CYMER INC - FORM 10-Q - April 28, 2011

Attached files

file	filename
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - SECTION 302 - CYMER INC	dex311.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - SECTION 302 - CYMER INC	dex312.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - SECTION 906 - CYMER INC	dex321.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - SECTION 906 - CYMER INC	dex322.htm
EXCEL - IDEA: XBRL DOCUMENT - CYMER INC	Financial_Report.xls

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended March 31, 2011

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

For the transition period from to

Commission file number 0-21321

CYMER, INC.

(Exact name of registrant as specified in its charter)

Nevada

33-0175463

(State or other jurisdiction of

incorporation or organization)

(IRS Employer Identification No.)


17075 Thornmint Court, San Diego, CA		92127
(Address of principal executive offices)		(Zip Code)

(858) 385-7300

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report).

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x

Accelerated filer ¨

Non-accelerated filer ¨

(Do not check if a smaller

reporting company)

Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The total number of shares of Common Stock, with $0.001 par value, outstanding on April 21, 2011 was 30,517,551.

CYMER, INC.

FORM 10-Q

Quarterly Period Ended March 31, 2011

INDEX


		Page

PART 1.	FINANCIAL INFORMATION

ITEM 1.	Financial Statements (unaudited)		3

	Consolidated Balance Sheets – March 31, 2011 and December 31, 2010		3

	Consolidated Statements of Operations – Three Months Ended March 31, 2011 and 2010		4

	Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2011 and 2010		5

	Consolidated Statement of Equity – Three Months Ended March 31, 2011		6

	Consolidated Statements of Cash Flows – Three Months Ended March 31, 2011 and 2010		7

	Notes to Unaudited Consolidated Financial Statements		8

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		26

ITEM 4.	Controls and Procedures		27

PART II.	OTHER INFORMATION

ITEM 1.	Legal Proceedings		27

ITEM 1A.	Risk Factors		27

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		41

ITEM 3.	Defaults Upon Senior Securities		41

ITEM 4.	(REMOVED AND RESERVED)		41

ITEM 5.	Other Information		41

ITEM 6.	Exhibits		41

SIGNATURES			43

ITEM 1. Financial Statements

CYMER, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)


	March 31, 2011		December 31, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	173,262	$	154,312
Short-term investments		66,838		54,964
Accounts receivable, net		145,269		127,747
Inventories		207,869		213,002
Deferred income taxes		12,612		11,961
Other current assets		48,518		55,027

Total current assets		654,368		617,013
Long-term investments		1,897		7,506
Property, plant and equipment, net		112,153		104,705
Deferred income taxes		32,720		35,690
Goodwill		8,833		8,833
Intangible assets, net		7,472		7,645
Other assets		7,215		5,939

Total assets	$	824,658	$	787,331

LIABILITIES
Current liabilities:
Accounts payable	$	30,963	$	27,731
Deferred revenue		43,973		30,593
Other current liabilities		37,935		68,121

Total current liabilities		112,871		126,445
Deferred revenue		2,049		690
Deferred income taxes		1,085		21
Other liabilities		19,284		21,920

Total liabilities		135,289		149,076

EQUITY
Cymer, Inc. stockholders’ equity:
Preferred stock		0		0
Common stock		44		43
Additional paid-in capital		640,945		620,272
Treasury stock		(492,890)		(492,890)
Accumulated other comprehensive loss		(1,240)		(2,881)
Retained earnings		542,510		513,711

Total equity		689,369		638,255

Total liabilities and equity	$	824,658	$	787,331

See Notes to Unaudited Consolidated Financial Statements.

CYMER, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)


	Three Months Ended March 31,
	2011		2010
Revenue	$	154,399	$	113,781
Cost of revenue		74,886		56,965

Gross profit		79,513		56,816

Operating expenses:
Research and development		27,779		19,885
Sales and marketing		6,034		5,134
General and administrative		10,043		9,211

Total operating expenses		43,856		34,230

Operating income		35,657		22,586

Other income (expense):
Foreign currency exchange gain		784		104
Interest income		146		93
Interest expense		(133)		(177)
Other income		1		47

Total other income (expense)		798		67

Income before income taxes		36,455		22,653
Income tax expense		7,656		6,796

Net income	$	28,799	$	15,857

Net loss attributable to noncontrolling interest in subsidiary		0		148

Net income attributable to Cymer, Inc.	$	28,799	$	16,005

Earnings per share:
Basic	$	0.95	$	0.53

Diluted	$	0.94	$	0.53

Weighted average shares outstanding:
Basic		30,197		29,997

Diluted		30,765		30,325

See Notes to Unaudited Consolidated Financial Statements.

CYMER, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)


	Three Months Ended March 31,
	2011		2010
Net income	$	28,799	$	15,857
Other comprehensive income (loss):
Foreign currency translation adjustments		1,629		(888)
Unrealized gains (losses) on available for sale investments, net of income tax expense (benefit) of $6 and ($15) for 2011 and 2010, respectively		10		(23)
Unrealized (losses) gains on foreign currency forward exchange contracts, net of income tax (benefit) expense of ($3) and $27 for 2011 and 2010, respectively		(4)		40
Unrealized pension gains		6		0

Total other comprehensive income (loss)		1,641		(871)

Comprehensive income	$	30,440	$	14,986
Comprehensive loss attributable to noncontrolling interest in subsidiary		0		148

Comprehensive income attributable to Cymer, Inc.	$	30,440	$	15,134

See Notes to Unaudited Consolidated Financial Statements.

CYMER, INC.

CONSOLIDATED STATEMENT OF EQUITY

(in thousands)

(unaudited)


													Accumulated
					Additional								Other
	Common Stock				Paid-in		Treasury Stock						Comprehensive			Retained
	Shares		Amount		Capital		Shares			Amount			Loss			Earnings		Total
BALANCE, DECEMBER 31, 2010		43,232	$	43	$	620,272		(13,412	)	($	492,890	)		($2,881	)	$	513,711	$	638,255
Exercise of common stock options		408		1		13,891		0			0			0			0		13,892
Issuance of shares upon vesting of restricted stock unit awards		283		0		0		0			0			0			0		0
Employee stock-based compensation		0		0		3,256		0			0			0			0		3,256
Income tax benefit from stock option exercises		0		0		3,526		0			0			0			0		3,526
Net income		0		0		0		0			0			0			28,799		28,799
Other comprehensive income:
Foreign currency translation adjustments		0		0		0		0			0			1,629			0		1,629
Unrealized gains on available-for-sale investments, net of tax		0		0		0		0			0			10			0		10
Unrealized losses on forward exchange contracts, net of tax		0		0		0		0			0			(4	)		0		(4	)
Unrealized pension gains, net of tax		0		0		0		0			0			6			0		6

BALANCE, MARCH 31, 2011		43,923	$	44	$	640,945		(13,412	)	($	492,890	)		($1,240	)	$	542,510	$	689,369

See Notes to Unaudited Consolidated Financial Statements.

CYMER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Three Months Ended March 31,
	2011		2010
Operating activities:
Net income	$	28,799	$	15,857
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, amortization and accretion		4,219		4,988
Stock-based compensation		3,256		2,304
Bad debt recoveries		(199)		(412)
Excess tax benefits from stock option exercises		(3,709)		(502)
Provision for deferred income taxes		6,906		(4,585)
Loss on disposal or impairment of property, plant and equipment		11		61
Change in assets and liabilities:
Restricted cash		0		(1,061)
Accounts receivable		(16,553)		(23,907)
Accounts receivable, related party		0		732
Inventories		(1,280)		(5,220)
Other assets		5,365		662
Accounts payable		2,179		11,119
Accounts payable, related party		0		(9,284)
Deferred revenue		15,110		(30)
Other liabilities		(31,992)		(3,469)

Net cash provided by (used in) operating activities		12,112		(12,747)

Investing activities:
Acquisition of property, plant and equipment		(4,311)		(5,035)
Purchases of investments		(50,417)		(7,697)
Proceeds from sold or matured investments		44,363		23,389

Net cash (used in) provided by investing activities		(10,365)		10,657

Financing activities:
Proceeds from issuance of common stock		13,550		942
Purchase of noncontrolling interest		0		(728)
Excess tax benefits from stock option exercises		3,709		502
Payments under capital lease obligations		(17)		0

Net cash provided by financing activities		17,242		716

Effect of exchange rate changes on cash and cash equivalents		(39)		(88)

Net increase (decrease) in cash and cash equivalents		18,950		(1,462)
Cash and cash equivalents at beginning of the period		154,312		118,381

Cash and cash equivalents at end of the period	$	173,262	$	116,919

Supplemental disclosure of cash flow information:
Interest paid	$	96	$	59

Income taxes paid	$	8,698	$	10,992

Supplemental disclosure of non-cash operating, investing and financing activities:
Net increase (decrease) in acquisition of property and equipment included in accounts payable	$	1,287	$	(1,864)

Net increase in in-transit proceeds from issuance of common stock	$	342	$	487

Property and equipment acquired under capital lease obligations	$	173	$	0

See Notes to Unaudited Consolidated Financial Statements.

CYMER, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Quarterly Period Ended March 31, 2011

1. BASIS OF PRESENTATION

Nature of Operations

Cymer, Inc., together with its wholly-owned subsidiaries, is engaged in the development, manufacturing and marketing of light source systems for sale to customers who manufacture photolithography tools in the semiconductor equipment industry. We sell replacement parts and support directly to chipmaker customer as well as to lithography tool manufacturer customers. Our TCZ reporting segment develops, integrates, markets, and supports silicon crystallization tools used in the manufacture of low temperature poly-silicon liquid crystal displays (“LTPS – LCD”) and organic light emitting diode (“OLED”) flat panel displays.

We manufacture our products primarily at our San Diego headquarters, and we also conduct refurbishment manufacturing activities for replacement parts at our Korea subsidiary. We sell our products to customers primarily in the United States, Europe, Japan, Taiwan, Korea and other Asian countries. We provide customer support from our San Diego headquarters, and from our field offices located throughout the United States, the Netherlands, Japan, Korea, Singapore, China, and Taiwan.

Basis of Accounting

The accompanying unaudited consolidated financial information has been prepared by management, without audit, in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. The consolidated balance sheet at December 31, 2010 was derived from the audited consolidated financial statements at that date; however, it does not include all disclosures required by accounting principles generally accepted in the United States.

In the opinion of management, the unaudited consolidated financial statements for the interim period presented reflect all material adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations as of and for such periods indicated. These unaudited consolidated financial statements and notes hereto should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010. Results for the interim periods presented herein are not necessarily indicative of results that may be reported for any other interim period or for the year ending December 31, 2011.

Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of Cymer, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. References to “Cymer”, “the Company,” “we,” “us,” “our” and other similar words refer to Cymer, Inc. and its consolidated subsidiaries, unless the context suggests otherwise.

Use of Estimates

The unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. Applying these 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 unaudited consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results may differ from those estimates.

Correction of Immaterial Error Related to Prior Periods

We corrected an immaterial error in our previously presented unaudited consolidated statement of cash flows for the three months ended March 31, 2010 related to the treatment of non-cash transfers between inventory and property, plant and equipment. The effect of the correction on our unaudited consolidated statement of cash flows for the three months ended March 31, 2010 was to increase net cash used in operating activities from $11.0 million to $12.7 million and to increase net cash provided by investing activities from $9.0 million to $10.7 million.

Recently Adopted Accounting Standards

In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance to require additional disclosures for fair value measurements including the following: (1) amounts transferred in and out of Level 1 and 2 fair value measurements, which is effective for interim and annual reporting periods beginning after December 15, 2009 (“Part I”), and (2) activities in Level 3 fair value measurements including purchases, sales, issuances, and settlements, which is effective for interim and annual reporting periods beginning after December 15, 2010 (“Part II”). We adopted Part I of the revised guidance for fair value measurements disclosures on

January 1, 2010, which did not have a material effect on our unaudited consolidated financial statements. We adopted Part II of the revised guidance for fair value measurement disclosures on January 1, 2011, which did not have a material effect on our unaudited consolidated financial statements.

In April 2010, the FASB issued additional guidance for revenue recognition to provide criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. A vendor can recognize as revenue, in its entirety, consideration that is contingent upon achievement of a milestone in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. The guidance for milestone method of revenue recognition is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. We adopted this additional guidance for revenue recognition on January 1, 2011, which did not have a material effect on our unaudited consolidated financial statements.

2. INVENTORIES

Inventories consist of the following (in thousands):


	March 31, 2011		December 31, 2010
Raw materials	$	63,680	$	62,562
Work-in-progress		39,240		43,190
Finished goods		104,949		107,250

	$	207,869	$	213,002

3. FAIR VALUE MEASUREMENTS

We account for our financial assets and liabilities that are being measured and reported on at fair value on a recurring basis per the provisions of the authoritative guidance for fair value measurements. This includes certain items we report in cash equivalents and available-for-sale securities within our cash and cash equivalents, and short and long term investments on the accompanying unaudited consolidated balance sheets. In addition, our derivatives, which consisted of foreign currency forward exchange contracts, are reported at fair value and are included in the scope of the authoritative guidance for fair value measurements and disclosures.

The authoritative guidance for fair value measurements stipulates that fair value is defined as the price at which an asset or liability could be exchanged in a current transaction between knowledgeable, willing parties. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques include unobservable inputs and involve some level of estimation and judgment on the part of the reporting entity, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.

Per the authoritative guidance for fair value instruments, assets and liabilities recorded at fair value in our unaudited consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The levels as defined by the fair value hierarchy in the authoritative guidance for fair value instruments are as follows:


Level 1	—	Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2	—	Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly at the measurement date.
Level 3	—	Inputs are unobservable for the asset or liability and usually reflect the reporting entity’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

Financial Assets and Liabilities Measured on a Recurring Basis

We analyze our financial assets and liabilities measured at fair value and categorize them within the fair value hierarchy based on the level of judgment associated with the inputs used to measure their fair value in accordance with the authoritative guidance for fair value instruments and the fair value option for financial assets and financial liabilities.

The majority of our available-for-sale securities and our foreign currency forward exchange contracts are priced via independent providers. In obtaining such valuation information from third parties, we have evaluated the valuation methodologies used to develop the fair values in order to determine whether such valuations are representative of an exit price in our principal markets.

Available-for-Sale Securities

The fair values of our available-for-sale securities are determined by a matrix pricing, which is a mathematical technique widely used to value securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark-quoted securities. Such assets are classified as Level 2 inputs in the fair value hierarchy and typically include commercial paper and government and corporate fixed income securities which are included in our investment portfolio.

Preferred Stock

We hold preferred stock which was valued at zero at March 31, 2011 and December 31, 2010. On August 4, 2010 the issuer filed Chapter 11 bankruptcy protection, and we believe it is unlikely we will receive any future cash flow from this preferred stock.

Derivative Instruments

Our foreign currency forward exchange contracts are valued using an income approach which includes observable Level 2 market inputs at the measurement date and uses a standard valuation technique to convert future foreign currency amounts to a single discounted present amount assuming participants are motivated, but not compelled, to transact. Level 2 inputs are limited to quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability. Key inputs in this discounted calculation include spot currency exchange rates at the measurement date, interest rates, and credit default swap rates at standard quoted intervals. Credit default swaps on us are not available, so we estimated our credit risk premium based on a financing arrangement that was offered to us during the three month period ended March 31, 2011 by a third party. The principal market in which we execute our foreign currency forward exchange contracts is the retail market. Mid-market pricing is used as a practical expedient for fair value measurements. Since significant inputs in the valuation of our foreign currency forward exchange contracts are observable in the active market, they are classified as Level 2 in the fair value hierarchy. For further discussion, see Note 5, “Derivative Instruments and Hedging Activities”. Financial assets and liabilities (excluding cash balances) measured at fair value on a recurring basis are summarized below (in thousands):


		March 31, 2011		Fair Value Measurements at Reporting Date Using:
				Quoted Prices in Active Markets for Identical Assets (Level 1) (1)		Significant Other Observable Inputs (Level 2) (1)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents		$	107,837	$	97,987	$	9,850	$	0
Short-term investments:
U.S. government securities			10,206		0		10,206		0
Corporate debt securities			24,091		0		24,091		0
Municipal bonds			32,541		0		32,541		0
Long-term investments:
U.S. government securities			1,897		0		1,897		0
Foreign currency forward exchange contracts	(2)		146		0		146		0

		$	176,718	$	97,987	$	78,731	$	0


		December 31, 2010		Fair Value Measurements at Reporting Date Using:
				Quoted Prices in Active Markets for Identical Assets (Level 1) (1)		Significant Other Observable Inputs (Level 2) (1)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents		$	85,121	$	66,511	$	18,610	$	0
Short-term investments:
U.S. government securities			17,457		0		17,457		0
Corporate debt securities			31,731		0		31,731		0
Municipal bonds			5,776		0		5,776		0
Long-term investments:
Corporate debt securities			5,611		0		5,611		0
U.S. government securities			1,895		0		1,895		0

		$	147,591	$	66,511	$	81,080	$	0

Liabilities:
Foreign currency forward exchange contracts	(3)	$	(1,064)	$	0	$	(1,064)	$	0

		$	(1,064)	$	0	$	(1,064)	$	0

(1)	We did not have any transfers in or out of Level 1 or Level 2.

(2)	Included in other current assets on the accompanying unaudited consolidated balance sheets.

(3)	Included in other current liabilities on the accompanying unaudited consolidated balance sheets.

Non-Financial Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

We apply fair value techniques on a non-recurring basis associated with: (1) valuing potential impairment losses related to goodwill, which are accounted for pursuant to the authoritative guidance for intangibles—goodwill and other; and (2) valuing potential impairment losses related to long-lived assets, which are accounted for pursuant to the authoritative guidance for property, plant and equipment.

We develop, manufacture and market our products within two reportable business segments, Cymer and TCZ. Cymer’s primary business is to design, manufacture and sell light source systems and installed base products for use in photolithography systems used in the manufacture of semiconductors. TCZ develops, integrates, markets and supports silicon crystallization tools used in the manufacture of LTPS-LCD and OLED flat panel displays. We test for goodwill impairment at the reporting unit level. All of our goodwill is associated with our primary business unit, and we determine the fair value of this reporting unit based on a combination of inputs including our market capitalization, as well as Level 3 inputs such as discounted cash flows which are not observable from the market, directly or indirectly. We conduct our goodwill impairment analysis annually in the fourth quarter of each year, or upon the occurrence of certain triggering events. No such triggering events occurred during the three months ended March 31, 2011. Historically, the fair value of our primary business reporting unit has significantly exceeded its carrying value.

We test for the impairment of our long-lived assets when triggering events occur and such impairment, if any, is measured at fair value. The inputs for fair value of our long-lived assets would be based on Level 3 inputs as data used for such fair value calculations would be based on discounted cash flows which are not observable from the market, directly or indirectly. During the three months ended March 31, 2011, there have been no triggering events associated with our long-lived assets; therefore, no impairment analysis was conducted during the period.

4. CASH, CASH EQUIVALENTS AND INVESTMENTS

Cash, cash equivalents and investments at March 31, 2011 consist of the following (in thousands):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash	$	65,425	$	0	$	0		$	65,425
Cash equivalents:
Money market funds		67,977		0		0			67,977
Certificate of deposits		30,010		0		0			30,010
Corporate debt securities		9,850		0		0			9,850

Total cash and cash equivalents	$	173,262	$	0	$	0		$	173,262

Short-term investments:
U.S. government securities		10,209		4		(7	)		10,206
Corporate debt securities		24,077		15		(1	)		24,091
Municipal bonds		32,549		3		(11	)		32,541

Total short-term investments	$	66,835	$	22	$	(19	)	$	66,838

Long-term investments:
U.S. government securities		1,898		0		(1	)		1,897

Total long-term investments	$	1,898	$	0	$	(1	)	$	1,897

	$	241,995	$	22	$	(20	)	$	241,997

Cash, cash equivalents and investments at December 31, 2010 consist of the following (in thousands):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash	$	69,191	$	0	$	0		$	69,191
Cash equivalents:
Money market funds		36,504		0		0			36,504
Certificate of deposits		30,007		0		0			30,007
Municipal bonds		13,064		0		(2	)		13,062
Corporate debt securities		5,551		0		(3	)		5,548

Total cash and cash equivalents	$	154,317	$	0	$	(5	)	$	154,312

Short-term investments:
U.S. government securities		17,465		0		(8	)		17,457
Corporate debt securities		31,722		13		(4	)		31,731
Municipal bonds		5,774		2		0			5,776

Total short-term investments	$	54,961	$	15	$	(12	)	$	54,964

Long-term investments:
Corporate debt securities		5,619		0		(8	)		5,611
U.S. government securities		1,898		0		(3	)		1,895

Total long-term investments	$	7,517	$	0	$	(11	)	$	7,506

	$	216,795	$	15	$	(28	)	$	216,782

As of March 31, 2011, the contractual maturities of our cash equivalents and investments were as follows (in thousands):


	Cost		Fair Value
Due in one year or less	$	174,672	$	174,675
Due after one year through five years		1,898		1,897

	$	176,570	$	176,572

We did not have any investments in individual securities that have been in a continuous unrealized loss position deemed to be temporary for more than 12 months at March 31, 2011.

5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We conduct business in several currencies through our global operations with certain transactions denominated in local currencies, such as Japanese Yen, Korean Won, Taiwanese Dollars and the Euro. We use derivative financial instruments, such as forward exchange contracts, to hedge certain forecasted foreign denominated transactions expected to occur over the next twelve months. The purpose of our derivative financial instruments is to mitigate the effect of the exchange rate fluctuations on certain foreign currency denominated revenue, costs and cash flows. We do not enter into derivative instruments for speculative purposes.

Our foreign currency risk falls into two primary categories. First, our gross profit margins are subject to change when we sell our products in one currency and the product costs are denominated in a different currency. To mitigate this risk, we enter into derivative financial instruments, principally forward contracts, which we designate as cash flow hedges to mitigate fluctuations in the gross profit margins of these forecasted transactions. Designated hedging instruments qualify for cash flow hedge accounting treatment if certain criteria are met. For example, at the inception of the hedge, we must have formal documentation of the hedging relationship and our management objective and strategy for undertaking the hedge, including identification of the hedging instrument, the hedged transaction, the nature of the risk being hedged, and how the hedging instrument’s effectiveness will be assessed. The hedging relationship must be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the hedge. We record changes in the fair value of the effective portion of these hedges in accumulated other comprehensive income (loss), and subsequently reclassify the gain or loss to cost of revenue in the same period that the related sale is made to the third party. Interest charges or “forward points” on our forward contracts are excluded from the assessment of hedge effectiveness and are recorded in cost of revenue in the unaudited consolidated statements of operations.

As mentioned above, gains and losses on cash flow hedges are recorded in accumulated other comprehensive income (loss) until the hedged transaction is recorded in the unaudited consolidated financial statements. Once the underlying transaction is recorded, we de-designate the derivative, reclassify the accumulated gain or loss on the derivative into cost of revenue and cease to apply hedge accounting treatment. Once the derivative has been de-designated, any further gains or losses are recorded to other income (expense). The cash flows resulting from forward exchange contracts are classified in the unaudited consolidated statements of cash flows as part

of cash flows from operating activities. If all or a portion of the forecasted transaction were cancelled, this would render all or a portion of the cash flow hedge ineffective, and we would reclassify the ineffective portion of the hedge into other income (expense). We generally do not experience ineffectiveness of our cash flow hedges as a result of cancelled transactions and the accompanying unaudited consolidated financial statements do not include such gains or losses. We adjust the level and use of derivatives as soon as practicable after learning that an exposure has changed. We review all exposures on derivative positions on a regular basis.

The second category of foreign currency risk occurs when transactions are recorded in our unaudited consolidated financial statements in a currency other than the applicable subsidiary’s functional currency and the cash settlement of the transaction occurs at some point in the future. When transactions in non-functional currencies are recorded in our unaudited consolidated financial statements, changes in the recorded amounts resulting from fluctuations in the value of that currency are recorded to other income (expense). In order to mitigate these remeasurement gains and losses, we enter into derivative financial instruments, principally forward contracts. The forward contracts that hedge these transactions that have been recorded to our unaudited consolidated financial statements are not designated as hedges and, therefore, we record changes in their fair value to other income (expense).

At March 31, 2011, we had outstanding forward contracts to buy $2.9 million in exchange for Japanese Yen, $7.5 million in exchange for Korean Won, $6.5 million in exchange for Taiwanese Dollars and to sell $10.0 million in exchange for Euros. The fair value of all of our forward contracts totaled to an asset of $146,000 at March 31, 2011 and a liability of $1.1 million at December 31, 2010.

The derivative instruments that we enter into are subject to master netting arrangements and qualify for net presentation on the balance sheet. The gross fair value of derivative instruments in our unaudited consolidated balance sheets was as follows (in thousands):


	Asset Derivatives
	March 31, 2011		December 31, 2010
	Balance Sheet Location	Fair Value	Balance Sheet Location	Fair Value
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Other current assets	$ 365	Other current assets	$ 60



There were no asset derivatives designated as hedging instruments at March 31, 2011 or December 31, 2010.



	Liability Derivatives
	March 31, 2011		December 31, 2010
	Balance Sheet Location	Fair Value	Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments:
Foreign exchange contracts	Other current liabilities	$ 7	Other current liabilities	$ 0

Derivatives not designated as hedging instruments:
Foreign exchange contracts	Other current liabilities	213	Other current liabilities	1,124

		$220		$1,124

The effect of derivative instruments on our unaudited consolidated statements of operations and comprehensive income (loss) was as follows (in thousands):


	Three Months Ended March 31, 2011
Derivatives in cash flow hedging relationships	Gain (loss) recognized in other comprehensive income (“OCI”) on derivative (effective portion)			Location of gain (loss) reclassified from accumulated OCI into income (effective portion)	Gain (loss) reclassified from accumulated OCI into income (effective portion)		Location of gain (loss) recognized in income on derivatives (ineffective portions and amount excluded from effectiveness testing)	Gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing) (1)
Foreign exchange contracts	$	(7	)	Cost of revenues	$	0	Cost of revenues	$	0

(1)	The amount represents the gain (loss) recognized in income on the amount of the hedging relationship excluded from effectiveness testing. There was no gain (loss) recognized in income related to an ineffective portion of the hedging relationship.


	Three Months Ended March 31, 2010
Derivatives in cash flow hedging relationships	Gain (loss) recognized in other comprehensive income (“OCI”) on derivatives (effective portion)		Location of gain (loss) reclassified from accumulated OCI into income (effective portion)		Gain (loss) reclassified from accumulated OCI into income (effective portion)			Location of gain (loss) recognized in income on derivatives (ineffective portions and amount excluded from effectiveness testing)		Gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing) (2)
Foreign exchange contracts	$	67		Cost of revenues	$	(44	)		Cost of revenues	$	2

(2)	The amount represents the gain (loss) recognized in income on the amount of the hedging relationship excluded from effectiveness testing. There was no gain (loss) recognized in income related to an ineffective portion of the hedging relationship.


	Three Months Ended March 31, 2011
Derivatives not designated as hedging instruments	Location of gain (loss) recognized in income on derivatives		Gain (loss) recognized in income on derivatives
Foreign exchange contracts		Foreign currency exchange gain	$	840


	Three Months Ended March 31, 2010
Derivatives not designated as hedging instruments	Location of gain (loss) recognized in income on derivatives		Gain (loss) recognized in income on derivatives
Foreign exchange contracts		Foreign currency exchange loss	$	(935	)

We are exposed to credit losses in the event of nonperformance by the banks with which we transact foreign currency hedges. We manage this credit risk by transacting foreign currency hedging with more than one institution, only executing hedges with counterparties that meet our minimum requirements, monitoring the credit ratings of our counterparties on a periodic basis and negotiating contractual master netting provisions that allow us to record and offset liabilities to a counterparty against amounts due from that counterparty in an event of default. We do not receive collateral from our hedging counterparties. As of March 31, 2011, we have a total credit exposure of $146,000 from nonperformance of foreign exchange hedging counterparties.

6. OTHER LIABILITIES

Details of other liabilities consist of the following (in thousands):


	March 31, 2011		December 31, 2010
Other current liabilities
Accrued payroll and benefits	$	17,192	$	39,340
Accrued warranty		11,283		11,050
Income taxes payable		1,717		8,607
Other		7,743		9,124

	$	37,935	$	68,121


	March 31, 2011		December 31, 2010
Other liabilities
Accrued income taxes	$	11,060	$	14,731
Other		8,224		7,189

	$	19,284	$	21,920

7. EQUITY

Equity Awards

We grant stock options and stock units from our 2005 Equity Incentive Plan (the “Incentive Plan”). Stock options granted under the Incentive Plan have an exercise price at least equal to the fair market value of our common stock on the dates of grant, expire no more than ten years from the date of grant, and generally vest ratably over a four-year period following the date of grant. Restricted stock unit awards granted under the Incentive Plan generally vest one to three years from the date of grant. We also grant performance-based restricted stock unit awards to our executive officers and certain key management. The number of shares granted is subject to increase or decrease based upon actual performance against performance measures approved by the Compensation Committee of our Board of Directors.

Stock Options, Restricted Stock Unit Awards (“RSUs”) and Performance-Based Restricted Stock Unit Awards (“PRSUs”).

The table below summarizes the total number of shares granted:


	Three Months Ended March 31,
	2011		2010
Stock options (1)		30,000		20,000
RSUs (2)		354,556		212,419
PRSUs (3)		148,395		252,100

		532,951		484,519

(1)

Stock options vest over a four-year period with 25% of the shares vesting on the one-year anniversary of the participant’s date of grant for 2011 and date of hire for 2010. The balance vests in 36 equal monthly installments thereafter, subject to the participant’s continued service through the applicable vesting dates.

(2)

RSUs vest annually over a three-year period following the date of grant, subject to the participant’s continued service through the applicable vesting dates.

(3)

The number of shares subject to PRSUs granted represents the aggregate target awards for such PRSUs. The number of shares ultimately issued will be determined based on our performance related to market share, revenue, and net income targets. The shares, if any, will be issued following the end of the applicable performance period. The shares issued will vest annually over a three-year period following the date of grant, subject to the participant’s continued service through the applicable vesting dates.

We measure the fair value of stock-based awards at our closing stock price on the date of grant, and the fair value is recognized as expense over the requisite service period. We measure the fair value of stock options on the date of grant, as determined by the Black-Scholes option pricing model. We utilize a blended volatility, a combination of historical and implied volatility, in this valuation model. Historical volatility is based on a period commensurate with the expected term of the options. Implied volatility is derived based on a six-month period of traded options of our common stock. The expected term of our stock options represents the

period of time options are expected to be outstanding and is based on observed historical exercise patterns for us, which we believe are indicative of future exercise behavior. For the risk free interest rate, we use the then currently available rate on zero coupon U.S. government issues with a remaining period commensurate with the expected term for valuing options.

The following weighted average assumptions were used for stock options granted during the periods:


	Three Months Ended March 31,
	2011			2010
Dividend yield		None			None
Volatility rate		41	%		43	%
Risk fee interest rate		2.37	%		2.30	%
Expected term (in years)		3.15			2.92

Share-Based Compensation Expense

The components of share-based compensation expense were as follows (in thousands):


	Three Months Ended March 31,
	2011		2010
Stock options	$	371	$	391
RSUs		1,825		865
PRSUs		1,060		1,048

	$	3,256	$	2,304

Stock Repurchase Program

In April 2008, our board of directors authorized us to repurchase up to $100 million of our common stock. The program does not have a fixed expiration date and may be discontinued at any time. During the three months ended March 31, 2011, no shares were repurchased under this program. As of March 31, 2011, $57.8 million remain available for repurchase under this program.

8. COMPREHENSIVE LOSS

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss are as follows (in thousands):


	March 31, 2011		December 31, 2010
Foreign currency translation adjustments	$	(965)	$	(2,594)
Unrealized gains (losses) on available-for-sale investments, net of tax		2		(8)
Net unrealized losses on foreign currency forward exchange contracts, net of tax		(4)		0
Unrealized pension losses, net of tax		(273)		(279)

Accumulated other comprehensive loss	$	(1,240)	$	(2,881)

9. EARNINGS PER SHARE (“EPS”)

Basic EPS is calculated by dividing net income attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is calculated on the basis of the weighted average number of shares of common stock including the effect of the potential dilution that could occur if securities to issue common stock were exercised or converted into common stock. Potential dilutive securities include outstanding stock options, RSUs, PRSUs, and Employee Stock Purchase Plan (“ESPP”). The following table sets forth a reconciliation of basic and diluted EPS (in thousands, except per share information):


	Three Months Ended March 31,
	2011		2010
Numerator:
Net income attributable to Cymer, Inc.	$	28,799	$	16,005
Denominator:
Weighted average common shares		30,197		29,997
Effect of dilutive stock options, RSUs and PRSUs		568		328

Denominator for diluted earnings per share		30,765		30,325

Earnings per share:
Basic	$	0.95	$	0.53

Diluted	$	0.94	$	0.53

For the three months ended March 31, 2011 and 2010, options to purchase 67,000 and 939,000 shares, respectively, were anti-dilutive because the option exercise price exceeded the average market value of our common stock. For the three months ended March 31, 2011 and 2010, RSU/PRSU shares of 221,000 and RSU shares of 62,000, respectively, were excluded as their effect would be anti-dilutive.

10. INCOME TAXES

We calculate our interim tax provision in accordance with the guidance for accounting for income taxes in interim periods. At the end of each interim period, we estimate the annual effective tax rate and apply that tax rate to our ordinary year-to-date pre-tax income. The tax expense or benefit related to significant, unusual or extraordinary discrete events during the interim period is recognized in the interim period in which those events occurred. In addition, the effect of changes in enacted tax laws or rates or tax status is recognized in the interim period in which the change occurs.

Income tax expense of $7.7 million and $6.8 million reflect an effective tax rate of 21% and 30% for the three months ended March 31, 2011 and 2010, respectively. Our effective tax rate for the three months ended March 31, 2011 was less than the United States federal statutory rate of 35% due primarily to a reduction in our net unrecognized tax benefits of $3.7 million due to the expiration of a foreign statute of limitations as well as benefits recognized for research and development credits and manufacturing deductions in the United States. These reductions were offset partially by an increase in our income tax expense of $1.0 million resulting from a foreign tax audit. Our effective tax rate for the three months ended March 31, 2010 was less than the United States federal statutory rate of 35% due primarily to our estimate of the outcome of a foreign tax audit that resulted in a net tax benefit in the United States of $1.2 million recorded as a discrete item during the three months ended March 31, 2010. We are currently negotiating settlement of this audit with the foreign tax authority and the United States Treasury Department, and our estimated benefit could change as negotiations evolve. Final resolution of this audit may not be known for several years.

As of March 31, 2011, the balance of our net unrecognized tax benefits is $11.1 million, a decrease of $3.7 million from December 31, 2010. This decrease is due primarily to the expiration of a foreign statute of limitations noted above. During 2011, we expect to further reduce the balance of unrecognized tax benefits by $1.0 million due to the expiration of a statute of limitations.

We are subject to taxation in the United States and in various states and foreign jurisdictions. Our tax years 2007 and forward are subject to examination by the IRS, our tax years 2000 and forward are subject to examination by material state jurisdictions, and our tax years 2004 and forward are subject to examination by material foreign jurisdictions.

Several of our subsidiaries are currently under audit or appeal. It is reasonably possible that the examination phase of these audits or appeals may conclude in the next 12 months, and that the related tax reserves or unrecognized tax benefits for uncertain tax positions may change, potentially having a material effect on our effective tax rate. However, based on the status of the various examinations or appeals in multiple jurisdictions, an estimate of the range of reasonably possible outcomes cannot be made at this time.

11. COMMITMENTS AND CONTINGENCIES

Guarantees and Warranties

In the ordinary course of business, we are not subject to potential obligations under guarantees that fall within the scope of the authoritative guidance for guarantees with the exception of our standard warranty provisions associated with product sales and indemnification provisions related to intellectual property that are contained within many of our lithography tool manufacturer agreements.

We record a provision for warranty, which is included in cost of revenue and is recorded at the time that the related revenue is recognized. The warranty period and terms for light source systems and replacement parts varies by light source system model. We review our warranty provision using a statistical financial model which calculates actual historical expenses, product failure rates, and potential risks associated with our different product models. We then use this financial model to calculate the future probable expenses related to warranty and the required level of the warranty provision. Throughout the year, we review the risk levels, historical cost information and failure rates used within this model and update them as information changes over the product’s life cycle. For new product offerings, such as EUV sources and TCZ crystallization tools, for which we have limited or no historical failure rates, we estimate our future probable expenses related to the warranties based on an evaluation of parts covered under warranty and their expected failure rates determined through internal testing and analysis. If actual warranty expenditures differ substantially from our estimates, revisions to the warranty provision would be required. Actual warranty expenditures are recorded against the warranty provision as they are incurred. Consumed parts under warranty, when returned, are recorded as reductions to warranty expenditures during the period at their estimated fair value. We do not include the return of consumed parts in our statistical financial model used to estimate our provision for warranty because the specific parts and their estimated future fair value when returned, if any, cannot be reasonably estimated at the time revenue is recorded.

The following table provides the changes in the product warranty accrual (in thousands):


Balance at January 1, 2011	$	11,050
Accruals for warranties issued during the period		3,856
Changes in liability related to pre-existing warranties		(2,747)
Warranty expenditures (1)		(876)

Balance at March 31, 2011	$	11,283

(1)

Warranty expenditures are net of consumed parts returned of $274,000.

Intellectual Property Indemnifications

We agree to indemnify certain of our customers in the general purchase agreements with our three lithography tool manufacturer customers, ASML, Canon and Nikon, and under certain of our development and supply agreements. These indemnifications generally include both general and intellectual property indemnification provisions that provide we defend these parties against certain infringement claims directed against our products. Under the indemnification provisions, we would pay costs and damages attributable to the infringement claims, including attorneys’ fees associated with settlements or defenses in respect of such claims, provided that certain conditions are satisfied. As of March 31, 2011, we were not subject to any pending general or intellectual property-related litigation or claims. We have not received any requests for nor have we been required to make any payments under these indemnification provisions.

Contingencies Related to Third-Party Review and Legal Actions

From time to time, we are subject to potential claims and assessments from third parties. We are also subject to various governmental audits and reviews. We continually assess whether or not such claims have merit and warrant accrual. Where appropriate, we accrue estimates of anticipated liabilities in the unaudited consolidated financial statements. Such estimates are subject to change and may affect our operating results, financial condition and cash flows.

We are from time to time party to legal actions in the normal course of business. Management does not expect the outcome of legal action in the normal course of business to have a material effect on our operating results, financial condition and cash flows.

12 . SEGMENT OPERATIONS

Operating segments are defined as components of a public entity which engage in business activity which may earn revenue and incur expenses and its operating results are reviewed regularly by the chief operating decision maker (“CODM”), or decision making group, in deciding how to allocate resources and in assessing performance. We develop, manufacture and market our products within two reportable business segments: Cymer and TCZ. Cymer’s primary business is to design, manufacture and sell light source systems and installed base products for use in photolithography systems used in the manufacture of semiconductors. TCZ develops, integrates, markets and supports silicon crystallization tools for use in the manufacture of flat panel displays.

Our CODM is our chief operating officer who reviews the operations and full financial statements of Cymer and TCZ on a quarterly basis. Our CODM uses this information in order to make decisions on resources needed for our light source systems and the silicon crystallization tools businesses and to assess the overall performance of these businesses. The accounting policies to derive our unaudited consolidated financial results are the same as those used for our segment reporting. Information related to our Cymer and TCZ operating segments is as follows (in thousands):


	Three Months Ended March 31,
	2011		2010 (2)
Revenue:
Cymer	$	154,553	$	113,873
TCZ		0		0
Reconciling items (1)		(154)		(92)

	$	154,399	$	113,781

Operating income (loss):
Cymer	$	39,962	$	26,550
TCZ		(4,305)		(3,990)
Reconciling items (3)		0		26

	$	35,657	$	22,586


	March 31, 2011		December 31, 2010
Total assets:
Cymer	$	813,992	$	775,648
TCZ		10,666		11,940
Reconciling items (3)		0		(257)

	$	824,658	$	787,331

(1)

Reconciling items represent intercompany revenue between segments.

(2)

TCZ operating loss is presented net of noncontrolling interest.

(3)

Reconciling items represent unallocated items not segregated between the two segments.

Sales to ASML and Nikon, two of our three lithography tool manufacturing customers, and Samsung, one of our chipmaker customers, amounted to 42%, 9% and 10%, respectively, of total revenue for the three months ended March 31, 2011. A loss of one or more of these customers would have a significant adverse effect on our operating results, financial condition, and cash flows.

13 . SUBSEQUENT EVENTS

On April 1, 2011, we acquired all of the outstanding equity of eDiag Solutions (“eDiag”), a privately held company based in Seoul, Korea, that provides a portfolio of software solutions for lithography source performance data mining and analytics, which complements our OnPulse offerings. By combining our current fault monitoring, predictive techniques and worldwide service infrastructure with eDiag’s data analysis capabilities, we will continue to drive increased operational efficiency and support improved availability for our customers’ light sources.

Pursuant to the purchase agreement, we acquired eDiag for $15.0 million cash, with $6.0 million paid on April 1, 2011 and $3.0 million payable on April 1, 2012, 2013 and 2014. There was no debt assumed with the acquisition. Additionally, we entered into a services agreement with the president and previous majority stockholder of eDiag that pays him $2.5 million on April 1, 2015 and $2.5 million on April 1, 2016, if he continues his employment with us through those dates.

As of the date of this report, we have not completed the detailed valuations necessary to estimate the fair value of the assets acquired and the liabilities assumed from eDiag and the related allocation of the purchase consideration.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and notes thereto included in “Item 1. Financial Statements” of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and the section titled “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities Exchange Commission on February 18, 2011.

FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q that are not strictly historical in nature are forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include, but are not limited to, references to the outlook for the semiconductor industry and us; expected timeline for the adoption of new photolithography, extreme ultraviolet and flat panel display technologies by customers; expected domestic and international product sales and development; our research and development activities and expenditures; the productization of our extreme ultraviolet sources and flat panel display technologies; adequacy of our capital resources and investments; effects of business cycles in the semiconductor business; our competitive position; and our relationships with customers and third-party manufacturers of our products, and may contain words such as “believes,” “anticipates,” “expects,” “plans,” “intends” and words of similar meaning. In addition, statements regarding backlog and book-to-bill ratios should not be read as predictions or projections of future performance. These statements are predictions based on current information and our expectations and involve a number of risks and uncertainties. The underlying information and our expectations are likely to change over time. Actual events or results may differ materially from those projected in the forward-looking statements due to various factors, including, but not limited to, those contained under the caption “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Forward-looking statements herein speak only as of the date of this Quarterly Report on Form 10-Q. Unless required by law, we undertake no obligation to update or revise any forward-looking statements to reflect new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements.

Cymer, XLR, XLA, XL, OnPulse, TCZ, eDiag Solutions and all other Cymer product or service names used herein are either registered trademarks or trademarks of Cymer, Inc. Other marks mentioned herein, if any, are the property of their respective holders.

OVERVIEW

Revenue of $154.4 million in the first quarter of 2011 represented a 36% increase over the first quarter of 2010 and a 5% increase over the fourth quarter of 2010. The increases over prior year and last quarter are due to growth in light source system revenue and continued growth in installed base products. Key customer DUV light source selections awarded in the second half of 2010 began to translate into an increased level of light source shipments in the first quarter of 2011. The majority of our source shipments continued to be argon and fluorine (“ArF”) sources in support of 45nm and below immersion lithography, and we also increased shipments of krypton and fluorine (“KrF”) sources. We also experienced growth in light source system sales over the fourth quarter of 2010, and gross pulse utilization remained high, despite the typical first quarter seasonal slowing due to the Chinese New Year and the post holiday sell-through.

This quarter, we continued to make solid progress demonstrating the value of our OnPulse product. We now have approximately 1,500 light sources under OnPulse coverage, which represents approximately 55% of total production light sources in our active installed base. In our continuing effort to extend OnPulse value, we completed the acquisition of eDiag Solutions, a privately held company based in Seoul, Korea on April 1, 2011. eDiag provides a portfolio of software solutions for lithography source performance data mining and analytics, which complements our OnPulse offerings.

Gross margin was 51.5% in the first quarter of 2011, an increase over gross margin of 50.0% in the first quarter of 2010, and a decrease from gross margin of 53.1% in the fourth quarter of 2010. The increase in gross margin over prior year was driven primarily by our continued focus on operational execution including improved manufacturing absorption, declines in warranty expenses due to light source reliability improvements and decreases in freight expense. These improvements in gross margin were offset partially by an increase in inventory write-downs. The decrease in gross margin from the fourth quarter of 2010 was driven primarily by higher installed base product costs and an increase in inventory write-downs, offset partially by decreases in warranty and freight expenses.

Operating expenses of $43.9 million in the first quarter of 2011 represent a 28.1% increase over the first quarter of 2010 and a 7.3% increase over the fourth quarter of 2010. The increase in operating expenses is primarily due to the increase in our investment in EUV in support of the development of our 3100 and 3300 source technology. Operating expenses as a percentage of net sales decreased to 28.4% in the first quarter of 2011, compared to 30.1% in the first quarter of 2010 and 27.8% in the fourth quarter of 2010.

As a result of the above, we reported first quarter 2011 net income of $28.8 million, compared to $16.0 million net income in the first quarter of 2010 and $32.9 million of net income in the fourth quarter of 2010. Additionally, our cash and investments increased to $242.0 million at March 31, 2011. Net cash provided by operations for the three months ended March 31, 2011, was $12.1.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

General

The discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. For a summary of significant accounting policies, see Note 1 to the Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2010. The preparation of these financial statements requires us to make estimates and use judgment that may impact the reported amounts of assets, liabilities, revenue, expenses, and related disclosure of contingent liabilities. As a part of our ongoing internal processes, we regularly evaluate our estimates and judgments associated with revenue recognition, inventory valuation, warranty obligations, stock- based compensation, income taxes, allowances for doubtful accounts, long-lived assets valuation, goodwill valuation, assets and liabilities valuation, and contingencies and litigation. We base these estimates and judgments upon historical information, projected information, and other facts and assumptions that we believe to be valid and reasonable under the circumstances. These assumptions and facts form the basis for making judgments and estimates and for determining the carrying values of our assets and liabilities that are not apparent from other sources. Adverse global economic conditions, illiquid credit markets, volatile equity, foreign currency fluctuations and declines in consumer spending have increased the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, particularly those related to the condition of the economy, actual results could differ significantly from these estimates.

We believe that revenue recognition, inventory valuation, warranty obligations, stock-based compensation, allowance for doubtful accounts, long-lived assets valuation, and income taxes require more significant judgments and estimates in the preparation of our unaudited consolidated financial statements than do other of our accounting estimates and judgments.

There have been no changes to the items disclosed as critical accounting policies and estimates in “Management Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2010.

RESULTS OF OPERATIONS

The following table sets forth certain items in our unaudited consolidated statements of operations as a percentage of total revenue:


	Three Months Ended March 31,
	2011			2010
Revenue		100.0	%		100.0	%
Cost of revenue		48.5			50.0

Gross profit		51.5			50.0

Operating expenses:
Research and development		18.0			17.5
Sales and marketing		3.9			4.5
General and administrative		6.5			8.1

Total operating expenses		28.4			30.1

Operating income		23.1			19.9
Other income (expense)		0.5			0.0

Income before income taxes		23.6			19.9
Income tax expense		5.0			6.0

Net income		18.6			13.9

Net loss attributable to noncontrolling interest in subsidiary		0.0			0.1

Net income attributable to Cymer, Inc.		18.6	%		14.0	%

We develop, manufacture and market our products within two reportable business segments, Cymer and TCZ. Cymer’s primary business is to design, manufacture and sell light source systems and installed base products for use in photolithography systems used in the manufacture of semiconductors. TCZ develops, integrates, markets and supports silicon crystallization tools used in the manufacture of LTPS-LCD and OLED flat panel displays. The discussion which follows for revenue, cost of revenue and operating expenses includes our unaudited consolidated results and identifies those amounts associated with the TCZ segment, which are included in the unaudited consolidated amounts, for the three months ended March 31, 2011 and 2010. Additional information regarding our reporting segments is contained in Note 12 to our Unaudited Consolidated Financial Statements in Part I, Item 1 of this report.

Three Months Ended March 31, 2011 and 2010

Revenue. The following table summarizes the components of our revenue (in thousands, except units sold):


	Three Months Ended March 31,				Growth/Decline
	2011		2010		Dollars			Percent
Light source systems:
Revenue	$	68,414	$	39,007	$	29,407			75	%

Units sold		50		24		26			108	%

Average selling price (1)	$	1,400	$	1,524	$	(124	)		(8	%)

Installed base product revenue	$	85,985	$	74,774	$	11,211			15	%

Total revenue	$	154,399	$	113,781	$	40,618			36	%

(1)

For purposes of calculating the average selling price, we have excluded the effect of deferred light source system revenue between periods in order to present the actual average selling price per light source system sold.

Total revenue increased primarily due to increased demand for light source systems and installed base products as our customers continued their investment in existing and new manufacturing facility (“fab”) expansions. The increase in light source revenues was primarily due to increased investments in ArF immersion light source systems in support of 45nm and below lithography and an increase in KrF light source system purchases when compared to the same period in the prior year. The average selling price of our light source systems decreased due to a change in the product mix of light source systems sold when compared to the same period in the prior year, as KrF light source systems have a lower average selling price than ArF light source systems. Our installed base product revenue increased when compared to the same period in the prior year primarily due to the increase in pulse utilization of our light source systems by chipmaker customers and continued customer adoption of our OnPulse product.

Sales to ASML, Nikon and Samsung amounted to 42%, 9% and 10%, respectively, of total revenue for the quarter ended March 31, 2011, and 28%, 15% and 10%, respectively, of total revenue for the quarter ended March 31, 2010.

Our sales to external customers consist of sales generated from each of the following geographic locations in which we do business (in thousands):


	Three Months Ended March 31,				Growth/Decline
	2011		2010		Dollars		Percent
United States	$	76,924	$	44,877	$	32,047		71	%
Korea		22,490		18,533		3,957		21	%
Japan		22,318		22,925		(607)		(3	%)
Taiwan		15,864		11,306		4,558		40	%
Other Asia (China and Singapore)		8,728		8,103		625		8	%
Europe		8,075		8,037		38		0	%

Total revenue	$	154,399	$	113,781	$	40,618		36	%

We anticipate that international sales will continue to account for a significant portion of our sales.

Backlog. Our DUV backlog includes only those orders for light source systems and replacement parts for which we have accepted a purchase order from a customer, and that will be delivered to the customer within the following 12 months. In addition, our DUV backlog does not include service or support which will be provided to our customers in the future or under service contracts.

Timing of delivery can be affected by many factors, including factors that cannot be easily predicted or controlled. Because it is the practice in our industry that customers may cancel or delay orders with little or no penalty, our backlog as of any particular date may not be a reliable indicator of actual sales for any succeeding period.

Our backlog for DUV source systems and replacement parts at March 31, 2011 was $71.0 million compared to $43.8 million at March 31, 2010. DUV bookings for the quarter ended March 31, 2011 and 2010 were $161.5 million and $111.6 million, respectively. The DUV book-to-bill ratio for the quarter ended March 31, 2011 was 1.05 compared to 0.98 for the quarter ended March 31, 2010. The increase in backlog and bookings year over year primarily reflects an increase in demand for our systems in the first quarter of 2011.

We also had a backlog of $45.3 million for EUV sources and $37.2 million for silicon crystallization tools at March 31, 2011. Revenue will be recorded for these sources and tools when customer acceptance has occurred.

Cost of revenue. Cost of revenue includes direct material and labor, warranty expenses, license fees, manufacturing and service overhead. Cost of revenue also includes foreign exchange gains and losses on foreign currency forward exchange contracts (“forward contracts”) associated with purchases of our products for resale under firm third-party sales commitments. Costs incurred for shipping and handling are included in cost of revenue at the time the related revenue is recognized. Amounts billed to a customer, if any, for shipping and handling are reported as revenue.

The cost of revenue increased 31.5% to $74.9 million for the quarter ended March 31, 2011 from $57.0 million for the same period in the prior year. Gross profit increased to $79.5 million with a 51.5% gross margin for the quarter ended March 31, 2011 from $56.8 million with a 50.0% gross margin for the quarter ended March 31, 2010. The increase in gross profit from period to period was primarily due to the higher level of light source system and installed based product sales for the quarter ended March 31, 2011. The increase in gross margin over prior year was driven primarily by our continued focus on operational execution including improved manufacturing absorption, declines in warranty expenses due to light source reliability improvements and decreases in freight expense. These improvements in gross margin were offset partially by an increase in inventory write-downs primarily related to EUV. Included in cost of revenue was $318,000 and $247,000 for the quarters ended March 31, 2011 and 2010, respectively, for our TCZ segment.

Research and development. Research and development expenses include costs of continuing product development projects, which consist primarily of employee and material costs, depreciation of equipment and other engineering related costs. Research and development expenses increased 39.7% to $27.8 million for the quarter ended March 31, 2011 from $19.9 million for the same period in the prior year primarily due to increased investment in EUV source development when compared to the same period in the prior year. In addition, research and development expenses included $3.1 million and $2.9 million for the quarters ended March 31, 2011 and 2010, respectively, for our TCZ segment. As a percentage of total revenue, research and development expenses increased to 18.0% for the quarter ended March 31, 2011 from 17.5% for the same period in the prior quarter.

Sales and marketing. Sales and marketing expenses include sales, marketing, customer support staff and other marketing expenses. Sales and marketing expenses increased 17.5% to $6.0 million for the quarter ended March 31, 2011 from $5.1 million for the same period in the prior year. The increase in sales and marketing expenses primarily reflects increased employee related costs due to increased headcount and increased travel and consulting costs when compared to the same period in the prior year. Included in sales and marketing expenses were $523,000 and $495,000 for the quarters ended March 31, 2011 and 2010, respectively, for our TCZ segment. As a percentage of total revenue, sales and marketing decreased to 3.9% for the quarter ended March 31, 2011 compared to 4.5% for same period in the prior quarter.

General and administrative. General and administrative expenses consist primarily of management and administrative personnel costs, professional services including external audit and consultant fees, and administrative operating costs. General and administrative expenses increased 9.0% to $10.0 million for the quarter ended March 31, 2011 from $9.2 million for the same period in the prior quarter primarily due to an increase in employee related costs due to increased headcount when compared to the same period in the prior year. Included in general and administrative expenses were $321,000 and $519,000 for the quarters ended March 31, 2011 and 2010, respectively, for our TCZ segment. As a percentage of total revenue, general and administrative expenses decreased to 6.5% for the quarter ended March 31, 2011 compared to 8.1% for the same period in the prior quarter.

Other income (expense). Other income (expense) consists primarily of interest income earned on our investment portfolio, foreign currency exchange gains or losses associated with fluctuations in the value of the functional currencies of our foreign subsidiaries against the U.S. Dollar and other items that may be specific to a reporting period. Other income was $798,000 for the quarter ended March 31, 2011 compared to $67,000 for the same period in the prior quarter. The increase primarily reflects an increase in foreign currency exchange gains.

Income tax expense. The tax expense of $7.7 million and $6.8 million reflect an effective tax rate of 21% and 30% for the three months ended March 31, 2011 and 2010, respectively. The decrease in the effective tax rate for the three months ended March 31, 2011 was primarily due to benefits recognized for research and development credits in the United States that were not reinstated until the end of 2010. Additionally, we recorded the following discrete items during the three months ended March 31, 2011: a $3.7 million

decrease in tax expense for the reduction in our net unrecognized tax benefits due to the expiration of a foreign statute of limitations, offset partially by a $1.0 million increase in tax expense resulting from a foreign tax audit. This compares to a net tax benefit in the United States of $1.2 million recorded as a discrete item during the three months ended March 31, 2010 based on our estimate of the outcome of a foreign tax audit. We are currently negotiating settlement of this audit with the foreign tax authority and the United States Treasury Department, and our estimated benefit could change as negotiations evolve. Final resolution of this audit may not be known for several years.

Our future effective tax rate depends on various factors, such as tax legislation and credits and the geographic compositions of our pre-tax income. Additionally, several of our subsidiaries are under audit or appeal. It is reasonably possible that the examination phase of these audits or appeals may conclude in the next 12 months, and that the related tax reserves or unrecognized tax benefits for uncertain tax positions may change, potentially having a material effect on our effective tax rate.

LIQUIDITY AND CAPITAL RESOURCES

In recent years, we have funded our operations primarily from cash generated from operations and proceeds from employee stock option exercises. We have also from time to time utilized cash to repurchase shares of our common stock. In summary, our cash flows were as follows (in thousands):


	Three Months Ended March 31,
	2011		2010
Net cash provided by (used in) operating activities	$	12,112	$	(12,747)
Net cash (used in) provided by investing activities		(10,365)		10,657
Net cash provided by financing activities		17,242		716
Effect of exchange rate changes on cash and cash equivalents		(39)		(88)

Net increase (decrease) in cash and cash equivalents	$	18,950	$	(1,462)

Operating Activities. Net cash provided by operating activities for the three months ended March 31, 2011 primarily reflects net earnings for the period before depreciation, amortization, stock-based compensation and provision for deferred income taxes and an increase in deferred revenue of $15.1 million. These increases in cash were offset partially by $32.0 million decrease in other liabilities and a $16.6 million increase in accounts receivable. The decrease in other liabilities primarily reflects payment of our 2010 variable cash compensation programs and income taxes paid during the quarter. The accounts receivable increase results primarily from the increase in revenue and, to a lesser extent, an increase in days sales outstanding to 83 days at March 31, 2011 from 79 days at December 31, 2010.

Net cash used in operating activities for the three months ended March 31, 2010 primarily reflects net earnings for the period before depreciation, amortization, and stock-based compensation, offset primarily by changes in working capital, including a $23.9 million increase in accounts receivable as well as a $5.2 million increase in inventory. The increase in accounts receivable reflects both the increase in revenue and a higher percentage of revenue generated in the third month of the quarter.

Investing Activities

Net cash used in investing activities for the three months ended March 31, 2011 was due primarily to investment purchases of $50.4 million and capital expenditures of $4.3 million related primarily to EUV and TCZ, offset by sales of matured investments of $44.4 million. Net cash provided by investing activities for the three months ended March 31, 2010 was due to sales of matured investments of $23.4 million, offset by capital expenditures of $5.0 million, primarily related to EUV, and investment purchases of $7.7 million.

Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2011 primarily reflects $13.6 million of proceeds from the exercise of employee stock options and excess tax benefits related to stock option exercises of $3.7 million. Net cash provided by financing activities for the three months ended March 31, 2010 primarily reflects $942,000 of proceeds from the

exercise of employee stock options and excess tax benefits related to stock option exercises of $502,000, offset by the first installment paid to our former joint venture partner in TCZ of $728,000.

Effect of Exchange Rate Changes

Most of our foreign subsidiaries operate in currencies other than the U.S. Dollar, and the majority of their cash balances are denominated in these foreign currencies. As a result, our cash and cash equivalent balances are subject to the effects of the fluctuations in these currencies against the U.S. Dollar at the end of each reporting period. Several of the foreign currencies in which our subsidiaries operate have experienced volatility over the past several years. The net effect of exchange rate changes on cash and cash equivalents, when expressed in U.S. Dollar terms, was a decrease in cash of $39,000 and $88,000 for the three months ended March 31, 2011 and 2010, respectively.

Prospective Capital Needs

We require substantial resources to fund the operations of our business, particularly to fund our investment in new technologies, including inventory and capital in support of these technologies. We expect purchases of property, plant and equipment in 2011 to be approximately $30.0 million, a significant portion of which will relate to purchases of equipment and facility improvements associated with EUV development and manufacturing, as well as purchases of software and equipment. Effective April 1, 2011, we acquired all of the outstanding equity of eDiag Solutions for $15.0 million cash, with $6.0 million paid on April 1, 2011 and $3.0 million payable on April 1, 2012, 2013 and 2014. There was no debt assumed with the acquisition. Additionally, we entered into a services agreement with the president and previous majority stockholder of eDiag that pays him $2.5 million on April 1, 2015 and $2.5 million on April 1, 2016, if he continues his employment with us through those dates. In addition, we require resources to fund our normal operations.

We believe that our operating cash flows, together with our current cash, cash equivalents and marketable securities will be sufficient to cover our working capital needs for our normal operations, and our investments in our new technologies, including EUV and silicon crystallization tools, for at least the next 12 months. It is possible that we may need to raise additional funds to finance our activities or to acquire assets, products or new technologies beyond the next 12 months. We may also decide that it is prudent in the current business and economic environment to secure commitments to access additional capital, including equity or debt securities, to protect our long term liquidity position. In April 2008, our board of directors authorized us to repurchase up to $100.0 million of our common stock. During the three months ended March 31, 2011, we had no purchases under this program and $57.8 million remain available for repurchase under this program.

Our future capital requirements may vary materially from those currently planned. We anticipate that the amount of capital we will need in the future will depend on many factors, including:

•

the required investments in our new technologies such as EUV and silicon crystallization tools and in the products derived from them;

•

the market acceptance of our products;

•

the overall levels of sales of our products and gross profit margins;

•

general economic and political conditions and specific conditions in the markets in which we operate, including the volatility in the semiconductor industry, and trends in the semiconductor markets in various geographic regions, including seasonality in sales of consumer products into which semiconductors are incorporated;

•

the timing and requirements of spending to support product development efforts for our current technologies and other operating costs;

•

our competitors’ responses to our products and our anticipation of and responses to their products;

•

our manufacturing activity;

•

the levels of inventory and accounts receivable that we maintain;

•

the inability of certain of our customers who depend on credit to have access to their traditional sources of credit to finance the purchase of products from us, particularly during changing or adverse global economic conditions, which may lead them to reduce their level of purchases or to seek credit or other accommodations from us;

•

competitive labor market compensation requirements;

•

acquisitions of assets, products or new technologies;

•

repurchases of our common stock;

•

capital improvements for new and existing facilities; and

•

our relationships with suppliers and customers.

OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

At March 31, 2011 and 2010, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, variable interest, or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we did not engage in trading activities involving non-exchange traded contracts. As a result, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. We do not have relationships with or enter into transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties except as disclosed herein.

There have been no material changes to our contractual obligations from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report on Form 10-K for the year ended December 31, 2010 except, as disclosed in Note 13 to our unaudited consolidated financial statements in Part I, Item 1 of this report, we acquired all of the outstanding equity of eDiag effective April 1, 2011. Pursuant to the purchase agreement, we acquired eDiag for $15 million cash, with $6.0 million paid on April 1, 2011 and $3.0 million payable on April 1, 2012, 2013 and 2014. There was no debt assumed with the acquisition. Additionally, we entered into a services agreement with the president and previous majority stockholder of eDiag that pays him $2.5 million on April 1, 2015 and $2.5 million on April 1, 2016, if he continues his employment with us through those dates.

RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 1 to our unaudited consolidated financial statements in Part I, Item 1 of this report for a description of recently issued accounting standards, including our expected dates of adoption and estimated effects on our results of operations and financial condition.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

FOREIGN CURRENCY RISK

We conduct business in several international currencies through our global operations. Our foreign currency hedging program manages fluctuations in the value of the Japanese Yen, the Korean Won, the Euro and the Taiwanese Dollar. Our foreign currency risk falls into two primary categories.

First, we are subject to uncertain gross profit margins when we forecast selling products in one currency and the product costs are denominated in a different currency, primarily for the purchases of our products for resale under firm third-party sales commitments. In this instance, we enter into derivative financial instruments, principally forward contracts, which we designate as cash flow hedges in order to mitigate fluctuations in the gross profit margins of these forecasted transactions.

Forward contracts on forecasted transactions that hedge uncertain gross profit margins generally qualify for cash flow hedge accounting treatment. Gains and losses on cash flow hedges are recorded in accumulated other comprehensive income (loss) until the hedged transaction is recorded in the financial statements. Once the underlying transaction is recorded in the financial statements, we de-designate the derivative, reclassify the accumulated gain or loss on the derivative into cost of revenue and cease to apply hedge accounting treatment. Once the derivative has been de-designated, any further gains or losses are recorded to other income (expense). If all or a portion of the forecasted transaction were cancelled, this would render all or a portion of the cash flow hedge ineffective and we would reclassify the ineffective portion of the hedge into other income (expense). We generally have not experienced ineffectiveness of cash flow hedges from cancelled transactions.

The second category of foreign currency risk occurs when transactions are recorded to our unaudited consolidated financial statements in a currency other than the applicable entity’s functional currency and the cash settlement of the transaction occurs at some point in the future. When transactions in non-functional currency are recorded to our unaudited consolidated financial statements, any changes in the recorded amounts resulting from fluctuations in the value of that currency will be recorded to other income (expense). In order to mitigate these revaluation gains and losses, we enter into derivative financial instruments, principally forward contracts. The forward contracts that hedge transactions that have been recorded to our unaudited consolidated financial statements are not designated as hedges, and we record changes in their fair value to other income (expense) in order to attempt to offset gains and losses on the underlying transactions. We considered the historical trends in currency exchange rates and determined that it was reasonably possible that adverse changes in exchange rates of 20% for all currencies could be experienced in the near term. These changes would have resulted in an adverse effect on income before income taxes of approximately $2.0 million and $1.2 million at March 31, 2011 and 2010, respectively. The adverse effect at March 31, 2011 and 2010 is after consideration of the offsetting effect of approximately $4.7 million and $4.8 million, respectively, from forward exchange contracts in place at that time. These reasonably possible adverse changes in foreign currency exchange rates of 20% were applied to net assets and liabilities denominated in currencies other than the functional currencies at the balance sheet dates to compute the adverse effect these changes would have had on our income before income taxes in the near term.

At March 31, 2011, we had outstanding forward contracts to buy $2.9 million in exchange for Japanese Yen, $7.5 million in exchange for Korean Won, $6.5 million in exchange for Taiwanese Dollars and to sell $10.0 million in exchange for Euros. These contracts expire on various dates through October 2011. The fair value of all our forward contracts totaled to an asset of $146,000 at March 31, 2011.

INVESTMENT AND DEBT RISK

We maintain an investment portfolio consisting primarily of government and corporate fixed income securities, commercial paper and money market funds. While it is our general intent to hold such securities until maturity, we will occasionally sell certain securities for cash flow purposes. Therefore, our investments are classified as available-for-sale and are carried on the balance sheet at fair value. If interest rates were to increase instantaneously and uniformly by 100 basis points, the fair market value of our investment portfolio as of March 31, 2011 would decrease by $335,000.

ITEM 4. Controls and Procedures

Evaluation of disclosure controls and procedures. Our chief executive officer and our chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of March 31, 2011, have concluded that as of such date, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting. There has been no change in our internal control over financial reporting during the quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on the Effectiveness of Internal Control. There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurances with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal controls may vary over time.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

None.

ITEM 1A. Risk Factors

The risks described below may not be the only risks we face. Additional risks that we do not currently believe are material may also impair our business operations. The risk factors set forth below with an asterisk (*) next to the title contain changes to the description of the risk factors associated with our business as previously disclosed in Item 1A to our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. If any of the events or circumstances described in the following risks occur, our business, financial condition, results of operations or cash flows could suffer, and the trading price of our common stock and our market capitalization could decline.

Our revenue and operating results from quarter to quarter and year to year have varied in the past and our future operating results may continue to fluctuate significantly.*

Factors that contribute to fluctuations in our revenue and operating results include:

•

global demand for semiconductors in general and, in particular, for leading edge devices with smaller circuit geometries;

•

utilization rates of light sources by our chipmaker customers and pulse usage which affect our installed base products revenue and costs;

•

cyclicality in the market for semiconductor manufacturing equipment;

•

rates at which our chipmaker customers take delivery of photolithography tools from our lithography tool manufacturer customers;

•

rates at which lithography tool manufacturer customers take delivery of light source systems from us;

•

timing and size of orders from our customers;

•

the ability of our customers to pay for products purchased from us;

•

our abilities to manage customer satisfaction and product reliability, and to provide effective field support to our customers;

•

variability in the amount and timing of parts replacement costs under our contracts and service agreements, including our OnPulse contracts;

•

changing or adverse global economic conditions, including energy prices, inflation, deflation, recession, unemployment, consumer confidence and demand, turmoil in the credit markets and financial services industry, and credit availability and their potential effects on our customers, suppliers, ability to sell products, and investments;

•

improved or reduced market penetration by our competitors;

•

demand for reduced product lead times from our customers;

•

the mix of light source models, and the level of installed base products revenue in our total revenue;

•

changes in the price and profitability of our products;

•

our ability to develop and implement new technologies and introduce new products that meet our customers’ needs, in particular, EUV lithography;

•

research and development costs incurred to develop new technologies;

•

demand for our advanced EUV sources;

•

global demand for flat panel displays, in particular, for LTPS – LCD and OLED displays;

•

demand for silicon crystallization tools used in the manufacture of LTPS – LCD and OLED flat panel displays;

•

our ability to manage our manufacturing and inventory requirements, including our inventory levels and controls at our widely dispersed operations;

•

natural events such as severe weather and earthquakes in the locations in which we, our customers or our suppliers operate;

•

the financial condition of our suppliers which, if negative, could affect their ability to supply us with the parts that we need to manufacture our products;

•

foreign currency exchange rate fluctuations and possible protectionist measures in the countries in which we do business;

•

our investments in marketable securities;

•

changes in our effective tax rate;

•

worldwide political instability;

•

intellectual property protection; and

•

potential impairments to our goodwill or long-lived assets.

In recent years, chipmakers have been controlling the number of new tools they need to purchase by improving their manufacturing efficiency, utilization and repurposing of existing tools. As a result, revenue from installed base products has grown as a percentage of our total revenue. The revenue from the operation of our installed base of light source systems depend on the rate at which our customers use these light source systems, the rate of growth of our installed base, and the mix of pulses from our various light source models. Our operating results for a particular period may be adversely affected if our customers reduce usage rates, or change their buying patterns, or if we incur higher parts replacement costs. Because we sell a limited number of light source systems, the precise timing for recognizing revenue from an order may have a significant effect on our total revenue for a particular period. As is the practice in our industry, our customers may cancel or reschedule orders with little or no penalty. Orders expected in one quarter could shift to another period due to changes in the anticipated timing of our customers’ purchase decisions or rescheduled delivery dates requested by our customers. Our operating results for a particular quarter or year may be adversely affected if our customers cancel or reschedule orders, or if we cannot fill orders in time due to unexpected delays in manufacturing, testing, shipping, or product acceptance or due to an unexpected material surge in demand. Our light source systems used in a production environment generate installed base product revenue based on system usage, which may also vary period to period. Additionally, we may be required to defer revenue associated with contracts that contain multiple deliverables.

We manage our expense levels based, in large part, on expected future revenue. As a result, if our actual revenue decreases below the level we expect, or we are not successful in aligning our manufacturing cost structure with decreasing production levels, our operating results will be adversely affected. As a result of these or other factors, we could fail to achieve our expectations as to future revenue, gross profit and gross margin, operating income, net income, earnings per share, and cash flows. Our failure to meet the performance expectations set and published by external sources could result in a sudden and significant drop in the price of our stock, particularly on a short-term basis, and could negatively affect the value of any investment in our stock.

Our business depends on the semiconductor and the semiconductor capital equipment industries, which are volatile and unpredictable.

We derive the majority of our revenue from our lithography tool manufacturer customers who, as original equipment manufacturers (“OEMs”), incorporate our light source systems in photolithography tools that they sell to semiconductor manufacturers, or chipmakers, and from our chipmaker customers who purchase installed base products directly from us in support of their light source systems. Like us, our OEM customers depend on market demand for their products from the chipmakers. This market demand can be volatile and unpredictable and can affect our ability to accurately predict future revenue and, therefore, our ability to manage our future expense levels. When cyclical fluctuations result in lower than expected revenue levels, operating results may be adversely affected and cost reduction actions may be necessary in order for us to remain competitive and financially stable. During a down cycle or slowdown, we must adjust our cost and expense structure to prevailing market conditions while maintaining our longer term strategies and motivating and retaining our key employees. In contrast, during periods of rapid growth, we must quickly increase manufacturing capacity and personnel to meet our customers’ needs. We can provide no assurance that these objectives can be met in a timely manner in response to industry cycles. We are not able to predict with any certainty the duration of any industry cycle or the timing or order of magnitude of any recovery from a down cycle or slowdown.

Downturns in the semiconductor industry often result in decreases in demand for semiconductor manufacturing equipment, including the photolithography tools that our OEM customers produce. Downturns in the semiconductor industry have generally had severe effects on the demand for semiconductor manufacturing equipment and to a lesser extent, the associated installed base products. Fluctuating levels of investment by chipmakers and resulting pricing volatility will continue to materially affect our aggregate bookings, revenue and operating results. Even during periods of reduced revenue, we believe we must continue to invest in research and development and maintain extensive ongoing worldwide customer support capabilities to meet our customers’ needs and to remain competitive. Continued spending to further these objectives may temporarily harm our financial results. Semiconductor industry downturns and slowdowns will likely continue to adversely affect our business, financial condition and operating results.

While revenue from installed base products has grown as a percentage of our total revenue, we continue to derive a significant percentage of our revenue from the sales of light source systems. Market conditions in the semiconductor industry and our OEM customers’ production efficiency can cause them to expand or reduce their orders for new light source systems as they try to manage their inventories and production requirements. We continue to work closely with our OEM customers to better understand these issues. However, we cannot guarantee that we will be successful in understanding our OEM customers’ inventory management or production requirements or that our OEM customers will not build up an excess inventory of light source systems. If our OEM customers retain an excess inventory of light source systems, our revenue could be reduced in future periods as the excess inventory is utilized, which could adversely affect our operating results, financial condition and cash flows. If our OEM customers demand shorter product lead times to improve their inventory and cash positions, our inventory management and cash position may be negatively affected, which may adversely affect our operating results, financial condition and cash flows.

A significant percentage of our revenue is derived from sales to a limited number of customers, and if we are not able to retain these customers, or they reschedule, reduce or cancel orders, or delay or default on payments, we may experience material adverse effects on our operating results, financial condition and cash flows.*

Two large companies, ASML and Nikon, dominate the photolithography tool business. ASML, Nikon and Samsung, one of our chipmaker customers that purchase our installed base products, accounted for the following percentages of our revenue during the periods indicated:


	Three Months Ended March 31,
	2011		2010
ASML		42%		28%
Nikon		9%		15%
Samsung		10%		10%

Total		61%		53%

We expect that sales to these customers will continue to account for a substantial portion of our revenue in the foreseeable future. None of our customers are obligated to purchase a minimum number of our products in the aggregate or during any particular period. We can provide no assurance that any of our customers will continue to purchase our products at past or current levels. Sales to any of these customers may be affected by many factors, some of which are beyond our control. These factors include:

•

changes in global economic or market conditions affecting the semiconductor or the photolithography tool industries;

•

our ability to develop and introduce new products, including EUV sources, that meet a customer’s needs and specifications;

•

a change in a customer’s competitive position in its industry;

•

a customer experiencing production problems or disruption for a variety of reasons, including but not limited to work stoppages, terrorism, political turmoil, fire, earthquake, energy shortages, flooding or other natural disasters;

•

a decision to purchase light sources, silicon crystallization tools or other products from other suppliers;

•

a change in a customer’s production or utilization rate; and • a decline in a customer’s financial condition.

These companies accounted for the following percentages of our total accounts receivable at the dates indicated:


	March 31, 2011		December 31, 2010
ASML		41%		31%
Nikon		10%		16%
Samsung		4%		4%

Total		55%		51%

We believe there is limited credit risk exposure for us with these companies who continue to demonstrate sound creditworthiness. However, our ability to generate future revenue and collect accounts receivable from them is dependent on their ongoing financial condition and liquidity.

The loss of any significant business from, or production problems or disruption due to natural disasters for, any one of these customers may have a material adverse effect on our operating results, financial condition and cash flows.

The majority of our revenue is derived from selling our light source systems and supporting the installed base of light source systems being used in production.

We expect sales of our light source systems, including KrF and ArF systems, and the products in support of the installed base of light source systems to continue to account for a majority of our revenue in the near term. Continued market acceptance of our light source systems and installed base products is, therefore, critical to our future success. The rate at which chipmakers adopt light sources may vary, for reasons including:

•

performance of ArF immersion-specific resists;

•

potential shortages of specialized materials used in DUV optics;

•

the productivity of double-patterning ArF lithography tools;

•

our ability to develop and introduce an EUV source and our customers’ and chipmakers’ adoption of our EUV technology;

•

consolidation of chipmakers; and

•

the level of demand for chips with ever-smaller feature sizes.

We cannot guarantee that these factors can or will be overcome or that the demand for our light source systems and installed base products will not be materially reduced. The demand for our light source systems and installed base products, and therefore our operating results, financial condition and cash flows could be adversely affected by a number of factors, including:

•

a decline in demand for our customers’ photolithography tools;

•

a decline in chipmaker light source utilization rates or retirement of light sources in our installed base;

•

a failure to achieve continued market acceptance of our products;

•

a failure to manage customer satisfaction, product reliability, or maintain the effectiveness of direct field support;

•

a failure to release enhanced versions of our products on a timely basis or to successfully develop and introduce EUV sources;

•

a failure to meet certain performance specifications on EUV sources;

•

a deterioration in global economic conditions;

•

the introduction of one or more improved versions of light sources by our competitors; and

•

technological changes that we are unable to address with our products.

We depend on a few key suppliers for purchasing components and subassemblies that are included in our products.*

We purchase a limited number of components and subassemblies included in our light source systems, installed base products and silicon crystallization tools from a single supplier or a small group of suppliers. There may also be single source suppliers that we are not aware of for components of our purchased subassemblies. To reduce the risk associated with these suppliers, we have supply agreements in place and carry a strategic inventory of these components. Strategic inventories are managed as a percentage of future demand. We also have vendor-managed inventory of critical components to further reduce the risk of a single supplier. In addition, we contract for the manufacture of various subassemblies of our products and depend on our contract manufacturers to deliver to our required specifications, schedule, and quality standards. Further, some of our suppliers have specialized in supplying equipment or manufacturing services to semiconductor equipment manufacturers and, therefore, are susceptible to industry fluctuations and subject to the same risks and uncertainties as we are regarding the ability to respond to changing market and global economic conditions. Because many of these suppliers reduce their workforce in an industry downturn and rehire in an upturn, they may not be able to meet our requirements or respond quickly enough as an upturn begins and gains momentum. Due to the nature of our product development requirements, these key suppliers must rapidly advance their own technologies and production capabilities in order to support the introduction schedule of our new products. These suppliers may not be able to provide new modules and subassemblies when they are needed to satisfy our manufacturing and delivery schedules. These suppliers may also be adversely affected by economic conditions, which could result in a lack of available capital and limit their ability to access such capital, if needed, to fund their operations. In addition, if we cannot purchase enough of these materials, components or subassemblies, or if these items do not meet our quality standards, there could be delays or reductions in our product shipments, which may have a material adverse effect on our business, operating results, financial condition and cash flows.

We depend on the introduction of new products for our success, and we are subject to risks associated with rapid technological change.

The development, introduction and support of new products in a competitive business environment are complex processes and could be expensive. New or improved products may lead to higher costs and perhaps reduced profits. Rapid technological changes in semiconductor manufacturing processes subject us to increased pressure to develop technological advances which enable such processes. We believe that our future success depends in part upon our ability to develop, manufacture, and support new light source products with improved capabilities on a timely basis and to continue to enhance our existing product and process capabilities. Due to the risks inherent in transitioning to new products, we must forecast accurate demand for new products while managing the transition from established products. After our chipmaker customers have built their capacity to levels appropriate to meet existing demand, their demand for our light source products will depend, in part, on their sales forecasts, their estimates regarding the duration and magnitude of the current industry cycle and whether their projected manufacturing process yields will enable ongoing investments at a suitable level of capacity. To provide our customers with more productive and lower cost of operation systems, our existing light source systems and their process capabilities must be enhanced, and we must develop and manufacture new products, such as EUV sources, to continue to grow our business. We cannot guarantee that we will be able to manage our business growth effectively. We may not be able to develop and introduce new sources, products or enhancements to our existing products and processes in a timely or cost effective manner that satisfies customer needs or achieves market acceptance. Development of new sources, products and enhancements to existing products represent significant investments of our resources, and there is no guarantee that we will realize a return on these investments. Further, we may not be able to effectively integrate new sources, products and applications into our current operations. Any of these risks could have a material adverse effect on our operating results, financial condition and cash flows.

Current technologies that are still being developed and commercialized, such as EUV, and future technologies such as nano-imprint lithography and certain maskless lithography techniques may render our existing light source systems and products obsolete. We must manage product transitions, as the introduction of new products could have a negative adverse affect on our sales of existing products.

The display industry continues to be driven by new applications, such as the use of smart phones and ongoing expansion of traditional display markets such as laptops, tablets, and televisions. In addition, the display industry continues to introduce new capabilities, including better visual appearance such as three dimensional (“3D”) displays, lower power consumption, reduced thickness, and lower cost. In addition to the established display technologies such as LCDs that are used in numerous products, new display technologies such as OLED are starting to enter the market. Our current products might not adequately address these shifting demands, and we may not be able to develop and introduce new products or enhancements to our existing products and processes in a timely or cost effective manner that satisfies customer needs or achieves market acceptance.

EUV sources could fail to meet customer specifications or not be delivered on time.*

We are investing significant financial and other resources to develop EUV source technology for chip manufacturing. These expenditures are reflected in our research and development expenses in our unaudited consolidated statements of operations, as well as

inventory and property, plant and equipment in our unaudited consolidated balance sheets. In 2010, we shipped four EUV pilot sources and we are planning to deliver additional pilot EUV sources in 2011. We will record revenue associated with these EUV sources when customer acceptance is received. If we are not able to meet customer specifications, or have reliability or quality problems, or if the pilot sources and eventually commercial systems do not meet customer specifications or are not introduced on time, or if our inventory balances exceed our net realizable value under the related contracts, or if a competitor’s source is selected over our source, we may experience the recording of impairment charges of our inventory and/or property, plant and equipment, reduced orders, order cancellations, higher manufacturing costs, delays in acceptance of and payment for new products, product rejections, and additional service and warranty expenses. These risks could also damage our reputation among the initial adopters of EUV source technology and limit our ability to penetrate the market. Any of these risks could have a material adverse effect on our operating results, financial condition and cash flows.

We could fail to penetrate the flat panel display market and may not achieve profitability in our TCZ operating segment.*

Our TCZ operating segment develops, integrates, markets and supports silicon crystallization tools used in the manufacture of different types of displays, including LTPS-LCD and OLED flat panel displays. The manufacture of silicon crystallization tools is a new market for us and involves numerous risks. The global flat panel display industry historically has experienced considerable volatility in capital equipment investment levels, due in part to the limited number of LTPS—LCD and OLED manufacturers and the concentrated nature of LTPS—LCD and OLED end-use applications.

We may not experience sufficient demand for TCZ’s silicon crystallization tools for LTPS-LCD and OLED processing in the manufacture of flat panel displays. We have shipped, installed, and received customer acceptance of our first TCZ production tool for OLED flat panel display fabrication. We have received several orders for TCZ production tools and have shipped two tools with only one of those tools being accepted by a customer. If future tools do not meet customer specifications or the customers decide not to place follow-on orders for additional tools, we may experience damage to our reputation among manufacturers of LTPS-LCD and OLED fabrication systems and there is no guarantee that we will be able to materially penetrate this market or ever achieve profitability in our TCZ operating segment. To the extent TCZ is unable to achieve profitability, or we are obligated to provide increasing financial resources to support our silicon crystallization tool operations, our business, operating results, financial condition and cash flows could be materially adversely affected.

Global economic conditions could affect our revenue and operating results.

A general weakening of, or declining corporate or consumer confidence in, the global economy, or a reduction in corporate or consumer spending, could delay or significantly decrease purchases of our products by our customers, which are driven in part by indirect consumer demand for the electronic devices that contain semiconductor chips. It could also decrease revenue from our installed base products by causing our chipmaker customers to reduce their usage rates. Our revenue and operating results will be affected by uncertain or changing economic and market conditions including inflation, deflation, prolonged weak consumer demand or other changes which may affect the principal markets in which we conduct business. If economic or market conditions in the United States or other key global markets deteriorate, we may experience material adverse effects on our business, operating results, financial condition and cash flows.

Adverse economic and market conditions could also harm our business by negatively affecting the parties with whom we do business, including our business partners, our customers and our suppliers. These conditions could impair the ability of our customers to pay for products they have purchased from us. As a result, allowances for doubtful accounts and write-offs of accounts receivable from our customers may increase. In addition, our suppliers may experience financial difficulties that could negatively affect their operations and their ability to supply us with the parts we need to manufacture our products.

We face competition in the DUV and EUV lithography market and could face additional competition if other competitors enter the market.

Our future performance depends, in part, upon our ability to continue to compete successfully worldwide. The principal elements of competition in our markets are the technical performance characteristics of light source products and the operating efficiency of the system, which is based on availability, reliability, performance efficiency, cost of ownership, and overall quality.

We currently have one DUV light source competitor, Gigaphoton. Gigaphoton is a joint venture between two large companies, Komatsu and Ushio, and is headquartered in Japan. Our customers have purchased products from Gigaphoton and have qualified Gigaphoton’s DUV light source systems for use with their products. Additionally, Gigaphoton’s DUV light sources have been qualified by a number of chipmakers in Europe, Japan, other regions in Asia and the United States, and Gigaphoton has an installed base of light source systems at chipmakers in these regions. We also face competition from both Gigaphoton and Ushio in the development of EUV source technology.

Future competitors may develop systems and products that are competitive to our products. This competition may affect our ability to sell our products. Larger companies with substantially greater resources, such as other manufacturers of industrial light

sources for advanced lithography, may attempt to sell competitive products to our customers. Potential competitors may also be attracted to our growing installed base of DUV light sources which represents a significant revenue stream for us, and they may attempt to supply replacement parts to our customer base. If any existing or future competitors gain market acceptance, we could lose market share and our growth could slow or decline, which could have a material adverse effect on our business, operating results, financial condition and cash flows.

We face competition in the flat panel display market.

We face strong competition in the flat panel display market from a number of established competitors, including Japan Steel Works, AP Systems, Sumitomo Heavy Industries and others. Many of these companies have been qualified by a number of display makers in Japan, Korea, Taiwan and China, and have a number of tools currently installed. In addition to the competitors mentioned above, there are other potential competitors that provide equipment for crystallization that uses a thermal source, rather than a laser, to perform crystallization.

We must effectively manage changes in our business.

In order to respond to the business cycles of the semiconductor industry and overall economic conditions, we must constantly adjust our business plans and cost structure. As the semiconductor equipment industry cycle moves between contraction and growth and the condition of the global economy changes, we need to:

•

quickly adapt to changing sales and marketing channels;

•

effectively manage our inventory levels;

•

closely manage our global operations and cost structure;

•

accurately forecast demand and meet production schedules for our products;

•

differentiate our products from those of competitors, meet customer performance specifications, and drive efficiencies;

•

allocate resources including key personnel between the development of new products and the enhancement of existing products, as most appropriate and effective for future growth;

•

improve our product reliability through quality control, order fulfillment and customer support capabilities;

•

attract, train, retain and motivate key personnel; and

•

improve our processes and other internal management systems.

If we fail to effectively manage changes in our business, we may experience a material adverse effect on our operating results, financial condition and cash flows.

Any failure to manage our inventory levels and our inventory controls at our widely dispersed operations could adversely affect our business, operating results, financial condition and cash flows.

We need to continually evaluate and monitor the adequacy of our inventory levels. We also need to closely manage the levels of obsolete and excess parts. We have inventory located at warehouses at our corporate office in the United States and at bonded warehouses and customer locations throughout Asia, Europe and North America. The success of our business depends to a significant degree on our ability to maintain or increase the sales of our products in the markets in which we do business. If we overestimate demand for our products or the overall condition of the global economy, we could experience excess inventory levels and use unnecessary cash. As a result of such excess inventory, we may be required to significantly write down the value of our inventory, which would negatively affect our operating results and financial condition.

We could also sustain a loss in the event of a catastrophe in any of the locations where we maintain our inventory if our insurance is inadequate to cover such losses. We will be required to continually analyze the sufficiency of our inventory distribution systems in order to support our operations. We may not adequately anticipate all of the changing demands that will be imposed on these systems. An inability or failure to update our internal inventory distribution systems or procedures, as required, could have a material adverse effect on our business, operating results and financial condition.

International operations expose us to foreign currency exchange rate fluctuations for all foreign currencies in which we do business, and we may be materially adversely affected by these fluctuations.

We have international subsidiaries that operate in foreign currencies. All of our international subsidiaries purchase inventory in U.S. Dollars from either our manufacturing facility in San Diego or from our Korean subsidiary and, in many cases, resell these products to their customers in their local currency. In addition, we purchase certain inventory for our TCZ reporting segment in Euros. We hedge the foreign currency risks associated with these intercompany transactions by entering into forward contracts. Although we enter into such forward contracts, they may not be adequate to eliminate the risk of foreign currency exchange rate exposures.

We have taken steps to mitigate our foreign currency exchange risks; however, these steps may fail to sufficiently hedge or otherwise manage our foreign currency risks properly and could have a material adverse effect on our operating results and financial condition.

International operations also expose us to currency fluctuations as we translate the financial statements of our international subsidiaries to U.S. Dollars, and a significant strengthening of the U.S. Dollar relative to international currencies would increase the effective prices our customers pay for our products, potentially reducing demand for them.

Failure to effectively maintain our direct service support operations could have a material adverse effect on our business.

We believe it is critical for us to provide quick and responsive support directly to our chipmaker and direct customers who use our light source products in their photolithography systems as well as to display manufacturers that purchase our silicon crystallization tools. It is also essential to have well trained field service engineers to provide the high level of support that our customers have come to expect. Accordingly, we have an ongoing effort to develop our direct support system with service locations in Europe, Korea, Japan, China, Singapore, Taiwan and the United States. This requires us to do the following:

•

recruit and train qualified support service personnel; and

•

maintain effective and highly trained resources who can provide support to our customers in various countries.

We may not be able to attract and train qualified personnel to maintain our direct support operations successfully. Further, we may incur significant costs in providing this support. Failure to implement our direct support operation effectively could harm our operating results, financial condition and cash flows.

We are dependent on our suppliers and manufacturing facilities to assemble and test our products.

Operations at our primary manufacturing facility in San Diego and our refurbishment facility in Korea and operations at our suppliers are subject to disruption for a variety of reasons, including but not limited to work stoppages, terrorism, political turmoil, fire, earthquake, energy shortages, flooding or other natural disasters. Such disruptions could cause delays in shipments of our products to our customers. Our San Diego facility, where we build our light source systems and replacement parts, poses the greatest risk. We provide no assurance that alternate production capacity would be available if a major disruption were to occur or that, if it were available, it could be obtained on favorable terms, or at all. Such disruption could result in cancellation of orders or loss of customers, which would have a material adverse effect on our operating results, financial condition and cash flows.

We depend on key personnel, particularly management and technical personnel, who may be difficult to attract and retain.

We are highly dependent on the services of many key employees in various areas, including:

•

research and development;

•

engineering;

•

sales and marketing;

•

direct service support;

•

manufacturing; and

•

management or leadership roles.

In particular, there are a limited number of experts in DUV and EUV source technology and the silicon crystallization process for flat panel display fabrication, and we require highly skilled hardware and software engineers. Competition for qualified personnel is intense and we cannot guarantee that we will be able to continue to attract and retain qualified personnel. We believe that our future growth and operating results will depend on:

•

the continued services of sufficient research and development, engineering, sales and marketing, direct service support, manufacturing, and management personnel;

•

our ability to attract, train and retain highly-skilled key personnel; and

•

the ability of key management to continue to expand, motivate and manage our employee base.

Stock option and restricted stock unit awards may not be viewed by key employees as a sufficient financial incentive during periods when stock price volatility could cause our stock price to fall, reducing the effectiveness of such awards as a means to retain and incentivize these employees. If we are unable to hire, train and retain key personnel as required, our operating results, financial condition and cash flows could be adversely affected.

Economic, political, regulatory and other events in geographic areas where we have significant revenue or operations could interfere with our business.*

We serve a global market and a large portion of our revenue is derived from customers outside of the United States. We expect our international sales to continue to account for the majority of our total revenue. In order to support our foreign customers, we maintain a refurbishment facility in Korea as well as field support facilities in Japan, the Netherlands, China, Singapore and Taiwan.

We may not be able to manage our operations to address and support our global customers effectively. Further, our investments in these types of activities may not be viably competitive in the global market, or we may not be able to meet the support or manufacturing levels required by our global customers. Additionally, we are subject to risks inherent in doing business globally, including but not limited to:

•

fluctuations in exchange rates and currency controls;

•

political turmoil and global economic instability;

•

imposition of trade barriers and restrictions, such as the Foreign Corrupt Practices Act, including changes in tariff and freight rates, foreign customs and duties;

•

difficulty in coordinating our management and operations in different countries;

•

difficulties in staffing and managing foreign subsidiary and branch operations;

•

limited intellectual property protection in some countries;

•

potentially adverse tax consequences in some countries;

•

the possibility of challenging accounts receivable collections;

•

the risk of business interruption as a result of natural disasters or supply chain disruptions;

•

the effect of acts of terrorism and war;

•

the burdens of complying with foreign laws, including regulatory structures and unexpected changes in regulatory environments; and

•

distribution costs, disruptions in shipping or reduced availability of freight transportation.

A significant portion of our customers are located in Asia. Political turmoil, economic problems and currency fluctuations affecting Asia could increase our risk in that region. It has not been difficult for us to comply with United States export controls; however, changes to these controls in the future could make it more difficult or impossible for us to export our products to many countries. There are certain risks for which we purchase limited or no insurance, including earthquake risk. Any of these vulnerabilities could have a material adverse effect on our business, operating results, financial condition and cash flows. Currently, none of our United States and less than 10 of our international employees are members of a labor union. However, if a greater number of our employees decide to join a union, our cost of doing business could increase, and we could experience contract delays, difficulty in adapting to a changing regulatory and economic environment, cultural conflicts between unionized and non-unionized employees, strikes and work stoppages, any of which could have a material adverse effect on our business, financial condition and operating results.

Our ability to compete could be jeopardized if we are unable to protect our intellectual property rights. These types of claims could seriously harm our business or require us to incur significant costs.

We believe our success and ability to compete depend in part upon protecting our proprietary technology. We rely on a combination of patent, trade secret, copyright and trademark laws, nondisclosure and other contractual agreements and technical measures to protect our proprietary rights. We own and have numerous patents pending in the United States and various foreign countries covering certain aspects of technology related to our light source systems and silicon crystallization tool. Patents related to our source technologies and piezoelectric techniques will expire at various times through 2029, and patents related to our silicon crystallization tools will expire at various times through 2021.

Our pending patent applications and any future applications might not be approved. Our patents may not provide us with a competitive advantage and may be successfully challenged by third parties. In addition, third parties’ patents might have an adverse effect on our ability to do business. Due to cost constraints, we do not seek international patent protection for all inventions that are covered by United States patents and patent applications. As a result, we do not have foreign patent protection for some of our inventions. Additionally, laws of some foreign countries in which our products are or may be developed, manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights to the same extent as do the laws of the United States Therefore, the likelihood of piracy of our technology and products is greater in these countries. Further, third parties might independently develop similar products, duplicate our products, or design around patents that are granted to us.

Other companies or persons may file or have filed patent applications that are similar or identical to ours. As a result, we may have to participate in appropriate proceedings in the courts or the patent offices to determine the priority of inventions. These proceedings may determine that these third-party patent applications have priority over our patent applications. Loss of priority in these interference proceedings could result in substantial cost to us and loss of rights.

We also rely on the following to protect our confidential information and our other intellectual property:

•

trade secret protection;

•

employee nondisclosure agreements;

•

third-party nondisclosure agreements; and

•

other intellectual property protection methods.

However, we may not be successful in protecting our confidential information or intellectual property, particularly our trade secrets, because third parties may:

•

develop substantially the same proprietary information or techniques independently;

•

gain access to our trade secrets from unrelated third parties and/or without obligation of confidentiality; or

•

disclose our technology following expiration of their confidentiality obligation.

We may be subject to patent litigation to enforce patents issued to us or defend ourselves against claimed infringement by our competitor or any other third party.

Third parties have notified us in the past, and may notify us in the future, that we are infringing their intellectual property rights. Also, we have notified third parties in the past, and may notify them in the future, that they may be infringing our intellectual property rights. In the future, patent litigation may result due to a claim of infringement by our competitor or any other third party or may be necessary to enforce patents issued to us. Any such litigation could result in substantial cost to us and diversion from our primary business efforts, which would have an adverse effect on our business, financial condition and operating results. Furthermore, our customers and the end-users of our products might assert other claims for indemnification that arise from infringement claims against them. If these assertions are successful, it may have a material adverse effect on our business, operating results, financial condition and cash flows. Instead of litigation, or as a result thereof, we may seek a license from third parties to use their intellectual property.

However, we may not be able to obtain a license. Alternatively, we may design around the third party’s intellectual property rights or we may challenge these claims in legal proceedings. Any adverse determination in a legal proceeding could result in one or more of the following:

•

loss of our proprietary rights;

•

exposure to significant liabilities by other third parties;

•

a requirement that we get a license from third parties on terms that are not favorable to us or not available at all; or

•

an injunction that prohibits us from manufacturing or selling our products.

Any of these actions could be costly and would divert the efforts and attention of our management and technical personnel, which could have a material adverse effect on our business, operating results, financial condition and cash flows.

If our goodwill, amortizable intangible assets or property, plant and equipment become impaired, we may be required to record a significant charge to earnings.

We review our amortizable intangible assets, which are primarily patents, and our property, plant and equipment, for impairment when events or changes in circumstances indicate that their carrying value may not be recoverable. Goodwill is also tested for impairment at least annually and more often if certain triggering events or circumstances occur. Factors that may be considered to be a change in circumstances that would indicate the carrying value of our goodwill, amortizable intangible assets or property, plant and equipment may not be recoverable include reduced future cash flow estimates for our company, a decline in our stock price and market capitalization, slower growth rates in our industry and adverse global economic conditions. If, as a result of our impairment test, it is determined that our goodwill, amortizable intangible assets or property plant and equipment is impaired, we may be required to record a significant charge in our financial statements during the period in which such impairment is determined, which may have a material adverse affect on our operating results.

Our investments in marketable securities are subject to market, interest and credit risk that may reduce their value.

The value of our investments in marketable securities may be adversely affected by changes in interest rates, downgrades in the creditworthiness of bonds we hold, turmoil in the credit markets and financial services industry and by other factors which may result in other than temporary declines in the value of our investments. Each of these events may cause us to record charges to reduce the carrying value of our investment portfolio, which could have a material adverse effect on our operating results and financial position.

Changes in our effective tax rate may have a material adverse effect on our operating results, financial position and cash flows.

Our future effective tax rate may be adversely affected by a number of factors including:

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changes in available tax credits, particularly the federal research and development tax credit;

•

the resolution of issues arising from tax audits with various tax authorities;

•

the jurisdictions in which profits are determined to be earned and taxed;

•

changes in the valuation of our deferred tax assets and liabilities;

•

adjustments to estimated taxes upon finalization of various tax returns;

•

increases in expenses not deductible for tax purposes;

•

changes in tax laws or the interpretation of such tax laws, such as the Internal Revenue Service (“IRS”) Code Section 199 manufacturing deduction which currently provides a tax benefit; and

•

the repatriation of non-U.S. earnings for which we have not previously provided for United States taxes.

An adverse change in our future effective tax rate could in turn, adversely affect our operating results, financial position and cash flows.

We may not have sufficient cash to fund our current operations and future growth plans.

We believe that our cash resources remain sufficient for our planned operations; however, if global economic conditions deteriorate, our business conditions worsen, our plans change or other unanticipated events occur, we may need to raise additional cash through the establishment of financing facilities or the sale of equity or debt securities to fund our operations. Depending on market conditions, it could be difficult for us to raise the additional cash needed without incurring significant dilution of our existing stockholders or agreeing to significant restrictions on our ability to operate as currently planned. If we were unable to raise additional cash in such circumstances, we could be required to reduce costs through the delay, reduction or curtailment of our operating plan, including reductions in our global workforce or other cost reduction actions, any of which could have a material adverse effect on our operating results, financial condition or cash flows.

The integration and operation of eDiag Solutions may disrupt our business and create additional expenses, and we may not achieve the anticipated benefits of the acquisition. We may also acquire other businesses or enter new markets that will involve numerous risks. We may not be able to address these risks successfully without substantial expense, delay or other operational and financial challenges.*

The risks involved with acquisitions, including the acquisition and integration of eDiag, mergers, and joint ventures or entering a new market include the following:

•

diversion of management’s attention and resources to integrate the new business opportunity;

•

failure to retain key personnel;

•

customer dissatisfaction or performance problems with the acquired company or new product in a new market;

•

costs associated with acquisitions and joint ventures and the integration of acquired operations;

•

costs associated with developing, marketing, introducing and supporting a new product in a new market;

•

failure to commercialize purchased technologies;

•

ability of the acquired companies, joint ventures or new markets to meet their financial projections;

•

assumption of unknown liabilities or other unanticipated events or circumstances; and

•

compliance with the Sarbanes-Oxley Act of 2002, new SEC regulations, NASDAQ Stock Market rules and new accounting standards as they relate to the new company or joint venture.

The success of our integration of eDiag assumes certain synergies and other benefits. We cannot assure you that these risks or other unforeseen factors will not offset the intended benefits of the acquisition, in whole or in part. The magnitude, timing and nature of any future acquisitions or investments will depend on a number of factors, including the availability of suitable candidates, the negotiation of acceptable terms, our financial capabilities and general economic and business conditions. Financing for future transactions would result in the utilization of cash, incurrence of debt, issuance of stock or some combination of the three. Further, any business that we acquire, any joint venture that we form, or new market we may enter may not achieve anticipated revenue or operating results and the costs of such activity may have a material adverse effect on our operating results, financial condition or cash flows.

We may experience difficulties with our enterprise resource planning (“ERP”) system or other critical information systems that we use for the daily operations of our business. System failure or malfunction or loss of data contained in these information systems may result in disruption of our operations and result in our inability to process transactions, and this could adversely affect our financial results.

System failure, malfunction or loss of data which is housed in our critical information systems could disrupt our ability to timely and accurately process transactions and produce key financial reports, including information on our operating results, financial position and cash flows. Any disruptions or difficulties that may occur in connection with our ERP system or other critical systems could also adversely affect our ability to complete important business processes such as the evaluation of our internal controls and attestation activities pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. We also regularly upgrade our information systems hardware and software to better meet the information requirements needed to effectively manage our business. If we encounter unforeseen problems with regard to our ERP system or other critical information systems, including those encountered during system upgrades, our business could be adversely affected.

Compliance with changing regulations and standards for accounting, corporate governance and public disclosure may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including new SEC regulations, new NASDAQ Stock Market rules, new accounting requirements and the expected future requirement to transition to international financial reporting standards are creating uncertainty and additional complexities for companies such as ours. For example, the Section 404 internal control evaluation requirements under the Sarbanes-Oxley Act of 2002 have added complexity and costs to our business and require a significant investment of our time and resources to complete each year. We take these requirements seriously and expect to continue to make every effort to ensure that we receive clean attestations on our internal controls each year from our outside auditors, but there is no guarantee that our efforts to do so will be successful. Financial reform legislation, and the regulations enacted under such legislation, could add costs to our business by requiring advisory votes on executive compensation and severance packages and increasing access to, and the number of proposals in, our proxy statement. To maintain high standards of corporate governance and public disclosure, we intend to invest all reasonably necessary resources to comply with all other evolving standards. These investments may result in increased general and administrative expenses and a diversion of management time and attention from strategic revenue generating and cost management activities.

We are dependent on air transport to conduct our business and disruption of domestic and international air transport systems could adversely affect our business.

We depend on regular and reliable air transportation on a worldwide basis for many of our routine business functions. If civil aviation in the United States or abroad is disrupted by terrorist activities or security responses to the threat of terrorism, regulatory compliance issues, weather or atmospheric conditions or for any other reason, our business could be adversely affected in the following ways:

•

supplies of raw materials and components for the manufacture of our products or our customers’ products may be disrupted;

•

we may not be able to deliver our products to our customers in a timely manner;

•

we may not be able to provide timely service of or support for installed light sources for chipmakers; and

•

our sales and marketing efforts may be disrupted.

We are subject to many standards and regulations of foreign governments and, even though we intend to comply, we may not always be in compliance with these rules, or we may be unable to design or redesign our products to comply with these rules.

Many foreign government standards and regulations apply to our products and these standards and regulations are frequently being amended. Although we intend to meet all foreign standards and regulations, our products may not comply with all of them. Further, it might not be cost effective for us to redesign our products to comply with these foreign government standards and regulations. Our inability to design products to fully comply with foreign standards, therefore, could have a material adverse effect on our business.

Our chipmaker customers’ prolonged use of our products in high volume production may not produce the results they desire and, as a result, our reputation and that of our customers who supply photolithography tools to the chipmakers could be damaged in the semiconductor industry.

Over time, our light source products may not meet our chipmaker customers’ production specifications or operating cost requirements after the light source has been used for a long period in high volume production. If any chipmaker cannot successfully achieve or sustain their volume production using our light sources, our reputation could be damaged with them and with lithography tool manufacturers. This would have a negative effect on our business.

Our operations are subject to environmental and other government regulations that may expose us to liabilities for noncompliance.

We are subject to federal, state and local regulations, such as regulations related to the environment, land use, public utility utilization and the fire code, in connection with the storage, handling, discharge and disposal of substances that we use in our manufacturing process and in our facilities. We believe that our activities comply with current government regulations that are applicable to our operations and current facilities. We may be required to purchase additional capital equipment or meet other requirements to comply with these government regulations in the future, if they change. Further, these government regulations may restrict us from expanding our operations. Adopting measures to comply with changes in the government regulations, our failure to comply with environmental and land use regulations, or restrictions on our ability to discharge hazardous substances, could subject us to future liability or cause our manufacturing operations to be reduced or stopped. This could have a material adverse effect on our business, operating results, financial condition and cash flows.

Our products are subject to potential product liability claims if personal injury or death results from their use.

We are exposed to significant risks for product liability claims if personal injury or death results from the use of our products. We may experience material product liability losses in the future. We maintain insurance against product liability claims; however, our insurance coverage may not continue to be available on terms that are acceptable to us. This insurance coverage also may not adequately cover liabilities that we incur. Further, if our products are defective, we may be required to recall or redesign these products. A successful claim against us that exceeds our insurance coverage level, or any claim or product recall that results in adverse publicity against us, could have a material adverse effect on our business, operating results, financial condition and cash flows.

Disputes may arise over the ownership of intellectual property resulting from our research and development activities that have been partially funded by other parties.

In the past, we received funds through research and development arrangements with third parties to pay for a portion of our research and development costs associated with the design and development of specific products. Additionally, funds from lithography tool manufacturers and chipmaker customers have been used to fund a portion of our source systems research and development efforts. In connection with providing these research and development services, we try to make contractually clear who owns the intellectual property that results from such activities. Disputes over the ownership or rights to use or market the resulting intellectual

property could arise between the funding organizations and us. Any dispute over ownership of the intellectual property we develop or have developed could restrict our ability to market our products and have a material adverse effect on our business.

Trademark infringement claims against our registered and unregistered trademarks would be expensive and we may have to stop using such trademarks and pay damages.

We have registered a number of trademarks including “CYMER” in the United States and in some other countries. We are also trying to register additional trademarks in the United States and in other countries. These registrations in other countries, or any new registrations we may undertake in the United States, could be unsuccessful.

We use these trademarks in the course of our business and in advertising materials, which are distributed throughout the world. While we take precautions against trademark infringement before using our trademarks in new markets, we may be subject to claims of trademark infringement. The process of negotiating a settlement or coexistence agreement to allow us to continue using our trademarks in a particular market could be expensive or distract us from our primary business efforts, potentially adversely affecting our financial condition or operations. Furthermore, if we must undertake negotiations, and the negotiations are ultimately unsuccessful, we would either need to discontinue using the trademarks in the new market, risk facing litigation or potentially pay damages. Even if we ultimately prevail, litigation could be expensive or distract us from our primary business efforts.

The price of our common stock has fluctuated and may continue to fluctuate widely.

The price of our common stock has historically been subject to fluctuations and could continue to fluctuate in response to a variety of factors, including the risk factors contained in this report.

Various factors may significantly affect the market price and volatility of our common stock, including:

•

the cyclical nature of the semiconductor industry;

•

actual or anticipated fluctuations in our operating results, including our net income, revenue and product gross margins;

•

conditions and trends in lithography, display manufacturing and other technology industries;

•

announcements of innovations in technology;

•

new products offered by us or our competitors;

•

developments of patents or proprietary rights;

•

changes in financial estimates by securities analysts;

•

global political, economic, and market conditions, including a recession or economic deterioration; and

•

failure to properly manage any single or combination of risk factors listed in this section.

Stock markets in the United States can experience extraordinary volatility. Severe price fluctuations in a company’s stock have frequently been followed by securities litigation. If such litigation were initiated against us, it may result in substantial costs and a diversion of management’s attention and resources and, therefore, could have a material adverse effect on our business, operating results, financial condition and cash flows.

Some anti-takeover provisions contained in our articles of incorporation and bylaws, as well as provisions of Nevada law and our executive employment contracts, could impair a takeover attempt.

Our articles of incorporation and bylaws contain provisions which could have the effect (separately, or in combination) of rendering more difficult or discouraging a merger, acquisition or other change of control deemed undesirable by our Board of Directors. These include provisions:

•

authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock;

•

limiting the liability of, and providing indemnification to, our directors and officers;

•

requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our Board of Directors;

•

controlling the procedures for conduct of stockholder meetings and election and removal of directors; and

•

specifying that stockholders may not take action by written consent.

These provisions, alone or together, could deter or delay hostile takeovers, proxy contests and changes in control or management.

As a Nevada corporation, we are subject to Nevada law. Nevada law does not grant stockholders the authority to call a special meeting unless the corporation’s articles of incorporation or bylaws otherwise provide; neither our articles of incorporation nor our bylaws contain such a provision. Nevada law may also limit the ability of certain stockholders to engage in certain business combinations with us and may limit the voting rights of stockholders who acquire 20% or more of our outstanding shares. Either limitation could discourage or increase the difficulty of an attempted merger, acquisition or other change of control.

Additionally, we have employment agreements with certain officers under which severance payments would become payable in the event of specified terminations without cause or terminations under certain circumstances after a change in control. If such persons were terminated without cause or under certain circumstances after a change of control, and the severance payments under the current employment agreements were to become payable, the officers would receive certain payments and other benefits which depend on the individual officer’s employment agreement but generally include continued base salary and health insurance payments for a period of time, lump sum bonus payments and accelerated vesting of equity awards.

Any provision of our articles of incorporation, bylaws, employment agreements or Nevada law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock in connection with such a transaction and also could affect the price that some investors are willing to pay for our common stock.

Sales of additional common stock and securities convertible into our common stock may dilute the voting power of current holders.

We may issue equity securities in the future the terms and rights of which are superior to those of our common stock. Our articles of incorporation authorize the issuance of up to 5,000,000 shares of preferred stock. These are “blank check” preferred shares, meaning that our Board of Directors is authorized, from time to time, to issue the shares and designate their voting, conversion and other rights, including rights superior, or preferential, to rights of already outstanding shares, all without stockholder consent. No preferred shares are outstanding, and we currently do not intend to issue any shares of preferred stock. Any shares of preferred stock that may be issued in the future could be given voting and conversion rights that could dilute the voting power and equity of existing holders of shares of common stock and have preferences over shares of common stock with respect to dividends and liquidation rights.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)

Not applicable

(b)

Not applicable

(c)

On April 21, 2008, we announced that our board of directors authorized us to repurchase up to $100 million of our common stock. The purchases have been made from time to time in the open market. We did not repurchase any shares during the first quarter of 2011, and the approximate dollar value of remaining shares that we are authorized to purchase under the program was $57.8 million at March 31, 2011. The program does not have a fixed expiration date and may be discontinued at any time.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. (Removed and Reserved)

ITEM 5. Other Information

(a)

None.

(b)

There were no material changes to the procedures by which security holders may recommend nominees to our board of directors.

ITEM 6. Exhibits


31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act.

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.


101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.


	CYMER, INC.

Date: April 28, 2011	By:	/S/ PAUL B. BOWMAN
		Paul B. Bowman
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer)

CYMER INC - FORM 10-Q - April 28, 2011

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