CONTRACTS - The Company enters into foreign currency exchange
contracts in order to reduce the impact of currency fluctuations related to
purchases of the Company's inventories by Cymer Japan, Inc. for resale under
firm third-party sales commitments. Net gains or losses are recorded on the
date the inventories are received by Cymer Japan, Inc. (the transaction date)
and are included in cost of product sales in the consolidated statements of
operations as the related sale is consummated. Amounts due from/to the bank on
contracts not settled as of the

F-9
<PAGE> 51

transaction date are recorded as foreign contracts receivable/payable in the
consolidated balance sheets.

The Company recognized net gains from the above foreign currency exchange
contracts of $496,000 and $1,920,000 for the years ended December 31, 1995 and
1996, respectively. The net gain of $496,000 for the year ended December 31,
1995 was classified as other income in the 1995 annual report and was
reclassified to cost of product sales for consistency with the 1996
presentation. The face amount of the underlying contracts was $4,048,000 and
$16,123,000, at December 31, 1995 and 1996, respectively. The Company also had
forward foreign exchange contracts at December 31, 1996 to buy $43.2 million
for 4.7 billion yen under foreign currency exchange facilities with banks in
Japan (see Note 4). The total unrecorded deferred gain and premium on these
contracts as of December 31, 1996 was $1,814,000. Such contracts expire on
various dates through September 1997.

CONCENTRATION OF CREDIT RISK - The Company invests its excess cash in an effort
to preserve capital, provide liquidity, maintain diversification and generate
returns relative to the Company's corporate investment policy and prevailing
market conditions. The Company has not experienced any losses on its cash
accounts. The Company has a small number of significant customers and maintains
a reserve for potential credit losses and such losses, to date, have been
minimal (see "Major Customers and Related Parties").

MAJOR CUSTOMERS AND RELATED PARTIES - Revenues from major customers are
detailed as follows:

Year ended December 31,
------------------------------------
Customer 1994 1995 1996
(in thousands)
<S> <C> <C> <C>

A $2,134 $5,035 $20,123
B 3,557 19,134
C 1,472 3,395 12,586
D 6,555
E 1,320 1,954
F 1,231

</TABLE>

Receivables from these customers totaled $2,576,000 and $16,183,000 at December
31, 1995 and 1996, respectively.

Revenues from Japanese customers, generated primarily by the Company's
subsidiary, accounted for 33%, 50% and 61% of revenues for the years ended
December 31, 1994, 1995, and 1996, respectively. Revenues from a customer in
the Netherlands accounted for 17%, 18% and 19% of revenues for the years ended
December 31, 1994, 1995, and 1996, respectively.

Revenues from stockholders totaled $2,917,000, $9,085,000 and $52,114,000 for
the years ended December 31, 1994, 1995, and 1996, respectively.

EARNINGS PER SHARE - Primary earnings per share is computed based on the
weighted average number of common and common equivalent shares (common stock
options and warrants) outstanding during each period using the treasury stock
method. Fully diluted earnings per share reflect the maximum dilution of per
share earnings utilizing the end of the year market price per share under the
treasury stock method. All shares of common stock and common stock equivalents
issued within twelve months of an initial public offering at a price per share
less than the estimated offering price are considered to be outstanding for all
periods presented in the same

F-10
<PAGE> 52
manner as a stock split. Accordingly, all shares of common stock and
common stock equivalents issued in 1996 prior to the Company's initial
public offering at a price per share below the initial public offering
price are considered to be outstanding for all of 1996. Earnings (loss)
per share information is not presented for 1994 and 1995 as such
presentation prior to the Company's initial public offering would not be
meaningful.

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

2. BALANCE SHEET DETAILS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
------- --------
(in thousands)
<S> <C> <C>
ACCOUNTS RECEIVABLE:
Trade $ 3,412 $ 19,072
Other 1,420 466
------- --------
4,832 19,538
Less allowance for doubtful accounts (705)
------- --------
Total $ 4,832 $ 18,833
======= ========

INVENTORIES:
Raw materials $ 2,114 $ 6,243
Work-in-progress 2,232 6,680
Finished goods 969 2,755
------- --------
Total $ 5,315 $ 15,678
======= ========

PROPERTY - at cost:
Furniture and equipment $ 4,113 $ 10,888
Capitalized lasers 1,788 3,474
Leasehold improvements 245 1,713
Construction in process 587 1,229
------- --------
6,733 17,304
Less accumulated depreciation and
amortization (3,680) (5,597)
------- --------

Total $ 3,053 $ 11,707
======= ========
</TABLE>

F-11
<PAGE> 53
3. INVESTMENTS

Investments consist of the following as of December 31, 1996
(in thousands):

<TABLE>
<S> <C>
Short term:
Weekly Municipal Floater $ 4,602
Municipal Bonds 3,706
Floating Rate Bonds 950
Commercial Paper 591
Medium-Term Notes 300
U.S. Government Agencies 300
-------
Total $10,449
=======

Long-term:
Municipal Bonds $ 1,061
Medium-Term Notes 300
-------

Total $ 1,361
=======
</TABLE>

Investments are recorded at fair value, which approximated cost as of
December 31, 1996. Short-term investments mature within one year and
long-term investments mature in one year to 17 months. Long-term
investments are included with other long-term assets on the consolidated
balance sheet. See also "Investments" in Note 1.

4. CREDIT FACILITIES

REVOLVING LOAN FACILITY - The Company had a revolving loan facility
("Loan Facility") providing for borrowings of up to $1,000,000 and
guaranteed by a preferred stockholder of the Company (see Note 10).
Interest was payable quarterly, and the balance was due on the earlier
of March 31, 1997 or the completion of the Company's initial public
offering. The $1,000,000 balance owed plus accrued interest due against
the Loan Facility was paid upon completion of the Company's initial
public offering in September 1996.

LOAN AND SECURITY AGREEMENT - The Loan and Security Agreement (the
"Agreement") provides for three revolving loan facilities and a loan
with a bank to provide for combined borrowings of up to a maximum of
$11,000,000 with interest on outstanding borrowings ranging from prime
to prime plus 0.25% (8.25% and 8.50%, respectively, at December 31,
1996). Borrowings under the Agreement are secured by substantially all
of the Company's assets. The Agreement provides for the following: (i)
a $2,000,000 bank loan which is secured by the Company's assets, bears
interest at a rate of prime plus .25% per annum, is payable in equal
quarterly installments which begin December 31, 1996 through September
30, 1998, (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 per
annum, is due March 5, 1997 and (iii) $8,000,000 under lines of credit
secured by the Company's foreign receivables and inventory and
guaranteed by the U.S. Export-Import Bank, which bear interest at prime
rate per annum, and are due March 5, 1997 (as to $3,000,000) and June
27, 1997 (as to $5,000,000). There was $1,750,000 outstanding under the
Agreement at December 31, 1996.

The Agreement requires the Company to maintain compliance with certain
financial statement and other covenants including, among other items,
limitation on additional debt, total liabilities to

F-12
<PAGE> 54
tangible net worth and minimum tangible net worth. As of December 31,
1996, the Company was in compliance with all such covenants.

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 (see Note 6).

ADVANCES AGAINST COMMERCIAL DRAFT - Advances against commercial drafts
represent funds advanced by a bank in Japan, without recourse, in
connection with the discounting of certain commercial drafts received
from customers as payment for the purchase of merchandise. The advances
against commercial drafts are for a maximum of 2.1 billion yen
(approximately $18,125,000 at December 31, 1996), are discounted at the
bill discount rate plus 0.5% (1.875% at December 31, 1996) and generally
mature within 120 days. The Company has deposited $459,000 with the bank
under lien to the bank as security under the agreement.

FOREIGN EXCHANGE FACILITIES - The Company has foreign exchange
facilities with banks in Japan and a bank in the United States. The
first facility with a bank in Japan provides up to $43.2 million to be
utilized for forward contracts for periods of up to one year. As of
December 31, 1996, $18.7 million was being utilized under the foreign
exchange facility (see "Foreign Exchange Contracts" in Note 1). The
Company has guaranteed approximately $1.7 million as security under this
agreement.

The second foreign exchange facility with another bank in Japan provides
up to $32.4 million to be utilized for forward contracts for periods of
up to eight months. As of December 31, 1996, $24.5 million was being
utilized under the foreign exchange facility (see "Foreign Exchange
Contracts" in Note 1). The facility is part of the agreement providing
advances against commercial drafts and is subject to the same security.

The foreign exchange facility with the United States bank provides up to
$3.5 million 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 million (settlement limit) at any one time. The
settlement limit may be increased against the revolving credit line
availability for advance payment arranged prior to delivery of the
foreign currency overseas. There were no foreign exchange contracts
outstanding under this agreement at December 31, 1996. This facility is
part of the Loan and Security Agreement discussed above and is subject
to the same security and covenants.

5. CONVERSION OF SUBORDINATED PROMISSORY NOTES - STOCKHOLDERS

During 1995, principal totaling $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 (see Note 6).

6. REDEEMABLE CONVERTIBLE PREFERRED STOCK

Upon the Company's initial public offering in September 1996, all
Redeemable Convertible Preferred Stock (approximately 7.7 million
shares) and Redeemable Convertible Preferred Stock warrants (to purchase
283,000 shares of such stock) were automatically converted into the
Company's common stock or warrants to purchase common stock. The
conversion of the preferred stock and warrants to common was on a 1 for
1 basis, except for the Series E preferred

F-13

<PAGE> 55
stock and warrants, which were converted on an approximate 1.5 to 1
basis. Upon conversion of the preferred stock and warrants, all
preferred stock dividends and other rights previously assigned ceased.

In 1994, the Company changed its method of accounting for the 8% per
annum accretion of the redemption price for the Company's Redeemable
Convertible Preferred Stock. Prior to 1994, the Company did not record
the accretion, as it was not probable that funds would be available for
redemption. However, in 1994, the Company's prospects improved,
justifying the change in method in accounting for the accretion. The
impact of the change was to increase the balance of Redeemable
Convertible Preferred Stock by $5,897,000 with a respective increase in
the accumulated deficit in stockholders' deficit as of December 31,
1994. Upon the September 1996 conversion discussed above, the cumulative
accretion of $7,901,000 was recorded as a reduction of the accumulated
deficit.

7. STOCKHOLDERS' EQUITY (DEFICIT)

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.

COMMON STOCK WARRANTS - At December 31, 1996, the Company had warrants
outstanding to purchase 323,000 shares of its common stock at a weighted
average purchase price of $3.42 per share. The warrants expire in 2000
and 2001.

STOCK OPTION AND PURCHASE PLANS - The Company has four plans that are
described in the following as:

<TABLE>
<CAPTION>
COMMON SHARES
DESIGNATED FOR
ISSUANCE
<S> <C>
(i) 1987 Stock Plan 1,500,000
(ii) 1996 Stock Option Plan 1,500,000
(iii) 1996 Employee Stock Purchase Plan 250,000
(iv) 1996 Director Option Plan 100,000
---------
Total 3,350,000
---------
</TABLE>

(i) 1987 Stock Plan (the "1987 Plan") - The 1987 Plan provides
that incentive and nonstatutory options to purchase shares of common
stock may be granted to employees and consultants at prices that are
not less than 100% (85% for nonstatutory options) of the fair market
value of the Company's common stock on the date the options are
granted. The 1987 Plan also provides for various restrictions
regarding option terms, prices, transferability and other matters.
Options issued under the 1987 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.

(ii) 1996 Stock Option Plan (the "1996 Stock Plan") - The 1996
Stock Plan provides for the grant of incentive stock options within
the meaning of Section 422 of the Internal Revenue

F-14

<PAGE> 56
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.

(iii) 1996 Employee Stock Purchase Plan (the "Purchase Plan") - The Purchase
Plan is intended to qualify under Section 423 of the Code. Under the Purchase
Plan, an eligible employee may purchase shares of common stock from the Company
through payroll deductions of up to 10% of his or her base compensation
(excluding bonuses, overtime and sales commissions), at a price per share equal
to 85% of the lower of (i) the fair market value of the Company's common stock
as of the first day of each offering period under the Purchase Plan or (ii) the
fair market value of the common stock at the end of the offering period. Each
six-month offering period will commence the first day on which the national
stock exchanges and the Nasdaq National Market are open for trading on or
after May 1 and November 1 of each year, except that the first offering period
began on the date of the Company's initial public offering and will end on
April 30, 1997. In the event of a merger or asset sale, the offering period
then in progress will be shortened so that each participant's options will be
exercised before the date of the merger or sale. Any employee who is
customarily employed for at least 20 hours per week and more than five months
per calendar year and who has been so employed for at least three consecutive
months on or before the commencement date of an offering period is eligible to
participate in the Purchase Plan.

(iv) 1996 Director Option Plan (the "Director Option Plan") - The Director
Option Plan went into effect upon the completion of the Company's initial
public offering. 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 automatically receives 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 is
exercisable at 100% of the fair market value of the Company's common stock on
the date such option is granted. Of the options granted under the Director
Option Plan, 6.25% 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 is in effect for a term of ten years unless sooner terminated by the
Board. There were no options issued under the Plan in 1996.

F-15
<PAGE> 57
Stock option transactions are summarized as follows (in thousands, except per
share data):

<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Price
Shares Per Share

<S> <C> <C>
Outstanding, January 1, 1994 492 $ 0.78
Granted 67 $ 0.50
Exercised (28) $ 0.59
Terminated (107) $ 0.72
=====

Outstanding, December 31, 1994 424 $ 0.76
Granted 979 $ 0.61
Exercised (59) $ 0.70
Terminated (383) $ 0.67
=====

Outstanding, December 31, 1995 961 $ 0.65
Granted 694 $14.31
Exercised (127) $ 0.73
Terminated (39) $ 2.32
=====

Outstanding, December 31, 1996 1,489 $ 6.96
=====

Exercisable, December 31, 1996 293 $ 0.62
=====
</TABLE>

The Company applies APB 25 and related interpretations in accounting for its
employee stock option plans. Accordingly, no compensation expense has been
recognized for its stock-based compensation plan, as the options are granted at
the fair market value of the Company's common stock. 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 FAS 123, the Company's
net income for the year ended December 31, 1995 would have been reduced by
approximately $19,000 and the Company's net income and earnings per share for
the year ended December 31, 1996 would have been reduced by approximately
$218,000 or $.02 per share. The fair value of the options granted during 1995
is estimated as $599,000 on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: no dividend yield or
volatility rate, risk free interest rates of 5.57% to 7.54%, assumed forfeiture
rate of 3% and an expected life of five years. The fair value of the options
granted during 1996 is estimated as $9,700,000 on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: no dividend
yield, volatility rate of 107%, risk free interest rates of 5.33% to 6.68%,
assumed forfeiture rate of 3% and an expected life of five years.

F-16
<PAGE> 58
The following table summarizes information as of December 31, 1996
concerning currently outstanding and exercisable options:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ------------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
(in thousands) (years) (in thousands)
<S> <C> <C> <C> <C> <C>
$0.25 - $3.00 801 3.30 $0.63 293 $0.62
$4.00 - $8.00 333 4.19 $5.32
$9.50 187 4.68 $9.50
$22.75 30 4.79 $22.75
$41.00 138 4.91 $41.00
------ ----
1,489 293
====== ====
</TABLE>

COMMON SHARES RESERVED - As of December 31, 1996, the Company had
reserved the following number of shares of common stock for issuance (in
thousands):

<TABLE>
<S> <C>
Issuance under stock option and purchase plans 1,502
Exercise of common stock purchase warrants 323
-----
Total 1,825
=====
</TABLE>

8. INCOME TAXES

Income taxes in the statement of operations for years ended December 31,
1994 and 1995 primarily represent taxes paid in Japan for research and
development revenues generated from agreements with Japanese companies
(see Note 10).

The components of the provision for income taxes are summarized as
follows for the year ended December 31, 1996 (in thousands):

<TABLE>
<S> <C>
Current income taxes:
Federal $1,605
Foreign 1,004
------
Total 2,609
------

Deferred income taxes:
Federal (131)
State (12)
Foreign (352)
------
Total (495)
------
Reduction in valuation allowance (923)
------
Provision for income taxes $1,191
======
</TABLE>

F-17
<PAGE> 59
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 period
ended December 31, 1996 are as follows:

<TABLE>
<S> <C>
Provision at statutory rate 34.0%
Foreign provision in excess of Federal statutory rate 7.3
State income taxes, net of Federal benefit (1.6)
Foreign sales corporation taxes, net of Federal benefit (4.4)
Federal tax credits (2.5)
Miscellaneous/other items 3.2
Reduction in valuation allowance (20.5)
-----
Provision at effective rate 15.5%
=====
</TABLE>

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,
-------------------------------
1994 1995 1996
(in thousands)
<S> <C> <C> <C>
Tax credit carryforwards $ 1,241 $ 1,829 $ 2,126
Net operating loss carryforwards 3,608 3,195
Capitalized research and development costs 298 359 243
Reserves and accruals not currently deductible 254 339 3,290
Differences between book and tax basis of inventory
and fixed assets 242 450 594
Unearned revenues 199 307 108
Deferred rent 141 159 175
State taxes (351) (427) (65)
Deferred taxes - foreign 352
Settlement costs (103)
------- ------- -------
Net deferred tax assets before valuation allowance 5,632 6,211 6,720
Valuation allowance (5,632) (6,211) (5,288)
------- ------- -------
Total $ - $ - $ 1,432
======= ======= =======
</TABLE>

The Company has Federal and state tax business credit carryforwards available to
offset future tax liabilities of $1,833,000 and $293,000, respectively. Such
Federal and state tax credit carryforwards expire at various dates beginning
with the year 1997 and 2003, respectively.

The Company recorded a valuation allowance equal to the total net deferred tax
asset balance at December 31, 1994 and 1995. The Company reduced its valuation
allowance in 1996 by $923,000 to the extent management believes current year
activity made realization of such benefit more likely than not.

F-18

<PAGE> 60

9. COMMITMENTS AND CONTINGENCIES

LEASES - The Company leases its primary facilities under non-cancelable
operating leases. The lease terms are through January 1, 2010 and provide
for certain rent abatements and minimum annual increases and options to
extend the term. 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.

Under the terms of an operating lease for an office building entered into
in December 1996, the Company has deposited approximately $2,224,000 in an
escrow account in lieu of a security deposit for the premises. The majority
of this amount is included with other long-term assets on the consolidated
balance sheet.

Rent expense under operating leases is recognized on a straight-line basis
over the life of the related leases and totaled approximately $555,000,
$736,000 and $1,052,000 for the years ended December 31, 1994, 1995, and
1996, respectively.

The net book value of assets under capital leases at December 31, 1995 and
1996 was approximately $85,000 and $528,000, net of accumulated
amortization of approximately $16,000 and $145,000, respectively.

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

YEAR ENDING DECEMBER 31, OPERATING CAPITAL
<S> <C> <C>
1997 $ 1,864 $181
1998 2,388 154
1999 2,443 148
2000 2,502 100
2001 2,560
Thereafter 23,418
------- ----
Total $35,175 583
=======
Less amount representing interest 116
----
Present value of minimum
lease payments 467
Less current portion 148
----
Long term obligations under
capital leases $319
====
</TABLE>

PATENT LICENSE AGREEMENT - The Company has a patent license agreement for a
non-exclusive worldwide license to certain patented laser technology. Under
the terms of the agreement, the Company is required to pay royalties
ranging from 0.25% to 5% of gross sales and leases as defined depending on
the total amounts attained. Royalty fees totaled $30,000, $64,000 and
$226,000 for the years ended December 31, 1994, 1995, and 1996,
respectively.

EMPLOYEE SAVINGS PLAN - The Company has a 401(k) plan that allows
participating employees to contribute a percentage of their salary, subject
to annual limits. The Plan is available to

F-19
<PAGE> 61
substantially all full-time United States employees. The Company is
not required to make contributions and through December 31, 1996, no
contributions had been made.

RETIREMENT PLAN - During the period ended December 31, 1996, Cymer
Japan, Inc. adopted a retirement benefit plan for all Cymer Japan,
Inc. employees and Japanese directors. The plan consists of a
multi-employer retirement plan covering all employees and life
insurance policies covering all employees and Japanese directors.
The multi-employer retirement plan was established under the Small
and Medium-Size Enterprise Retirement Benefits Cooperative Law.
Total expense under the plan for the year ended December 31, 1996
amounted to $37,000.

CONTINGENCY - On November 1, 1996, the Company entered into a
settlement agreement for the dismissal of a patent infringement
complaint filed against the Company in September, 1996. Under the terms
of the settlement, the plaintiffs agreed to (i) release the Company from
any claims they may have with respect to the disputed patent and (ii)
dismiss the patent infringement action with prejudice. In return, the
Company agreed to make annual payments to the plaintiffs over a 13 year
period. Such annual payments and the related expense are not material to
the Company's financial position, results of operations or cash flows.

In addition, the Company's Japanese manufacturing partner has been
notified that its manufacture of the Company's laser systems in Japan
may infringe a Japanese patent held by another Japanese company. The
Company has indemnified its Japanese manufacturing partner against
patent infringement claims under certain circumstances. The Company
believes, based upon the advice of counsel, that the Company's products
do not infringe any valid claim of the asserted patent.

10. RELATED PARTY TRANSACTIONS

COLLABORATIVE ARRANGEMENT - The Company has a collaborative arrangement
with a Japanese company that is also a stockholder of the Company. The
arrangement, entered into in August 1992, includes 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 with net proceeds to the
Company of $1,909,000. Such stock was converted to common
stock in 1996 (see Note 6).

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 and
$250,000 were received under the agreement for the years ended
December 31, 1994 and 1995, respectively. The agreement expired
in June 1995.

Product License Agreement - The Company granted to the
stockholder the exclusive right in Japan and the non-exclusive
right outside Japan to manufacture and sell one of the Company's
products and subsequent enhancements thereto. The Company also
granted the stockholder the right of first refusal to license
and fund the development of new technologies not developed with
funding from other parties. In exchange for these rights, the
Company received up-front license fees and 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

F-20

<PAGE> 62
at a 15% discount from the respective companies' list price. The
agreement terminates in August 2012. There was no activity under
this agreement in 1994, 1995 and 1996.

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. The Company made
$477,000 in purchases under this agreement in 1996. No purchases
were made in 1994 and 1995.

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

SERVICE AGREEMENT - The Company has a service agreement with another
Japanese company who is also a 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,
1994, 1995 and 1996, totaled $67,000, $211,000 and $1,284,000,
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. No payments were made
under the agreement in 1994, 1995 and 1996.

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.

11. GEOGRAPHIC INFORMATION

Presented below is information regarding sales, income (loss) from
operations, and identifiable assets, classified by operations located in
the United States and Japan. The Company sells its excimer lasers in
Japan through Cymer Japan, Inc. Intercompany sales to Cymer Japan, Inc.
are primarily at 85% of the price of products sold to outside customers.
All significant intercompany balances are eliminated in consolidation.
The majority of consolidated costs and expenses are incurred in the
Untied States and are reflected in the operating income (loss) from the
United States operations.

F-21

<PAGE> 63

Year Ended December 31,
----------------------------------------
1994 1995 1996
(In thousands)
Sales:
United States $ 6,661 $11,303 $ 26,918
Japan 2,260 7,517 38,077
------- ------- --------
Total $ 8,921 $18,820 $ 64,995
======= ======= ========
Operating income (loss):
United States $(2,312) $(3,425) $(13,974)
Japan 524 3,275 21,858
------- ------- --------
Total $(1,788) $ (150) $ 7,884
======= ======= ========

December 31,
----------------------------------------
1994 1995 1996
Identifiable assets:
United States $ 6,414 $10,876 $105,902
Japan 2,758 4,743 23,565
------- ------- --------
Total $ 9,172 $15,619 $129,467
======= ======= ========

F-22