20-F 1 u47074e20vf.htm FORM 20-F e20vf PAGEBREAK

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Securities and Exchange Commission

Washington, D.C. 20549

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

for the fiscal year ended December 31, 2003

Commission file number 0-25566

ASML HOLDING N.V.

(Exact Name of Registrant as Specified in Its Charter)

THE NETHERLANDS (Jurisdiction of Incorporation or Organization)

DE RUN 6501 5504 DR VELDHOVEN THE NETHERLANDS (Address of Principal Executive Offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act: None (Title of Class)

Securities registered or to be registered pursuant to Section 12(g)of the Act: Ordinary Shares (nominal value Eur 0.02 per share) (Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None (Title of Class)

Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report.

482,513,502 Ordinary Shares (nominal value Eur 0.02 per share) 23,100 Priority Shares (nominal value Eur 0.02 per share)

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 which financial statement item the registrant has elected to follow. Item 17 ( ) Item 18 (x)

Name and address of person authorized to receive notices and communications from the Securities and Exchange Commission: Richard A. Ely Skadden, Arps, Slate, Meagher & Flom (UK) LLP 40 Bank Street, Canary Wharf London E14 5DS England

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TABLE OF CONTENTS

Part I
Item 1 Identity of Directors, Senior Management and Advisors
Item 2 Offer Statistics and Expected Timetable
Item 3 Key Information
A. Selected Financial Data
B. Capitalization and Indebtedness
C. Reasons for the Offer and Use of Proceeds
D. Risk Factors
Item 4 Information on the Company
A. History and Development of the Company
B. Business Overview
C. Organizational Structure
D. Property, Plants and Equipment
Item 5 Operating and Financial Review and Prospects
A. Operating Results
B. Liquidity and Capital Resources
C. Research and Development, Patents and Licenses
D. Trend Information
E. Off- Balance Sheet Arrangements
F. Tabular Disclosure of Contractual Obligations
G. Safe Harbor
Item 6 Directors, Senior Management and Employees
A. Directors and Senior Management
B. Compensation
C. Board Practices
D. Employees
E. Share Ownership
Item 7 Major Shareholders and Related Party Transactions
A. Major Shareholders
B. Related Party Transactions
C. Interests of Experts & Counsel
Item 8 Financial Information
A. Consolidated Statements and Other Financial Information
B. Significant Changes
Item 9 The Offer and Listing
A. Listing Details
B. Plan of Distribution
C. Markets
D. Selling Shareholder
E. Dilution
F. Expenses of the Issue
Item 10 Additional Information
A. Share Capital
B. Memorandum and Articles of Association
C. Material Contracts
D. Exchange Controls
E. Taxation
F. Dividends and Paying Agents
G. Statement by Experts
H. Documents on Display
I. Subsidiary Information
Item 11 Quantitative and Qualitative Disclosures About Market Risk
Item 12 Description of Securities Other Than Equity Securities
Part II
Item 13 Defaults, Dividend Arrearages and Delinquencies
Item 14 Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 15 Evaluation of Disclosure controls and Procedures
Item 16
A. Audit Committee Financial Expert
B. Code of Ethics
C. Principal Accountant Fees and Services
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibit
Signatures
Exhibit Index
Exhibit 2.2
Exhibit 4.2
Exhibit 4.3
Exhibit 4.4
Exhibit 4.5
Exhibit 4.6
Exhibit 4.7
Exhibit 4.8
Exhibit 8.1
Exhibit 12.1
Exhibit 13.1
Exhibit 14.1

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Table of Contents

Contents
Part I
Item 1 Identity of Directors, Senior Management and Advisors	4
Item 2 Offer Statistics and Expected Timetable	4
Item 3 Key Information	4
A. Selected Financial Data
B. Capitalization and Indebtedness
C. Reasons for the Offer and Use of Proceeds
D. Risk Factors
Item 4 Information on the Company	16
A. History and Development of the Company
B. Business Overview
C. Organizational Structure
D. Property, plants and equipment
Item 5 Operating and Financial Review and Prospects	27
A. Operating Results
B. Liquidity and Capital Resources
C. Research and Development, Patents and Licenses
D. Trend Information
E. Off-Balance Sheet Arrangements
F. Tabular Disclosure of Contractual Obligations
G. Safe Harbor
Item 6 Directors, Senior Management and Employees	50
A. Directors and Senior Management
B. Compensation
C. Board Practices
D. Employees
E. Share Ownership
Item 7 Major Shareholders and Related Party Transactions	58
A. Major Shareholders
B. Related Party Transactions
C. Interests of Experts & Counsel
Item 8 Financial Information	61
A. Consolidated Statements and Other Financial Information
B. Significant Changes

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	61
A. Listing Details
B. Plan of Distribution
C. Markets
D. Selling Shareholder
E. Dilution
F. Expenses of the Issue
Item 10 Additional Information	63
A. Share Capital
B. Memorandum and Articles of Association
C. Material Contracts
D. Exchange Controls
E. Taxation
F. Dividends and Paying Agents
G. Statement by Experts
H. Documents on Display
I. Subsidiary Information
Item 11 Quantitative and Qualitative Disclosures About Market Risk	73
Item 12 Description of Securities Other Than Equity Securities	75
Part II
Item 13 Defaults, Dividend Arrearages and Delinquencies	76
Item 14 Material Modifications to the Rights
of Security Holders and Use of Proceeds	76
Item 15 Controls and Procedures	76
Item 16	76
A. Audit Committee Financial Expert
B. Code of Ethics
C. Principal Accountant Fees and Services
Part III
Item 17 Financial Statements	79
Item 18 Financial Statements	79
Item 19 Exhibits	79

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link1 "Part I"

| Part I Special Note Regarding Forward-Looking Statements |
| --- |
| In addition to historical information, this annual
report on Form 20-F contains and incorporates by
reference statements relating to our future business
and/or results. These statements include certain
projections and business trends that are
forward-looking within the meaning of the Private
Securities Litigation Reform Act of 1995. You can
generally identify these statements by the use of words
like may, will, could, should, project,
believe, anticipate, expect, plan, estimate,
forecast, potential, intend, continue and
variations of these words or comparable words. |
| Forward-looking statements do not guarantee future
performance and involve risks and uncertainties. Actual
results may differ materially from projected results as
a result of certain risks and uncertainties. These
risks and uncertainties include, without limitation,
those described under Item 3.D. Risk Factors and
those detailed from time to time in our other filings
with the U.S. Securities and Exchange Commission (the
Commission or the SEC). These forward-looking
statements are made only as of the date of this annual
report on Form 20-F. We do not undertake to update or
revise the forward-looking statements, whether as a
result of new information, future events or otherwise. |
| Presentation of Financial and Operational Information |
| In May 2001, we consummated our merger with Silicon
Valley Group, Inc. (SVG), now part of ASML US, Inc.
(ASML US). The merger is accounted for under the
pooling of interests method. Therefore, the
consolidated financial statements of ASML Holding N.V.
(ASML or the Company) for the year ended December
31, 2001, the Selected Financial Information for the
years ended December 31, 2001, 2000 and 1999 and the
financial and operational information presented in this
annual report on Form 20-F for the year ended December
31, 2001, reflect the combination of financial
statements for ASMLs historical operations with those
of SVG. |
| Because SVGs year-end prior to the merger differed
from ASMLs year-end, in conformity with accounting
principles generally accepted in the United States
(U.S. GAAP) ASMLs consolidated financial statements
for fiscal years 2000 and 1999 contain the results of
ASMLs historical operations for the twelve months
ended December 31, 2000 and December 31, 1999 and the
results of SVGs historical operations for the twelve
months ended September 30, 2000 and September 30, 1999. |
| On December 18, 2002, we announced the proposed
divestiture of our Thermal business, including related
customer support activities, and the termination of our
activities in the Track business. As a result of this
decision, our consolidated financial statements for
each of the three years ended |
| December 31, 2003, our Selected Financial Information
for each of the five years ended December 31, 2003 and
the financial and operational information presented in
this annual report on Form 20-F have been adjusted to
present these businesses as discontinued operations,
instead of as a separate segment as they had been
reported prior to the divestiture announcement. In
October 2003, we substantially concluded the
divestiture of our Thermal business. |

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link2 "Item 1 Identity of Directors, Senior Management and Advisors"

Item 1 Identity of Directors, Senior Management and Advisors Not applicable

link2 "Item 2 Offer Statistics and Expected Timetable"

Item 2 Offer Statistics and Expected Timetable Not applicable

link2 "Item 3 Key Information"

link3 "A. Selected Financial Data"

Item 3 Key Information
The following selected consolidated financial data should be read in conjunction with Item 5
Operating and Financial Review and Prospects and Item 18 Financial Statements

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Five-Year Financial Summary 1

Year ended December 31 — (in thousands, except per share data)	1999 — EUR	EUR		EUR		EUR		EUR
Consolidated statements of operations data
Net sales	1,518,027		2,672,630		1,589,247		1,958,672		1,542,737
Cost of sales	1,028,221		1,571,816		1,558,234		1,491,068		1,173,955
Gross profit on sales	489,806		1,100,814		31,013		467,604		368,782
Research and development costs	234,378		327,015		347,333		324,419		305,839
Research and development credits	(38,815	)	(24,983	)	(16,223	)	(26,015	)	(19,119	)
Selling, general and administrative expenses	186,638		256,513		245,962		263,243		212,609
Restructuring and merger and acquisition costs	(283	)	0		44,559		0		24,485
Operating income (loss)	107,888		542,269		(590,618	)	(94,043	)	(155,032	)
Minority interest in net result from subsidiaries	0		(3,205	)	3,606		0		0
Interest income (expense), net	1,009		12,593		(7,207	)	(36,781	)	(29,149	)
Income (loss) from continuing operations
before income taxes	108,897		551,657		(594,219	)	(130,824	)	(184,181	)
(Provision for) benefit from income taxes	(34,526	)	(167,923	)	179,017		42,779		59,675
Cumulative effect of accounting changes net of tax	0		(2,676	)	0		0		0
Net income (loss) from continuing operations	74,371		381,058		(415,202	)	(88,045	)	(124,506	)
Loss from discontinued operations
before income taxes	(25,270	)	(3,685	)	(103,001	)	(183,624	)	(59,026	)
Benefit from income taxes	8,087		674		39,211		63,846		23,316
Net loss from discontinued operations	(17,183	)	(3,011	)	(63,790	)	(119,778	)	(35,710	)
Net income (loss)	57,188		378,047		(478,992	)	(207,823	)	(160,216	)
Basic net income (loss) from continuing operations
per ordinary share 2	0.16		0.83		(0.89	)	(0.18	)	(0.26	)
Basic net loss from discontinued operations
per ordinary share 2	(0.04	)	(0.01	)	(0.14	)	(0.26	)	(0.07	)
Basic net income (loss) per ordinary share 2	0.12		0.82		(1.03	)	(0.44	)	(0.33	)
Diluted net income (loss) per ordinary share 2	0.12		0.78		(1.03	)	(0.44	)	(0.33	)
Number of ordinary shares used in computing
per share amounts (in thousands)
Basic	458,542		461,887		465,866		476,866		482,240
Diluted	462,682		483,127		465,866	3	476,866	3	482,240	3

| 1 | The selected consolidated data for all periods presented
have been adjusted to reflect the effects of our decision in December 2002
to discontinue our Track and Thermal businesses. |
| --- | --- |
| 2 | All net income (loss) per ordinary share amounts have been
retroactively adjusted to reflect the three-for-one stock split in April
2000, as well as the issuance of 47,139,000 shares in connection with the
May 2001 merger with SVG, which was accounted for as a pooling of
interests. |
| 3 | The calculation of the number of ordinary shares used in
computing diluted net income per ordinary share in 2001, 2002 and 2003
does not assume conversion of ASMLs outstanding Convertible Subordinated
Notes and does not assume the effect of the exercise of options issued
under ASMLs stock option plans, as such conversions and exercises would
have an anti-dilutive effect. |

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As of December 31 — (in thousands)	1999 — EUR	EUR		EUR		EUR		EUR
Consolidated balance sheets data
Working capital 4	1,550,886		2,145,378		1,822,711		1,662,570		1,463,308
Total assets	2,397,926		3,432,972		3,643,840		3,301,688		2,868,282
Long-term liabilities	823,281		871,742		1,588,846		1,233,398		1,040,556
Total shareholders equity	1,129,900		1,666,212		1,226,287		1,315,516		1,141,207
Consolidated statements of cash flows data
Purchases of property, plant and equipment	(126,057	)	(181,007	)	(312,857	)	(138,587	)	(71,440	)
Depreciation, amortization and impairment	77,773		111,133		138,959		186,686		156,900
Net cash provided by (used in) operating activities	28,198		250,744		(199,615	)	(54,151	)	509,333
Net cash used in investing activities	(150,269	)	(151,886	)	(326,095	)	(79,852	)	(25,702	)
Net cash provided by (used in) financing activities	553,154		34,198		664,290		21,427		(68,156	)
Net cash provided by (used in) discontinued operations	(40,566	)	(45,048	)	(69,815	)	(127,473	)	12,736
Net increase (decrease) in cash and cash equivalents	430,511		248,812		(73,522	)	(241,918	)	359,046
Ratios and other data
Increase (decrease) in net sales from
continuing operations (in percent)	36.7		76.1		(40.5	)	23.2		(21.2	)
Gross profit from continuing operations
as a percentage of net sales	32.3		41.2		2.0		23.9		23.9
Operating income (loss) from continuing
operations as a percentage of net sales	7.1		20.3		(37.2	)	(4.8	)	(10.0	)
Net income (loss) from continuing operations
as a percentage of net sales	4.9		14.3		(26.1	)	(4.5	)	(8.1	)
Shareholders equity as a percentage of total assets	47.1		48.5		33.7		39.8		39.8
Backlog of new systems (in units) at year-end
for continuing operations	206		365		117		103		103
Backlog of used systems (in units) at year-end
for continuing operations	0		0		1		7		21
Backlog of systems (in units) at year-end
for continuing operations	206		365		118		110		124
Sales of systems (in units)
from continuing operations	267		455		197		205		169
Number of employees at year-end
for continuing operations	4,889		6,628		6,039		5,971		5,059
Number of ordinary shares outstanding (in thousands)	460,412		463,395		466,978		482,182		482,514
Stock price ASML at year-end 5	36.76		24.19		19.52		7.96		15.72
Volatility % ASML stock (260 days) 6	99.7	%	80.0	%	71.0	%	89.0	%	60.9	%

| 4 | Working Capital is calculated as the difference between
total current assets and total current liabilities. |
| --- | --- |
| 5 | Closing price of ASMLs ordinary shares listed on the
Official Segment of the stock market of Euronext Amsterdam N.V. (Source:
Bloomberg) |
| 6 | Volatility represents the variability in our share price
on the Official Segment of the stock market of Euronext Amsterdam N.V. as
measured over the last 260 business days of each year presented. (Source:
Bloomberg) |

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| Exchange Rate Information |
| --- |
| We publish our consolidated financial statements in euro. In this
Annual Report, references to EUR or euro are to euro, and
references to $, dollars, U.S. dollars or USD are to
United States dollars. Solely for the convenience of the reader,
certain euro amounts presented as of and for the year ended
December 31, 2003 have been translated into United States dollars
using the exchange rate in effect on December 31, 2003 of USD 1.00
= EUR 0.7918. These translations should not be construed as
representations that the euro amounts could be converted into U.S.
dollars at that rate. |
| Historically, a portion of our revenues and expenses has been
denominated in currencies other than the euro. For a discussion
of the impact of exchange rate fluctuations on our financial
condition and results of operations, see Item 5.A. Operating
results Foreign Exchange Management and Note 1 to our
consolidated financial statements. |
| The following are the Noon Buying Rates certified by the Federal Reserve Bank
of New York
for customs purposes (the Noon Buying Rate) expressed in euro per U.S.
dollar. |

Calendar Period — 1999	0.99	0.94	1.00	0.85
2000	1.07	1.09	1.21	0.97
2001	1.12	1.12	1.19	1.05
2002	0.95	1.05	1.16	0.95
2003	0.79	0.88	0.97	0.79
2004 (through January 29)	0.81	0.79	0.81	0.78
(Source: Bloomberg)
1 The average of the Noon Buying Rates on the last business day of each month during the relevant period.

Monthly high and low euros per U.S. dollar exchange rates — July 2003	0.90	0.86
August 2003	0.92	0.88
September 2003	0.92	0.86
October 2003	0.86	0.85
November 2003	0.88	0.84
December 2003	0.84	0.79
January 2004 (through January 29)	0.81	0.78

(Source: Bloomberg)

link3 "B. Capitalization and Indebtedness"

link3 "C. Reasons for the Offer and Use of Proceeds"

B. Capitalization and Indebtedness
Not applicable
C. Reasons for the Offer and Use of Proceeds
Not applicable

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link3 "D. Risk Factors"

	D. Risk Factors
	In conducting our business, we face many risks that may interfere with our business
objectives. Some of these risks relate to our operational processes, while others relate to our
business environment. It is important to understand the nature of these risks and the impact
they may have on our business, financial condition and results of operations. Some of the
more relevant risks are described below.
Risks Related to
the Semiconductor
Industry	The Semiconductor Industry Has Been Experiencing a Period
of Contraction, the Length and Extent of Which Cannot Be
Forecast
	The year 2003 was an unprecedented third consecutive year of contraction in the global
semiconductor industry. Adverse conditions in the semiconductor market have caused
a number of semiconductor manufacturers to reduce their capital expenditures or delay
expansion or construction of manufacturing facilities. This has resulted in decreased demand
for our products, unanticipated rescheduling of ordered products and cancellation of
previously placed orders. The performance of the semiconductor market remains difficult to
predict. Continued difficult market conditions would likely have a material adverse effect on
our business, financial condition and results of operations.
	The Semiconductor Industry Is Highly Cyclical and We May Be
Adversely Affected by Any Future Downturns
	We expect that the semiconductor industry will experience future downturns. We cannot
predict the timing, duration or severity of any future downturn or the corresponding adverse
effect on our business, financial condition and results of operations. Our ability to maintain
profitability through any future downturns will depend substantially on whether we are
successful in our current efforts to lower our costs and break-even level, which is the number
of lithography systems we must sell in a year to achieve positive net income.
Sales of our photolithography systems depend in large part upon the level of capital
expenditures by semiconductor manufacturers. These capital expenditures depend upon
a range of competitive and market factors, including:
	the current and anticipated market demand for semiconductors and for products utilizing
semiconductors;
	semiconductor prices;
	semiconductor production costs; and
	general economic conditions.
	Historically, the semiconductor market has been highly cyclical and has experienced recurring
periods of oversupply, resulting in significantly reduced demand for capital equipment,
including advanced photolithography projection systems such as the wafer steppers and
Step & Scan systems we produce. Despite this cyclicality, we intend to maintain significant
levels of research and development expenditures in order to maintain our competitive position.

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| Our Business Will Suffer If We Do Not Respond Rapidly to the
Commercial and Technological Changes in the Semiconductor
Industry |
| --- |
| The semiconductor manufacturing industry is subject to: |
| rapid technological change; |
| frequent new product introductions and enhancements; |
| evolving industry standards; |
| changes in customer requirements; and |
| continued shortening of product life cycles. |
| Our products could become obsolete sooner than anticipated because of a faster than
anticipated change in one or more of the technologies related to our products or in market
demand for products based on a particular technology. Our success in developing new
products and in enhancing our existing products depends on a variety of factors, including the
successful management of our research and development programs and timely completion of
product development and design relative to competitors. If we do not develop and introduce
new and enhanced systems at competitive prices on a timely basis, our customers will not
integrate our systems into the planning and design of new fabrication facilities and upgrades
of existing facilities, which would have an adverse impact on our business, financial condition
and results of operations. |
| We Face Intense Competition |
| The semiconductor equipment industry is highly competitive. The principal elements of
competition in our markets are the technical performance characteristics of a photolithography
system and the value of ownership of that system based on its purchase price, maintenance
costs, productivity and customer service and support. In addition, we believe that an
increasingly important factor affecting our ability to compete is the strength and breadth
of our portfolio of patents and other intellectual property rights relative to those of our
competitors. This is due, in part, to the significant decline in the overall size of the market for
photolithography systems that has occurred since the beginning of 2001. We believe this
decline has resulted in increased competition for market share through the aggressive
prosecution of patents to prevent competitors from using and developing their technology.
Our competitiveness will increasingly depend upon our ability to protect and defend our
patents, as well as our ability to develop new and enhanced semiconductor equipment that
is competitively priced and introduced on a timely basis. See Item 4.B. Business Overview,
Intellectual Property and Note 14 to our consolidated financial statements. |
| The cost to develop new systems, in particular photolithography systems, is extremely high,
and accordingly, the photolithography equipment industry is characterized by the dominance
of a few suppliers. ASMLs primary competitors are Nikon Corporation (Nikon) and Canon
Kabushika Kaisha (Canon). Nikon and Canon are the dominant suppliers in the Japanese
market, which accounts for a significant portion of worldwide semiconductor production.
This market historically has been difficult for non-Japanese companies to penetrate,
and ASML has sold only a limited number of systems to Japanese customers. |

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| | Both Nikon and Canon have substantial financial resources and broad patent portfolios.
Each has stated that it will introduce new products with improved price and performance
characteristics that will compete directly with our products, which may cause a decline in
our sales or loss of market acceptance for our photolithography systems. In addition, adverse
market conditions, industry overcapacity or a decrease in the value of the Japanese yen in
relation to the euro or the U.S. dollar could lead to intensified price-based competition in
those markets that account for the majority of our sales, resulting in lower prices and margins
and an adverse impact on our business, financial condition and results of operations. |
| --- | --- |
| Risks Related to
ASML | The Number of Systems We Can Produce is Limited by Our
Dependence on a Limited Number of Suppliers of Key
Components |
| | We rely on outside vendors for the components and subassemblies used in our systems,
each of which is obtained from a single supplier or a limited number of suppliers. Our reliance
on a limited group of suppliers involves several risks, including a potential inability to obtain
an adequate supply of required components and the risk of untimely delivery of these
components and subassemblies. |
| | The number of photolithography systems we have been able to produce has occasionally been
limited by the production capacity of Carl Zeiss SMT AG (Zeiss). Zeiss is our sole supplier
of lenses and other critical optical components. The inability of Zeiss to maintain and increase
production levels or our inability to maintain our business relationship with Zeiss in the future
could result in our inability to fulfill orders, which could damage relationships with current and
prospective customers and have an adverse effect on our business, financial condition and
results of operations. If Zeiss were to terminate its relationship with us or if Zeiss were unable
to maintain production of lenses over a prolonged period, we would effectively cease to be
able to conduct much of our business. See further Item 4.B. Business Overview,
Manufacturing, Logistics and Suppliers. |
| | In addition to Zeiss current position as our sole supplier of lenses, the excimer laser
illumination systems that provide the ultraviolet light source, referred to as deep UV,
used in our high resolution steppers and Step & Scan systems, are available from only
a limited number of suppliers. |
| | Although the timeliness, yield and quality of deliveries to date from our remaining
subcontractors generally have been satisfactory, manufacturing certain of these components
and subassemblies is an extremely complex process and delays caused by suppliers may
occur in the future. A prolonged inability to obtain adequate deliveries, or any other
circumstance that requires us to seek alternative sources of supply, could significantly hinder
our ability to ship our products in a timely fashion, which could damage relationships with
current and prospective customers and have a material adverse effect on our business,
financial condition and results of operations. |
| | A High Percentage of Net Sales is Derived from a Few
Customers |
| | Historically, we have sold a substantial number of lithographic systems to a limited number of
customers. While the identity of our largest customers may vary from year to year, we expect |

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| sales to remain concentrated among relatively few customers in any particular year and
foresee further concentration of customers in future periods. The loss of any significant
customer or any reduction in orders by a significant customer may have an adverse effect
on our business, financial condition and results of operations. |
| --- |
| In 2003, sales to one customer accounted for EUR 314 million, or 20 percent of net sales,
compared to EUR 377 million, or 19 percent of net sales, in 2002. As a result of the limited
number of customers, credit risk on our receivables is concentrated. Our three largest
customers accounted for 44 percent of accounts receivable at December 31, 2003, compared
to 42 percent at December 31, 2002. Business failure of one of our main customers may result
in adverse effects on our business, financial condition and results of operations. |
| The Pace of Introduction of Our New Products is Accelerating
and is Accompanied by Potential Design and Production Delays
and by Significant Costs |
| The development and initial production, installation and enhancement of the systems we
produce, is often accompanied by design and production delays and related costs of a nature
typically associated with the introduction and transition to full-scale manufacture of complex
capital equipment. While we expect and plan for a corresponding learning curve effect in our
product development cycle, we cannot precisely predict the time and expense required to
overcome these initial problems and to ensure full performance to specifications. There is
a risk that we may not be able to introduce or bring to full-scale production new products as
quickly as we might have expected in our product introduction plans. This may result in
adverse effects on our business, financial condition and results of operations. |
| We Derive Most of Our Revenues from the Sale of a Relatively
Small Number of Products |
| We derive most of our revenues from the sale of a relatively small number of lithographic
equipment systems (169 units in 2003 and 205 units in 2002), with an average selling price in
2003 of EUR 7.6 million (EUR 9.5 million for new systems and EUR 2.0 million for used
systems). As a result, the timing of recognition of revenue from a small number of transactions
may have a significant impact on our net sales and other operating results for a particular
reporting period. Specifically, the failure to receive anticipated orders, or delays in shipments
near the end of a particular reporting period, due, for example, to: |
| unanticipated shipment rescheduling; |
| cancellation by customers; |
| unexpected manufacturing difficulties; and |
| delays in deliveries by suppliers, |
| may cause net sales in a particular reporting period to fall significantly below our expectations,
which would, in turn, adversely affect our operating results for that period. |
| Quarterly Reporting May Increase the Volatility of Our
Earnings Figures |
| Since the first quarter of 2003, we have published financial results on a quarterly basis. As a
result of our dependence on the sale of a relatively small number of products, described in
the preceding risk factor, our quarterly earnings announcements may increase the apparent
volatility of our earnings figures as compared to our historical practice of semi-annual earnings
announcements. |

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| Reporting in accordance with International Financial Reporting
Standards May Differ from Reporting in accordance with
U.S. GAAP |
| --- |
| Beginning in 2005, the European Commission will require companies that are quoted on a
European stock market, such as Euronext Amsterdam N.V. (Euronext Amsterdam), to publish
their financial statements in accordance with International Financial Reporting Standards (IFRS).
While we intend to continue publishing U.S. GAAP financial statements, we also will publish
our consolidated financial statements in accordance with IFRS from
January 1, 2005 onwards. Our financial condition and results of operations reported in accordance with IFRS may differ
from our financial condition and results of operations reported in accordance with U.S. GAAP,
which could adversely affect the market price of our ordinary shares. |
| See Item 5.A. Operating Results, Principal Differences Between IFRS and U.S. GAAP. |
| Failure to Adequately Protect the Intellectual Property Rights
upon Which We Depend Could Harm Our Business |
| We rely on patents, copyrights, trade secrets and other measures to protect our proprietary
technology. However, there is no assurance that such measures will be adequate. We face risks that: |
| competitors may be able to develop similar technology independently; |
| our pending patent applications may not be issued as expected; |
| the steps we take to prevent misappropriation or infringement of our intellectual property
may not be successful; and |
| intellectual property laws may not sufficiently protect our proprietary rights or may adversely
change in the future. |
| In addition, litigation may be necessary in order to enforce our intellectual property rights, to
determine the validity and scope of the proprietary rights of others or to defend against claims
of infringement. Any such litigation may result in substantial costs and diversion of resources,
and, if decided unfavorably to us, could have a material adverse effect on our business,
financial condition and results of operations. We also may incur substantial acquisition or
settlement costs where doing so would strengthen or expand our intellectual property rights
or limit our exposure to intellectual property claims of third parties. |
| Defending Against Intellectual Property Claims by Others Could
Harm Our Business |
| In the course of our business, we are subject to claims by third parties alleging that our
products or processes infringe upon their intellectual property rights. In addition, some of
our customers have received notices of infringement from third parties, alleging that our
equipment used by such customers in the manufacture of semiconductor products and/or
the methods relating to the use of our equipment infringe one or more patents issued to such
parties. We have been advised that, if such claims were successful, we could be required to
indemnify customers for some or all of any losses incurred or damages assessed against them
as a result of such infringement. We may also incur substantial licensing or settlement costs
where doing so would strengthen or expand our intellectual property rights or limit our
exposure to intellectual property claims by others. |

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| As more fully described in Item 4.B. Business Overview, Intellectual Property and Note
14 to our consolidated financial statements, we are currently party to a series of litigation
and administrative proceedings in the United States, Japan and Korea in which Nikon alleges
our infringement of Nikon patents relating to photolithography. A final non-appealable adverse
decision in any of these proceedings could substantially restrict or prohibit our ability to
conduct sales in or from the United States, Korea or Japan, which, in turn, could have
a material adverse effect on our financial condition or results of operations. |
| --- |
| We believe that the Nikon litigation is an example of a growing trend in the lithography
industry of competing for market share by means of aggressive prosecution of intellectual
property rights with the purpose of preventing or limiting a competitors ability to utilize and
develop technology. While we believe we have sufficient intellectual property rights to
successfully conduct our business, there is a continuing risk that we will be subject to claims
alleging the infringement of others patents or intellectual property rights. If successful,
these claims could limit or prohibit us from developing our technology and producing our
products, which would have a material adverse effect on our business, financial condition
and results of operations. In addition, we anticipate that the costs associated with the
maintenance, protection, through litigation or otherwise, and expansion of our intellectual
property portfolio in coming years will increase significantly. Furthermore, we rely on a number
of patents owned by Royal Philips Electronics, our former parent company. While Philips has
granted us, without charge, a worldwide, irrevocable, non-exclusive license under those patents,
they remain subject to the same risks regarding validity, scope and enforceability that relate to
our patents. Philips has no obligation to us to defend or enforce its patents against third parties. |
| We Are Subject to Risks in our International Operations |
| The majority of our business activity is conducted outside Europe, including in developing
and emerging markets in Asia. There are a number of risks inherent in doing business in those
markets, including the following: |
| potentially adverse tax consequences; |
| unfavorable political or economic factors; and |
| unexpected legal or regulatory changes. |
| Our inability to manage successfully the risks inherent in our international activities could
adversely affect our business, financial condition and results of operations. |
| Disruption in Taiwans Political Environment Could Seriously
Harm Our Business and the Market Price of Our Shares |
| Approximately 12% of our 2003 revenues and approximately 27% of our 2002 revenues
were derived from customers in Taiwan. Taiwan has a unique international political status.
The Peoples Republic of China asserts sovereignty over Taiwan and does not recognize the
legitimacy of the Taiwan government. Relations between Taiwan and the Peoples Republic
of China, changes in Taiwanese government policies and other factors affecting Taiwans
political, economic or social environment could affect our business, financial condition and
results of operation. |

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| We Are Subject to Environmental Laws and Regulations |
| --- |
| We are subject to certain Dutch and foreign environmental regulations in areas such
as energy resource management, reduction of hazardous substances, recycling, clean air,
water protection and waste disposal. We believe that we have taken adequate precautions to
comply with these regulations in the course of our ordinary business operations. Furthermore,
we do not believe that any environmental laws or regulations currently in effect will have an
adverse effect on our business, financial condition and results of operations. However,
we cannot predict whether any pending or future legislation will be adopted or what the effect
of such legislation would be on our business, financial condition and results of operations. |
| We Are Dependent on the Continued Operation of a Limited
Number of Manufacturing Facilities |
| All of our manufacturing activities, including subassembly, final assembly and system testing,
take place in one clean room facility located in Veldhoven, the Netherlands, and one clean
room facility in Wilton Connecticut, U.S. These facilities are subject to disruption for a variety
of reasons, including work stoppages, fire, energy shortages, flooding or other natural
disasters. As from 2003 onwards, we are assembling a portion of our components and
subassemblies at our facilities in Wilton, which were previously outsourced to an outside
vendor. We cannot ensure 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.
Such a disruption could have an adverse effect on our business, financial condition and
results of operations. Because of Labor Laws and Practices, any Workforce
Reductions That We May Wish to Implement In Order To
Reduce Costs Company-Wide May Be Delayed or Suspended. |
| The semiconductor market is highly cyclical and as a consequence we may need to implement
workforce reductions in case of a downturn, in order to adjust to such market changes.
In accordance with labor laws and practices applicable in the jurisdictions in which we
operate, a reduction of any significance may be subject to certain formal procedures,
which can delay, or may result in the modification of our decision. For example in the
Netherlands if our Works Council does not agree with a proposed workforce reduction in the
Netherlands, but we nonetheless determine to proceed, we must temporarily suspend any
action while the Works Council determines whether to appeal to the Dutch Courts. This appeal
process can cause a delay of several months and may require us to address any procedural
inadequacies identified by the Court in the way we reached our decision. Such delays,
could impair our ability to reduce costs company-wide to levels comparable to those of
our peers. See Item 6.D. Employees. |
| We May Have Significant Exposure to Fluctuations in Foreign
Exchange Rates, Which Could Harm Our Results of Operations |
| We incur the majority of our manufacturing costs and price our systems predominantly in euro.
Accordingly, fluctuations of the euro versus the Japanese yen and the U.S. Dollar may affect
our results of operations. However, a portion of our revenues is denominated in currencies
other than the euro. Therefore, a strengthening of the euro relative to such other currencies
in which we receive revenues could adversely impact our results of operations. |

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| | The euro is the reporting currency we use in our consolidated financial statements.
A substantial portion of our assets, liabilities and operating results are denominated in U.S.
dollars, and a minor portion of our assets, liabilities and operating results are denominated in
currencies other than the euro and the U.S. dollar. Consequently, fluctuations in the exchange
rate of the U.S. dollar and other currencies against the euro can
affect our financial results. See Item 5.A. Operating Results, Foreign Exchange Management, Item 11 Quantitative
and Qualitative Disclosures About Market Risk and Note 4 to our consolidated financial
statements. |
| --- | --- |
| | Our Ability to Realize Our Deferred Tax Assets is Uncertain |
| | We currently have significant deferred tax assets, which resulted primarily from operating
losses incurred in prior years as well as other temporary differences. The operating losses
have predominantly been incurred in the United States and The Netherlands. SFAS (Statement
of Financial Accounting Standard) No. 109, Accounting for Income Taxes, requires the
establishment of a valuation allowance to reflect the likelihood of the realization of deferred
tax assets. Based on available evidence, we regularly evaluate whether it is more likely than
not that the deferred tax assets will be realized. This evaluation includes our judgment on the
future profitability and our ability to generate taxable income, changes in market conditions
and other factors. At December 31, 2003, we believe that there is sufficient evidence to
substantiate recognition of our net deferred tax assets with respect to net operating loss carry
forwards in the jurisdictions concerned. Future changes in facts and circumstances, if any,
may result in a need for a valuation allowance to these deferred tax asset balances which may
have an adverse effect on our business, financial condition and results of operations. See
Note 16 to our consolidated financial statements. |
| Risks Related to Our Ordinary Shares | The Price of Our Ordinary Shares is Very Volatile |
| | The current market price of our ordinary shares may not be indicative of prices that will prevail
in the trading market in the future. In particular, since our initial public offering, the market
price of our ordinary shares has experienced significant fluctuation, including fluctuation that
is unrelated to our performance. We expect that this fluctuation will continue in the future. |
| | Restrictions on Shareholder Rights May Dilute Voting Power |
| | Our Articles of Association reflect that we are subject to the provisions of Netherlands law
applicable to large corporations, called structuurregime. These provisions have the effect of
concentrating control over significant corporate decisions and transactions in the hands of our
Supervisory Board, which has the power to appoint its own members. In addition, the
provisions in our Articles of Association relating to our Priority Shares have the effect of taking
control over certain significant corporate decisions away from holders of ordinary shares. As a
result, holders of ordinary shares may have more difficulty in protecting their interests in the
face of actions by members of the Board of Management or members of our Supervisory
Board than if we were incorporated in the United States. |
| | We also have a class of protective cumulative preference shares (the Preference Shares)
and have granted to Stichting Preferente Aandelen ASML, a Netherlands foundation, an option
to acquire from us, at their nominal value of EUR 0.02 per share, a number of preference
shares equal to the number of ordinary shares outstanding at the time of option exercise. |

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| This effectively would dilute by one-half the voting power of the outstanding ordinary shares.
The potential issuance of preference shares may discourage or significantly impede a third
party from acquiring a majority of our voting shares. |
| --- |
| See further Item 10.B. Memorandum and Articles of
Association. |

link2 "Item 4 Information on the Company"

link3 "A. History and Development of the Company"

| Item 4
Information on
the Company |
| --- |
| We commenced business operations in 1984. ASM Lithography Holding N.V. was incorporated
in the Netherlands on October 3, 1994 to serve as the holding company for our worldwide
operations, which include operating subsidiaries in the Netherlands, the United States,
Taiwan, Italy, France, Germany, the United Kingdom, Ireland, the Republic of Korea,
Singapore, Israel, China, Japan and Malaysia. In 2001, we changed our name from ASM
Lithography Holding N.V. to ASML Holding N.V. Our registered office is located at
De Run 6501, 5504 DR Veldhoven, the Netherlands. |
| In May 2001, we merged with SVG (now part of ASML US), a company that was active in the
Lithography, Track and Thermal businesses. The merger is accounted for under the pooling
of interests method. |
| In December 2002, we announced measures to contain costs, including the proposed
divestiture of our Thermal business, and related customer support activities, and the
termination of our activities in the Track business, except for certain ongoing customer
support obligations. In June 2003, we sold certain of our fixed assets and inventories related
to our Track business. In October 2003, we substantially completed the divestiture of our
Thermal business. In July 2003, we announced further workforce reductions to further
reduce costs company-wide. |
| Capital Expenditures |
| Our principal capital expenditures within continued operations over the past three years,
principally relating to machinery and equipment, amounted to EUR 74.5 million for 2003,
EUR 138.6 million for 2002 and EUR 313.4 million for 2001. Divestitures within continued
operations, also principally comprising machinery and equipment, amounted to
EUR 48.8 million for 2003, EUR 58.7 million for 2002 and EUR 21.7 million for 2001.
See Notes 8 and 9 to our consolidated financial statements. |
| Our current capital expenditures consist of machinery and equipment (e.g. prototypes,
demonstration systems and training models), information technology investments and
leasehold improvements to our facilities. Our Veldhoven headquarters is financed through a
special purpose vehicle that is a variable interest entity. See Item 5.E. Off-Balance Sheet
Arrangements and Note 12 to our consolidated financial statements. All other current capital
expenditures are financed internally. |

link3 "B. Business Overview"

B. Business Overview
We are one of the worlds leading providers of advanced technology systems for the
semiconductor industry, based on market share. We offer an integrated portfolio of lithography

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| systems mainly for manufacturing complex integrated circuits (semiconductors or ICs).
We supply systems to integrated circuit manufacturers throughout the United States,
Asia and Europe and also provide our customers with a full range of support from advanced
process and product applications knowledge to complete round-the-clock service support. |
| --- |
| Value of Ownership |
| Our business model is based on our Value of Ownership concept that consists of the
following: |

| | offering ongoing improvements in productivity and value by introducing advanced
technology based on modular platforms; |
| --- | --- |
| | providing customer services that ensure rapid, efficient installation and superior on-site
support and training to optimize manufacturing processes and improve productivity; |
| | maintaining appropriate levels of research and development to offer the most advanced
technology suitable for high-throughput, low-cost volume production at the earliest possible
date; |
| | enhancing the capabilities of the installed base through ongoing field upgrades based on
new technology developments; |
| | reducing the cycle time between customer order of a system and the use of that system
in volume production on-site; and |
| | expanding operational flexibility in research and manufacturing by reinforcing strategic
alliances with world-class partners. |

| Market and Technology Overview |
| --- |
| The worldwide electronics and computer industries have experienced dramatic growth since
the commercialization of ICs in the 1960s, largely due to the continual reduction in the cost
per function performed by ICs. Improvement in the design and manufacture of ICs with higher
circuit or packing densities has resulted in smaller, lower cost ICs capable of performing a
greater number of functions at higher speeds and with lower power consumption. We believe
that these long-term trends will continue for the foreseeable future and will be accompanied
by a continuing demand, subject to ongoing cyclical variations, for production equipment that
can accurately produce advanced ICs in high volumes at the lowest possible cost.
Photolithography is used to imprint complex circuit patterns onto the wafers that are the
primary raw material for ICs and is one of the most critical and expensive steps in their
fabrication. It is therefore a significant focus of the IC industrys demand for cost-efficient
enhancements to production technology. |
| We primarily design, manufacture, market and service semiconductor processing equipment
used in the fabrication of integrated circuits. Our photolithography equipment includes
Step & Scan systems, which combine stepper technology with a photoscanning method. |
| Our product platform, TWINSCAN, was introduced in July 2000 and leverages the
production-proven elements from our PAS 5500 product family to address the
industry shift toward larger (300 mm) wafers. The TWINSCAN platform has become
in 2003 the vehicle to introduce improved resolution products both for 300 mm
and 200 mm wafer size factories. |
| To enhance the flexibility towards 200 mm factory requirements, we are developing the XT
version of the TWINSCAN platform, both for 200 mm and 300 mm. The first shipment is |

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| expected to be in the first half of 2004 with the
XT:1250 products. Our PAS 5500 product family, which
supports a maximum wafer size of 200 mm in diameter,
comprises advanced wafer steppers and Step & Scan
systems suitable for i-line and deep UV (including 248
nanometer and 193 nanometer wavelengths) processing of
wafers. |
| --- |
| We are currently performing research & development on
immersion lithography, which is one of the possible
solutions to lower the cost per wafer and increase
resolution. The first proof of feasibility on a Step &
Scan system was completed in the second half of 2003.
The next step is the development of early production
tools that will allow our customers to verify the
immersion process qualification under specific process
conditions. This verification phase will probably take
several quarters. We do not expect volume shipments of
immersion lithography systems before 2005. |
| We are also currently performing research & development
on maskless lithography. Maskless lithography is one of
the possible solutions to manage escalating mask cost,
which is becoming a dominant factor in bringing new
semiconductor designs to market for advanced technology
nodes. Designs resulting in small quantities of wafers
produced, designs with many changes or designs that
require a fast time-to-market will particularly benefit
from this technology. In July 2003, Micronic Laser
Systems AB (Micronic) and ASML announced the signing
of a memorandum of understanding to form a
joint-venture company that will focus on the optical
maskless lithography market for semiconductor
manufacturing. We expect to conclude a joint-venture
agreement with Micronic in the first half of 2004. |
| Products |
| Our product development strategy focuses on the
development of product families based on a modular,
upgradeable design. Our PAS 5500 product family
comprises advanced wafer steppers and Step & Scan
systems suitable for i-line and deep UV processing of
wafers up to 200mm in diameter. In mid-1997, we
introduced the PAS 5500 Step & Scan systems with
improved resolution and overlay. Since then, we have
further developed and expanded this Step & Scan family.
This modular upgradeable design philosophy has been
further refined and applied in the design of our most
advanced product family, the TWINSCAN platform, which
is the basis for our current and next generation Step &
Scan systems, producing wafers up to 300 mm in diameter
and capable of extending shrink technology beyond 70
nanometers. |
| Our older PAS 2500 and PAS 5000 families are suitable
for g-line and i-line processing of wafers up to 150 mm
in diameter and are employed in manufacturing
environments and in special applications for which
design resolutions no more precise than 0.5 microns are
required. |
| In November 2002, ASML introduced the TWINSCAN
AT:1200B, a high numerical aperture (0.85) dual stage
ArF (193 nanometer) lithography system for 300
millimeter as well as 200 millimeter wafer processing.
It is the industrys first high productivity tool for
volume applications at 80 nanometer linewidth. |
| In February 2003, we announced productivity performance
enhancements for our TWINSCAN family of lithography
systems. Called TWINSCAN C, the new enhancements
increase throughput by approximately 15 percent,
depending on product model. The productivity |

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| enhancements in TWINSCAN C increase wafer output to over 110 wafers
per hour for 300 mm wafers at real production conditions (109
exposures per wafer). The increased stage speeds in the TWINSCAN
platform allow for these productivity improvements while maintaining
imaging, alignment and leveling accuracy. |
| --- |
| In April 2003, we announced the delivery of the industrys first
full-field 157 nanometer Step & Scan tool to the independent
research and development chip consortium IMEC. Called the
Micrascan VII, the new system is the first 157 nanometer
full-field tool able to create working chips. 157 nanometer
technology is an extension of optical lithography that offers
smaller feature sizes for more sophisticated chips. |
| In October 2003, we introduced the TWINSCAN XT:1250, a high
numerical aperture (0.85) dual stage ArF (193 nanometer) lithography
system for 300 millimeter as well as 200 millimeter wafer processing
that extends imaging to the 65 nanometer node. The TWINSCAN XT:1250
allows productivity improvements in comparison with previous product
models. |
| In December 2003, we received the industrys first order for an
immersion lithography system. The new tool ASMLs TWINSCAN
XT:1250i is a high productivity scanner for production
applications. Delivery of the first tool is scheduled for the third
quarter of 2004. We have a unique competitive advantage in
immersion techniques due, in part, to the dual-stage design of our
TWINSCAN system. Wafer measurement including focus and overlay

is completed on the dry stage while the imaging process, using
immersion fluid applied between the wafer and the lens is completed
on the other, wet stage. The dual-stage advantage of TWINSCAN
systems enables our customers to gain the process enhancements of
immersion and to continue with familiar and proven metrology
technology. |
| We also continually develop and sell a range of product options and
enhancements designed to increase productivity and to optimize value of ownership over the entire
life of our systems. |

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Current ASML Lithography product portfolio of Steppers and Step & Scan Systems

Feature Size	Wavelength of Light
Feature size =	Wavelength = length of light going through projection lens;
Resolution =	The shorter the wavelength, the smaller the line width
Size of line	and the finer the pattern on the IC

width in Nanometer	365 nm (i-line)	248 nm (KrF)	193 nm (ArF)	157 nm (F2)
700	PAS 5500/22
350	PAS 5500/125
300	PAS 5500/250
280	PAS 5500/400
	and AT:400
150		PAS 5500/350
130		PAS 5500/750 and AT:750
120		PAS 5500/800
110		PAS 5500/850 and AT:850
100			PAS 5500/1100 and AT:1100	MSVII
90			PAS 5500/1150 and AT:1150
80			AT:1200
70			XT:1250 and XT:1250i

Notes:

1000 nanometer = 1 micron (µ) = 0.001mm = one millionth of a meter PAS 5500/22/125/250/350 = Stepper system with wafer size of 200mm PAS 5500/400 and up = Step & Scan system with wafer size of 200mm AT and XT = TWINSCAN system with wafer size of 200 and 300mm This table does not include products sold on the PAS 2500 and PAS 5000 platforms.

| Sales and Customer Support |
| --- |
| We market and sell our products in the United States
and Europe principally through our direct sales staff.
In Asia, we sell our products primarily through our own
direct sales staff, supported by independent sales
agents. |
| We support our customers with applications, service and
technical support. Our field engineers and
applications, service and technical support specialists
are based throughout the United States, Europe and
Asia. |
| Historically, the semiconductor market has been highly
cyclical and has experienced recurring periods of
oversupply, resulting in significantly reduced demand
for capital equipment, including advanced
photolithography projection systems such as the wafer
steppers and Step & Scan systems we produce. The year
2003 was an unprecedented third consecutive year of
contraction in the global semiconductor industry. |

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| During 2003, we sharpened our customer focus through
the work of multiple cross-functional process
improvement teams. These process improvement teams are
striving to streamline and integrate main business
processes such as new product introduction, acquisition
of orders from customers, fulfillment of orders, and
our post-delivery support and services. |
| --- |
| Customers and Geographic Markets |
| In 2003, we shipped 169 systems (in our continuing
operations) to a limited number of customers. We expect
that sales to relatively few customers will continue to
account for a high percentage of our net sales in any
particular year for the foreseeable future. We make all
our sales into the United States through our U.S.
subsidiary and our system sales into Asia through our
Hong Kong subsidiary. See Note 17 to our consolidated
financial statements for a breakdown of our sales by
geographic segment. |
| Manufacturing, Logistics and Suppliers |
| Our business model is based on outsourcing a
significant part of the components and modules that
comprise our lithography systems, working in
partnership with suppliers from all over the world. Our
manufacturing activities comprise the assembly and
testing of a finished system from components and
subassemblies that are manufactured to our
specifications by third parties and by ourselves and
the testing of those components, subassemblies and
finished systems. All of our manufacturing activities
(subassembly, final assembly and system testing) are
performed in one clean room facility located in
Veldhoven, the Netherlands, and one clean room facility
in Wilton, Connecticut, U.S. We procure stepper and
Step & Scan system components and subassemblies from a
single supplier or a limited group of suppliers in
order to ensure overall quality and timeliness of
delivery. We jointly operate a formal strategy with
suppliers known as Value Sourcing that is based on
competitive performance in quality, logistics,
technology and total cost. The essence of Value
Sourcing is to maintain a supply base that is world
class, globally competitive and globally present. |
| Our Value Sourcing strategy is based on the following
strategic principles: |

	maintaining long-term relationships with our suppliers;
	sharing risks and rewards with our suppliers;
	each supplier must be less than 25% dependent on ASML;
	dual sourcing of knowledge, globally, together with our suppliers; and
	single, dual or multiple sourcing of products, where possible.

| Value sourcing aligns the actual supplier performance
to our requirements on quality, logistics, technology
and total costs. As from 2003 onwards, we are
assembling a portion of our components and
subassemblies at our facilities in Wilton, Connecticut,
U.S. |
| --- |
| Zeiss is our sole external supplier of lenses and other
critical optical components, which account for between
20 percent and 50 percent of our cost of goods sold,
varying by product type, and which collectively
accounted for 36 percent of our aggregate cost of goods
sold in 2003. Our relationship with Zeiss is structured
as an exclusive strategic alliance pursuant to several
agreements concluded in 1997, 2000 and 2003 that set
forth a framework for cooperation in the areas of
product research, design, planning and manufacturing
and pricing, as well as customer support and warranty
service. Dr. Ing. Peter H. Grassmann, |

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| the former Chief Executive Officer of Zeiss, is a
member of ASMLs Supervisory Board.
See Item 6 Directors, Senior Management and
Employees. |
| --- |
| From time to time, the number of systems we have been
able to produce has been limited by the capacity of
Zeiss to provide us with lenses and optical components.
Zeiss currently is capable of manufacturing a limited
number of lenses and optical components for our wafer
steppers and Step & Scan systems and is highly
dependent on Zeiss manufacturing and testing facility
in Oberkochen, Germany. Given our level of sales in
2003, we were not constrained by the number of lenses
that Zeiss can produce. However, if our sales increase,
the inability of Zeiss to maintain and increase
production levels could result in us being unable to
fulfill orders for our systems, which could damage
relationships with current and prospective customers
and have an adverse effect on our business, financial
condition and results of operations. See Item 3.D.
Risk Factors, The Number of Systems We Can Produce is
Limited by our Dependence on a Limited Number of
Suppliers of Key Components. |
| We have agreed with Zeiss to continue our strategic
alliance on an exclusive basis until either party
provides at least three years notice of its intent to
terminate. Although we believe such an outcome is
unlikely, if Zeiss were to terminate its relationship
with us, or if Zeiss were unable to maintain production
over a prolonged period (such as because of a
catastrophe affecting Zeiss Oberkochen facility), we
would effectively cease to be able to conduct our
business. |
| Research and Development |
| The semiconductor manufacturing industry is subject to
rapid technological changes and new product
introductions and enhancements. We believe that
continued and timely development and introduction of
new and enhanced systems are essential for us to
maintain our competitive position. To meet this ongoing
requirement, we have established sophisticated
development centers in the Netherlands and the United
States. |
| We have historically devoted a significant portion of
our financial resources to research and development
programs and we expect to continue to allocate
significant resources to these efforts. We also apply
for subsidy payments in connection with specific
development projects under programs sponsored by the
Netherlands government, the European Community and the
U.S. government (Defense Advanced Research Projects
Agency, or DARPA). Amounts received under these
programs generally are not required to be repaid,
except for technical development credits (Technische
Ontwikkelingskredieten, or TOK) received from the
Netherlands Ministry of Economic Affairs, which are
repayable contingent upon actual sales of
products, the development of which is funded by the
respective credits. See our discussions of research and
development in Item 5 Operating and Financial Review
and Prospects, and Notes 1 and 15 to our consolidated
financial statements. |
| We invested EUR 306 million on research and development
in continuing operations in 2003, a 6 percent decrease
compared to 2002. We are also involved in joint
research and development programs with both public and
private partnerships and consortiums, involving leading
chip manufacturers, as well as Netherlands government
and European Union programs such as MEDEA+ (a EUREKA
project) and IST. We aim to own or license our jointly
developed technology and designs of critical
components. |

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| In 2003, our research and development efforts propelled
further development of the TWINSCAN platform along with
several leading edge technologies, including 248
nanometer, 193 nanometer, immersion, 157 nanometer and
EUV. Our research and development activities in 2003
also led to productivity enhancements for our other
existing product families. |
| --- |
| Intellectual Property |
| We rely on patents, copyrights, trade secrets and other
measures to protect our proprietary technology. We aim
to have appropriate licensing in place with our
suppliers with respect to our jointly developed
technology or, alternatively, to obtain ownership
rights on know-how and designs of critical components.
However, we face the risk that these measures will be
inadequate. Competitors may be able to develop similar
technology independently. Our pending patent
applications may not be issued as intended, and
intellectual property laws may not sufficiently support
our proprietary rights. In addition, litigation may be
necessary in order to enforce our intellectual property
rights, to determine the validity and scope of the
proprietary rights of others or to defend against
claims of infringement. Any such litigation may result
in substantial costs and diversion of resources, and,
if decided unfavorably to us, could have a material
adverse effect on our business, financial condition or
results of operations. We also may incur substantial
acquisition or settlement costs where doing so would
strengthen or expand our intellectual property rights
or limit our exposure to intellectual property claims
of third parties. |
| On occasion, certain of our customers have received
notices of infringement from third parties, alleging
the ASML equipment used by those customers in the
manufacture of semiconductor products and/or the
methods relating to the use of ASML equipment infringe
one or more patents issued to such parties. We have
also been advised that, if claims were successful, we
could be required to indemnify such customers for some
or all of any losses incurred or damages assessed
against them as a result of that infringement. We may
also incur substantial licensing or settlement costs
where doing so would strengthen or expand our
intellectual property rights or limit our exposure to
intellectual property claims by others. |
| Patent litigation with Ultratech Stepper, Inc |
| On May 23, 2000, Ultratech Stepper, Inc. (Ultratech)
filed a lawsuit in the United States District Court for
the Eastern District of Virginia (which was
subsequently transferred to the United States District
Court for the Northern District of California) against
ASML. Ultratech alleged that ASML is infringing
Ultratechs rights under a United States patent,
through the manufacture and commercialization in the
U.S. of advanced photolithography equipment embodying
technology that, in particular, is used in Step & Scan
equipment. Ultratechs complaint seeks injunctive
relief and damages. On August 16, 2002, the Court granted ASMLs motion for summary
judgment of non-infringement based upon the previously
reported favorable interpretation by the Court as to
the scope and meaning of the claims of the asserted
patent. A final judgment on those favorable rulings was
subsequently entered in ASMLs favor and ASMLs
challenge to the validity and enforceability of the
patent was dismissed without prejudice in light of the
finding of no infringement. Ultratech has taken an
appeal to the United States Court of Appeals for the
Federal Circuit from the judgment in ASMLs favor,
where the matter has been briefed and now awaits oral
argument and disposition by the Court. |

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| We continue to believe that Ultratechs claims are
without merit and that ASMLs defenses are strong. ASML will continue to assert these defenses
vigorously. |
| --- |
| Patent litigation with Nikon |
| Since late 2001, we have been a party to a series of
civil litigations and administrative proceedings in
which Nikon alleges ASMLs infringement of Nikon
patents relating to photolithography. ASML in turn
filed claims against Nikon. These proceedings are
summarized below, and more detail is presented in Note
14 to our consolidated financial statements. The
proceedings are at various stages of advancement, and
their ultimate outcome is therefore uncertain. In each
case, however, we believe we have meritorious defenses
to Nikons claims, including that Nikons patents are
both not infringed and are invalid, as well as valid
counterclaims. We intend to vigorously pursue these
defenses and counterclaims. If a final non-appealable
decision that was adverse to ASML were to be rendered
in any of these proceedings, however, our ability to
conduct sales in one or more significant markets could
be substantially restricted or prohibited, which in
turn could have a material adverse effect on our
financial condition and results of operations. |
| Proceedings in the United States |
| In December 2001, Nikon filed a complaint with the U.S.
International Trade Commission (ITC) alleging that
ASMLs photolithography machines infringe seven patents
held by Nikon and seeking to exclude ASML from
importing into the United States any infringing
products. A trial before an administrative law judge
was completed in November 2002 and, in late January
2003, the administrative law judge initially determined
that ASML had not committed any violation. Nikon then
appealed the decision to the ITC. The ITC then adopted
the administrative law judges initial determination
that ASML did not infringe any valid, enforceable
patent of Nikons and had not violated Section 337.
Nikon has appealed the ITCs decision to the Court of
Appeals for the Federal Circuit. A decision from the
Court of Appeals is not expected before mid 2004. |
| In December 2001, Nikon also filed a separate patent
infringement action in the U.S. District Court for the
Northern District of California. In that proceeding,
Nikon alleges infringement of five Nikon patents and
seeks injunctive relief and damages. In April 2002,
ASML filed a counterclaim in the ITC action, alleging
that Nikons photolithography machines sold in the
United States infringe five ASML patents. This
counterclaim was subsequently transferred to the U.S.
District Court for the Northern District of California.
Nikon filed a second patent infringement action in that
court alleging infringement of six out of the seven
patents from the ITC action and two additional patents.
Discovery in the California litigation is currently
ongoing. We do not expect a trial before late 2004. |
| Proceedings in Japan |
| In July 2003, Nikon withdrew its counterclaim against
ASML filed in October 2002, in which Nikon argued that
ASMLs photolithography machines infringed 12 Japanese
patents held by Nikon. In November 2003, Nikon filed a
new complaint against ASML and its subsidiary in Japan
alleging that ASMLs photolithography machines sold in
Japan infringe patents held by Nikon. A final decision
for this litigation is not expected before 2006. The
patent infringement actions filed by ASML in August
2002 and in January 2003 are still pending at the Tokyo |

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| District Court. In January 2004, ASML filed a new
complaint against Nikon in the Tokyo District Court. Final non-appealable decisions for
these cases are not expected before 2005. |
| --- |
| Proceedings in Korea |
| In October 2002, Nikon filed a patent infringement
action against ASML and its Korean subsidiary, alleging
that ASMLs photolithography machines infringe five of
Nikons patents, four of which are related to Nikons
patents asserted in its U.S. litigation. Both sides
have filed briefs with the court on the preliminary
issues. In January 2003, ASML filed a patent
infringement complaint against Nikon and its Korean
subsidiary, seeking to enjoin Nikon from the
manufacture and sale of lithography devices that
infringe another of ASMLs patents. A decision by the
Korean District Court is not expected before 2005. A
final non-appealable decision (through the High Court
appeal and the Supreme Court appeal) is not expected
before 2006. |
| Competition |
| The semiconductor equipment industry is highly
competitive. The principal elements of competition in
our markets are the technical performance
characteristics of a photolithography system and the
value of ownership of that system based on its purchase
price, maintenance costs, productivity and customer
service and support. In addition, we believe that an
increasingly important factor affecting our ability to
compete is the strength and breadth of our portfolio of
patent and other intellectual property rights relative
to those of our competitors. We believe that the market
for photolithography systems and the investments
required to be a significant competitor in this market
have resulted in increased competition for market share
through the aggressive prosecution of patents to
prevent competitors from using and developing their
technology. Our competitiveness will increasingly
depend upon our ability to protect and defend our
patents, as well as our ability to develop new and
enhanced semiconductor equipment that is competitively
priced and introduced on a timely basis. See Item 3.D.
Risk Factors, We Face Intense Competition and Note 14
to our consolidated financial statements. |
| Government Regulation |
| Our business is subject to direct and indirect
regulation in each of the countries in which our
customers or we do business. As a result, changes in
various types of regulation could affect our business
adversely. The implementation of new technological or
legal requirements could impact our products,
manufacturing or distribution processes, and could
affect the timing of product introductions, the cost of
our production or product as well as their commercial
success. Moreover, environmental and other regulations
that adversely affect the pricing of our products could
affect our net sales and operating profit. The
impact of these changes in regulation could affect
adversely our business even where the specific
regulations do not directly apply to us or to our
products. |

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link3 "C. Organizational Structure"

| C. Organizational Structure |
| --- |
| ASML Holding N.V. is a holding company that operates
through its subsidiaries. ASML Holding N.V.s material subsidiaries, each of which is a direct
wholly-owned subsidiary, are as follows: |
| ● |
| See Exhibit 8.1 for a full list of ASML Holding N.V.s
subsidiaries. |

link3 "D. Property, Plants and Equipment"

| D. Property, Plants and Equipment |
| --- |
| We own several facilities, including office facilities,
in the Netherlands, the United States and Japan. The
book value of the buildings used in our continuing
operations and owned by ASML amounted to EUR 93 million
as of December 31, 2003. The book value of buildings
included in our assets held for sale was EUR 3 million
as of December 31, 2003. We lease our headquarters,
applications laboratory and research and development
facilities, manufacturing (assembly and testing)
premises and some of our office facilities in
Veldhoven, the Netherlands. The operating leases for
all of our major facilities are long-term and contain
purchase options. |
| In 2003, we consolidated our office facilities at our
headquarters in Veldhoven. Some of these office
facilities are financed through a special purpose
vehicle that is a variable interest entity. See Item
5.E. Off-Balance Sheet Arrangements and Note 12 to
our consolidated financial statements. We also own and
have regional sales and service offices and
manufacturing facilities located worldwide near our
customers premises. |
| We expect capital expenditures in 2004 to range between
EUR 75 million and EUR 85 million, of which the
majority will be allocated to IT projects and equipment
and to machinery and tooling equipment. See Item 4.A.
History and Development of the Company, Capital
Expenditures |
| See also Item 5.B. Liquidity and Capital Resources
and Item 4.A. History and Development of the Company,
Capital Expenditures and Note 9 to our consolidated
financial statements. We rent certain of our facilities
and office space through long-term lease contracts with
leasing companies. See Item 5.E. Off-Balance Sheet Arrangements and Note 12 to
our consolidated financial statements. |
| While we anticipate continuing capital expenditures for
the purpose of upgrading and, where appropriate,
incrementally expanding our facilities, we believe that
our existing facilities are sufficient to accommodate
the likely range of production volumes that we might
experience in the market for semiconductor
manufacturing equipment for the next 2 years. |

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link2 "Item 5 Operating and Financial Review and Prospects"

	Executive Summary
Item 5
Operating and
Financial Review
and Prospects	ASML is the worlds leading provider of lithography systems for
the semiconductor industry, manufacturing complex machines
that are critical to the production of integrated circuits or
chips. Headquartered in Veldhoven, the Netherlands, ASML operates globally,
with activities in Europe, the United States and Asia.
	The year 2003 was an unprecedented third consecutive
year of downturn in the global semiconductor industry.
The semiconductor industry, traditionally one of the
more cyclical industries, continued to suffer from
overcapacity that had resulted from its high level of
capital expenditures during 2000. Over the last three
months of 2003, our order intake has shown considerable
strength for systems to be shipped in the first half of
2004. Approximately 80 percent or 100 systems of our
backlog as of December 31, 2003 is expected to be
shipped in the first half of 2004. Therefore, the
visibility of our sales level for the second half of
2004 is still unclear.
	Our sales consist of product sales and service sales.
Product sales generated approximately 88% of total net
sales in 2003. During 2003, we shipped 169 systems to
our customers, compared to 205 in 2002.
	Cost of sales reflects primarily the costs of
components and subassemblies that comprise our
lithography systems and labor used in the manufacture
of our systems. We procure system components and
subassemblies from a single supplier or a limited group
of suppliers in order to ensure overall quality and
timeliness of delivery. As from 2003 onwards, we are
assembling a portion of our components and
subassemblies at our facilities in Wilton, Connecticut,
U.S., which had previously been outsourced to an
outside vendor.
	The semiconductor manufacturing industry is subject to
rapid technological change and frequent new product
introductions and enhancements. The cost to develop new
systems is extremely high. Our high level of research
and development expenditures reflects our continuous
effort to be a technological leader.
	In December 2002, we announced cost containing
measures, including a reduction in workforce,
divestment of our Thermal business and termination of
our Track operations. During the year 2003, we
implemented the workforce reduction and substantially
completed the discontinuance of our Track and Thermal
businesses. In July 2003, we announced a further
workforce reduction, of which the majority is planned
in the Netherlands. Currently, ASML and its Works
Council are nearing the completion of a joint study on
implementing this workforce reduction in the
Netherlands. As a consequence, the Dutch workforce
reduction has been delayed and, any corresponding cost
reductions have been delayed. We believe that by
adjusting labor capacity and increasing operating flexibility, we can reduce our
break-even level by the end of 2004 to approximately
130 new systems from its current level of approximately
160 new systems, depending upon our product mix. The
break-even level is the minimum number of new systems
that need to be sold in a year in order to achieve net
profit in that year.
	ASML has sharpened its strategic focus through the work
of multiple cross-functional process
improvement teams. These process improvement teams are
focused on streamlining and

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integrating main business processes and are striving to improve ASMLs working capital management in order to further strengthen its cash position. These working capital improvement programs include initiatives in the area of inventory control, early collection of receivables and effective management of payments and, during 2003, contributed significantly to the EUR 509 million net cash provided by our continuing operating activities.

link3 "A. Operating Results"

| A. Operating
Results |
| --- |
| Critical accounting policies |
| Our discussion and analysis of our financial condition and results
of operations are based upon our consolidated financial statements,
which have been prepared in accordance with U.S. GAAP. The
preparation of our financial statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we
evaluate our estimates, including those related to customer
incentives, bad debts, inventories, tangible assets, intangible
assets, leases, income taxes, financing operations, warranty and
installation obligations, order cancellation costs, restructuring,
long-term service contracts, pensions and other post-retirement
benefits, and contingencies and litigation. We base our estimates
on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions. We have identified the
policies below as critical to our business operations and the
understanding of our results of operations. |
| Recognition of revenues, income and expenses |
| We distinguish between revenues from new and proven technology
systems. Revenues from proven technology systems are recognized
upon shipment, since title passes to the customer at that moment and
the customer has unconditionally accepted the system during a
factory test prior to shipment. Revenues from new technology
systems are deferred until installation and acceptance at the
customers premises is completed. As soon as a track record has been
established regarding the successful and timely installation and
acceptance of equipment previously identified as new technology,
ASML considers the equipment to be proven technology. At that
time, ASML changes the timing of revenue recognition to the shipment
date in accordance with its revenue policy for proven technology
and recognizes previously deferred revenue. We assess the change
from new technology to proven technology based on installation
times, full technical compliance with contract specifications and
customer site sign-off for approval. In the second half of 2002, our
TWINSCAN technology, which had been previously identified as new
technology, met the criteria for proven technology. A different
assessment could have resulted in the deferral of a significant
amount of revenues from uninstalled TWINSCAN systems in 2002, for
which the revenue was recognized upon shipment during that year. |

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| During 2003, we delivered 2 full-field 157 nanometer Step & Scan systems to
research
institutes and recorded related funding and costs under research and
development. |
| --- |
| In December 2003, we received the industrys first order for an
immersion lithography system, ASMLs TWINSCAN XT:1250i. We are
currently performing research and development on immersion
lithography, which is one of the possible technologies to achieve
lowering the cost per wafer and increasing resolution. The first
feasibility test of immersion on a Step & Scan system was completed
in the second half of 2003. The next step in the development of
immersion lithography technology is the development of early
production tools that will allow our customers to verify the
immersion process qualification under specific process conditions.
Delivery of the first tool is planned for the third quarter of 2004.
Whether we will consider this new tool as new technology or
proven technology will depend on our progress in developing
immersion lithography technology during 2004. |
| The fair value of installation services provided to our customers is
initially deferred and is recognized when the installation is
completed. The unearned revenue balance from installation services
amounted to approximately EUR 5 million at December 31, 2003. Sales
from service contracts are recognized when performed. Revenue from
prepaid service contracts is recognized over the term of the
contract. As of December 31, 2003, the unearned revenue balance on
prepaid service contracts amounted to approximately EUR 5 million. |
| Warranty |
| We provide standard warranty coverage on our systems for twelve
months, providing labor and parts necessary to repair systems during
the warranty period. The estimated warranty costs are accounted for
by accruing these costs for each system upon recognition of the
system sale. The estimated warranty cost is based on historical
product performance and field expenses. Based upon historical
service records, we calculate the charge of average service hours
and parts per system to determine the estimated warranty charge. We
update these estimated charges periodically. The actual product
performance and/or field expense profiles may differ, and in those
cases we adjust our warranty reserves accordingly. Future warranty
expenses may exceed our estimates, which could lead to an increase
in our cost of sales. A non-standard warranty generally includes
services incremental to the standard warranty coverage. Revenues
from the sale of a non-standard warranty are deferred as unearned
revenue and are recognized ratably as revenue when the applicable
warranty term commences. The unearned revenue balance on
non-standard warranties amounted to approximately EUR 39 million as
of December 31, 2003. |
| Evaluation of long-lived assets for impairment and costs
associated with exit or disposal activities |
| We evaluate our long-lived assets, including intellectual
property, for impairment whenever events or changes in
circumstances indicate that the carrying amount of those assets
may not be recoverable. If an impairment test is warranted, we
assess whether the undiscounted cash flows expected to be
generated by our long-lived assets exceed their carrying value. If
this assessment indicates that the long-lived assets are impaired,
the assets are written down to their fair value. These assessments
are based on our judgment, which includes the estimate of future
cash flows from long-lived assets and the estimate of the fair
value of an asset if it is impaired. We initiated impairment
assessments in 2003 based on the following |

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events: discontinuance of our Track and Thermal businesses, workforce reductions, net losses from continuing operations and the consolidation of our office facilities at our headquarters in Veldhoven. As a result of those assessments, we recorded impairment charges and exit costs as follows:

| | During 2003, we evaluated
assets related to our Thermal business for impairment anticipating
the expected proceeds from its sale. Accordingly, we recorded
approximately EUR 16 million impairment charges. The impairment
charges were determined based on the difference between the assets
carrying value and the value used in the negotiations with several
potential buyers. In October 2003, we substantially completed the
sale of our Thermal business; no gain or loss was realized on the
sale as the net assets were stated at the value equal to the
proceeds of the sale. |
| --- | --- |
| | In addition, during 2003, we recorded impairment charges of
approximately EUR 3 million on a building in the United States,
previously used by our Track business, for which there are
insufficient cash flows to support the carrying cost. The property
and equipment impairment was determined on the difference between
the buildings estimated fair value, as indicated by an independent
real estate appraiser, and its carrying value. |
| | During 2003, we
recorded a charge of approximately EUR 7 million relating to the
consolidation of our office and warehouse facilities at our
headquarters in Veldhoven as we ceased using certain of our
facilities. The facility exit charges included: |

| - | estimated future
obligations for non-cancelable lease payments (net of estimated
sublease income of EUR 25 million). We estimated the cost of exiting
by referring to the contractual terms of the lease agreements and by
evaluating the sublease agreements concluded for these facilities
or, where applicable, by referring to amounts being negotiated; and |
| --- | --- |
| - | the impairment of property and equipment (primarily leasehold
improvements) for which there are insufficient cash flows to support
the carrying cost. The property and equipment impairment was
determined based on the difference between the assets estimated
fair value and their carrying value. |

During 2003, we recorded impairment charges of EUR 12 million on machinery and equipment, for which there are insufficient cash flows to support the carrying cost. The impairment charges were determined based on the difference between the assets estimated fair value and their carrying value.

| Since our estimates of future cash flows are subject to
considerable judgment and changes in circumstances, actual cash
flows may be higher or lower. Although we believe the
above-mentioned events to be the known events that might indicate
asset impairment, other assets may be subject to loss in value due
to uncertain market circumstances, which could result in further
impairment charges in connection with these assets. See Notes 2, 3
and 9 to our consolidated financial statements. |
| --- |
| Inventories |
| Inventories are stated at the lower of cost (first-in, first-out method) or
market value. Cost includes net prices paid for materials purchased, charges for
freight and customs duties, production labor cost and factory
overhead. Inventory provisions are made for slow moving, obsolete or
unsaleable inventory and reviewed on a quarterly basis. Our
methodology involves matching our on-hand and on-order inventory
with our manufacturing forecast. We evaluate for determining
inventory provisions the inventory in excess of our forecasted needs
on both technological and economical criteria and take appropriate
provisions to reflect the risk of |

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| obsolescence. This methodology is significantly affected by our
forecasted needs for inventory. If actual demand or usage were to
be lower than estimated, additional inventory provisions for
excess or obsolete inventory may be required, which could have a
material adverse effect on our business, financial condition and
results of operations. See Note 6 to our consolidated financial
statements. |
| --- |
| Restructuring |
| ASML applies the criteria defined in SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities and SFAS No. 112,
Employers Accounting for Postemployment Benefits, in order to
determine when a liability for restructuring or exit costs should be
recognized. |
| With respect to employee termination costs, we are adopting SFAS
No. 146 (effective since January 1, 2003) in the case of benefit
arrangements that, in substance, do not constitute an ongoing
benefit arrangement. SFAS No. 112 is adopted when termination
benefits are provided under an ongoing benefit arrangement. SFAS
No. 146 establishes that a liability for a cost associated with an
exit or disposal activity shall be recognized and measured
initially at its fair value in the period in which the liability is
incurred; that is when a detail plan exists, has been committed to
by management and communicated to the employees. SFAS No. 112
establishes that a liability for termination benefits provided
under an ongoing benefit arrangement covered by SFAS No. 112 is
recognized when the likelihood of future settlement is probable and
can be reasonably estimated. Accordingly, the application of SFAS
No. 146 or SFAS No. 112 may affect the timing of recognition, as
well as the amounts recognized. |
| On December 18, 2002, ASML announced workforce reductions of approximately
700 positions worldwide. The related restructuring charges of EUR
7 million were recorded in 2003 since the details on the plan had
not been finally determined by December 31, 2002. As of December
31, 2003, this plan has been fully effectuated. |
| On July 16, 2003, ASML announced further workforce reductions of approximately
550 positions worldwide, of which the majority is planned in the
Netherlands. ASML recorded a provision of EUR 15 million as an
ongoing benefit arrangement during 2003 in respect of this workforce
reduction announced in July 2003. The amount of the provision was
based upon the details of the exit plan agreed on with our Works
Council in the Netherlands for the workforce reductions announced in
December 2002. Currently, the Board of Management and the Dutch
Works Council are nearing the completion of a joint study on
implementing these workforce reductions in the Netherlands.
Consequently, the Dutch workforce reduction has been delayed. |
| Other exit costs include purchase and other commitments to be
settled or fulfilled. Related costs are estimated based on expected
settlement fees and committed payments, taking into account future
potential benefits, if any, from those commitments. |
| Income tax |
| We use the asset and liability method in accounting for income
taxes. Under this method, deferred tax assets and liabilities are
recognized for the tax effect of incurred net operating
losses and for tax consequences attributable to differences
between the balance sheet carrying amounts of existing assets and
liabilities and their respective tax bases. |

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| If it is more likely than not that the carrying amounts of deferred tax assets
will not be realized,
a valuation allowance will be recorded to reduce the carrying amounts of those
assets. |
| --- |
| In 2003, we performed an extended assessment with respect to our
ability to realize our deferred tax assets resulting from net
operating loss carry-forwards. In this analysis, we incorporated the
application of a proposed Advanced Pricing Agreement (APA) that is
under negotiation with the Dutch and United States tax authorities.
Furthermore, in assessing the need to record a valuation allowance
on our deferred tax assets, we took into account possible tax
planning alternatives, and expected future profits in the
Netherlands and in the United States. Based on our assessment, we
believe that it is more likely than not that the net operating
losses will be offset by future taxable income before the statute on
loss compensation expires. However, if our assessment were
incorrect, a significant portion of the deferred tax assets recorded
on our balance sheet would have to be written down. See also Item
3.D. Risk Factors, Our Ability to Realize Our Deferred Tax Assets
is Uncertain. |
| ASML vision, mission, goal and business strategy |

| Vision | - | Offering the right technologies at the right time combined
with superior value of ownership measured by customers return on
investment in our tools. |
| --- | --- | --- |
| Mission | - | Providing leading edge imaging
solutions to continuously improve our customers global
competitiveness. |
| Goal | - | Achieving sustainable and profitable market
leadership through customer satisfaction. |
| Business strategy | - | Maintaining
leadership by providing high value drivers for customers while
striving for operational excellence that results in top
financial performance. |

	Business strategy
	ASMLs commitment is to be the industrys global leader in our core
competence of semiconductor lithography equipment, which images
nanometric circuit patterns on a silicon wafer, the material from
which tiny chips (integrated circuits) are made. We define and
direct our business strategy through technology leadership,
customer focus and operational excellence.
Technology leadership	We drive technology leadership along the semiconductor industry
roadmap in close consultation with existing customers and potential
new ones. This means we seek to satisfy the needs of different types
of chipmakers by customizing and configuring products to provide
premium value for the owners of ASML lithography systems. We pursue
world class productivity to benefit every type of customer. This
includes high volume, reliability demands associated with production
of memory chips; fast and frequent changeovers required by foundries
or made-to-order chip contractors; complexity of making
microprocessors; and unique specifications set by independent device
manufacturers.

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| | Changing technology and rising capital investments increasingly
influence the equipment choices of chipmakers. Therefore, ASML
continually anticipates, adapts and maintains its product offerings
to embrace the stages, speed and size of growth in different
lithography market segments. The Companys product range for
steppers and advanced Step & Scan systems spans the industrys
current wavelength technology for 200 and 300 millimeter wafers
alike. Our proven products cover 365, 248 and 193 nanometer
wavelengths, addressing the range of market needs for leading edge
as well as less critical line widths. Since 2000, we offer the
industrys only dual-stage wafer imaging system - our TWINSCAN
platform - that allows exposure of one wafer while simultaneously
measuring another wafer. |
| --- | --- |
| | Consistent with our strategy to remain at the industry forefront for
chipmaking, in 2003, we shipped the industrys first full-field Step
& Scan tool at the 157 nanometer wavelength. In 2003, we also
introduced our new immersion lithography system, a pioneering and
promising product that replaces the air over the wafer with fluid to
enhance focus and shrink line widths. |
| | Consistent with a business strategy focused on our core lithography
competence, we also strive to enhance productivity and process
performance in the lithography area of chipmaking where wafers spend
most of their overall process time. We form and maintain strategic
alliances with other semiconductor equipment suppliers, allowing us
to offer customers more complete solutions. For example, we have
joint development programs with leading makers of track equipment in
the so-called litho-cluster, where wafer coating and exposure can
couple to better meet demands of chipmakers. We are seeking to
jointly develop an optical maskless lithography system to reduce
time to market of new devices and help solve escalating mask costs,
an important factor for new semiconductor designs that feature
advanced and ever smaller critical dimensions. |
| | ASML also continues to offer solutions for special
application markets and to provide proprietary mask
technologies and software products that extend the limits of
optical lithography for semiconductor manufacturing. |
| | ASMLs strategic pursuit is to offer technology choice, incremental
quality and sustainable levels of added value. We increase the
customization of our products for customers and strive to provide
superior integration of our tools with theirs. For a market and
technology overview and further information about ASML products,
reference is made to Item 4.B. Business Overview. |
| Customer focus | Customer focus is central to the Companys strategic pursuit of
market share leadership. And ASMLs strategic approach to customer
focus lies in the empowerment of multi-discipline account
management teams. Our account managers represent our customers
across every function and business process at ASML, from marketing
and technology to logistics and customer support. Doing so ensures
that everyone at ASML is kept informed and involved, as
appropriate, in the Companys customer focus process. |
| | We track and treat levels of customer satisfaction three ways: our
own systematic methods; ratings provided by individual customers
using their own criteria, and independent industry surveys. The
Companys commitment to customers is to develop, install and
support |

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| | technological tools for volume production. Doing so enables customers to become
better
competitors and make more profit in the medium and long term. |
| --- | --- |
| | Strategically, we engage customers in very early stages of
technology development; we listen to their needs surrounding
product introduction and volume utilization. Together, we create a
dynamic and shared roadmap that begins with a customer need and
ends with a customer solution. ASML professionals continue building
customer relationships as we assist in developing and delivering
technology and associated results that are above and beyond normal
expectations. As a result, ASML not only maintains its technology
leadership, but also secures market leadership. |
| | We foster a culture of openness as the core of our customer focus,
while providing customers with confidentiality for their business,
financial and proprietary information. In addition, customer
support training provides leading edge learning solutions to meet
customer needs involving operators, technicians and engineers for
service, application, process and specialist requirements. The
Companys strategy of superior value for owners of ASML systems
allows each customer to operate their chip fabrication facilities -
anywhere in the world - with the highest productivity. |
| | When customers are satisfied, then they have confidence to commit
capital expenditures: customers repeat purchases of ASML
lithography systems and buy additional products and services from
ASML. It also means that customers are willing to pay premiums
consistent with ASMLs added value, in the face of fierce pricing
competition from rivals. |
| Operational excellence | To achieve technology leadership and customer focus, it is also
important to look inward. During 2003, inside ASML we sharpened our
strategic focus through the work of multiple cross-functional
process improvement teams. From an operational perspective, these
process improvement teams are striving to streamline and integrate
main business processes such as new product introduction,
acquisition of orders from customers, fulfillment of orders, and
our post-delivery support and services. We strive to measure the
output of each process, namely its quantified results and how it
adds value. |
| | ASMLs business strategy includes outsourcing the majority of
components and subassemblies that make up our lithography products.
We work in partnership with suppliers, jointly operating a strategy
known as Value Sourcing. It is based on the QLTC principle that
stands for quality, logistics, technology and total cost. With ASML
Value Sourcing, we strive to attain flexibility, best-of-breed
contributions and cost savings. It exemplifies mutual commitment,
alongside shared risk and reward. Selected sourcing from our own
facilities in the Netherlands and in the United States provides an
additional check on supplier performance. |
| | The Companys value of ownership proposition is a strategic driver
for increasing sales. This means customers assess ASMLs added
value. Their calculated return on capital employed in
semiconductor fabrication facilities supports ASMLs ability to
maintain pricing for our lithography
systems. Internally, ASML is committed to improvements in gross
margin by reducing cost of goods. |

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| Operational excellence is a strategic pillar that supports reduction
of fixed and variable costs to increase operating profit and
generate cash from working capital. Operational excellence enhances
efficiencies and effectiveness. This means cost reductions in
research and development; selling, general and administrative
expenses; customer support; information technology and management
systems; inventory and work-in-progress; manufacturing and
facilities management; and other activities. Operational excellence
strengthens the Companys ability to offer customers a range of
technological and system choices at the right time. |
| --- |
| Operational excellence is an internal strategic condition for
increasing flexibility and reducing our breakeven level for the
number of systems that we manufacture, depending on the mix of
products ordered by customers in different market segments in
various regions of the world. With a lower cost base and a higher
capacity for flexibility, ASML can satisfy customer demand on a
timely basis and continue to strengthen our competitive position. |
| Excellent people help make operational excellence happen. As
technology roadmaps and customer requirements become more
demanding, ASML needs the best talent available: fewer, better
qualified, more completely committed people. The Companys human
resource strategy embraces our unique culture of individual and
team commitment that makes outstanding accomplishments possible. |
| Given the structural changes and intensified cyclical conditions
in the world market for semiconductor lithography systems, the
Companys strategy is to transform our technology and market
success into a sustainable business success through operational
excellence. This means benchmarking financial results versus peer
technology companies. It also means pursuit of predictable
quarterly results that are consistent with shareholder
expectations. |
| In summary, the Companys commitment is to add measurable value and long-term
results to
benefit our customers as they design, produce and price their products. |
| Financial criteria for ASML |
| We strive to provide to our shareholders attractive return on their
invested capital. This means that we will continue working on
increasing the value of ownership (see Item 4.B. Business
Overview) to our customers resulting in higher average unit sales
prices for our systems. Furthermore, we will continue on controlling
our cost base by focusing on cost of goods reduction programs and
controlling research and development costs and selling, general and
administrative expenses. Finally, we intend to further improve our
working capital management. Our working capital improvement program
includes inventory control, early collection of our receivables and
effective management of payments. |
| To reflect our efforts in achieving return on capital invested by
our shareholders, we measure ourselves, amongst others, on the
following financial key performance criteria: gross margin,
operating margin, inventory turns, days sales outstanding, operating
income and market share. |
| Results of Operations |
| The following discussion and analysis of results of operations should be viewed
in the context
of the risks affecting our business strategy, described in Item 3.D. Risk
Factors. |

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| Our 2001 merger with SVG has been accounted for under the pooling
of interests method. Therefore, our consolidated financial
statements for the year ended December 31, 2001 reflect the
combination of financial statements of our historical operations
with those of SVG. Our decision in December 2002 to sell our Thermal
business and to terminate our Track business has resulted in
separate disclosure for continuing and discontinued operations. Our
consolidated financial statements for the year ended December 31,
2001, have been retroactively reclassified in order to reflect the
impact of this decision. |
| --- |
| Set forth below are our consolidated statements of operations from continuing
operations data
for the three years ended December 31, 2003, expressed as a percentage of total
net sales: |

Year ended December 31 — Total net sales	100.0	%	100.0	%	100.0	%
Cost of sales	98.0	1	76.1		76.1	2
Gross profit on sales	2.0		23.9		23.9
Research and development costs	21.9		16.6		19.8
Research and development credits	(1.0	)	(1.3	)	(1.2	)
Selling, general and administrative costs	15.5		13.4		13.8
Restructuring and merger and acquisition related charges	2.8		N/A		1.6
Operating loss from continuing operations	(37.2	)	(4.8	)	(10.0	)
Interest expense, net	0.5		1.9		1.9
Loss from continuing operations before income taxes	(37.4	)	(6.7	)	(11.9	)
Benefits from income taxes	(11.3	)	(2.2	)	(3.9	)
Net loss from continuing operations	(26.1	)	(4.5	)	(8.1	)

| 1 Includes restructuring
charges of EUR 400 million. |
| --- |
| 2 Includes restructuring charges of EUR 5 million. |
| Results of operations from continuing operations 2003
compared with 2002 |
| During the year 2003 we continued to face a significant downturn in
the semiconductor industry, which started in 2001. In the last
quarter of 2003, we have seen what may be the beginning of an upturn
that is apparent in most business segments within the semiconductor
industry. |

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| Consolidated sales and gross profit |
| --- |
| The following table shows a summary of sales (revenue and units sold), gross
profit on sales
and average sales price data on an annual basis for the years ended December
31, 2003 and 2002: |

	First	2002 — Second	Full	First	2003 — Second	Full
Year ended December 31	half year	half year	year	half year	half year	year
Net sales (EUR million)	788	1,171	1,959	647	896	1,543
Net product sales (EUR million)	674	1,067	1,741	553	804	1,357
Net service sales (EUR million)	114	104	218	94	92	186
Total units recognized	78	127	205	74	95	169
Total new systems recognized	73	110	183	55	71	126
Total used systems recognized	5	17	22	19	24	43
Gross profit on sales (% of sales)	29.6	20.0	23.9	19.4	27.2	23.9
Average unit sales price
for new systems (EUR thousands)	8,581	9,141	8,917	8,736	10,034	9,464
Average unit sales price
for used systems (EUR thousands)	1,162	763	854	1,816	2,162	2,018

Consolidated net sales from continuing operations consist of revenue from product sales (systems and options) and service sales. Consolidated net sales decreased from 2002 to 2003 by approximately 21 percent. Product sales declined by approximately 22 percent from 2002 to 2003, primarily due to a decreasing number of new systems recognized, partially offset by an increase in average unit sales price (ASP). The ASP for new systems increased by approximately 6% reflecting a shift in our product portfolio towards an increased share of our latest technology equipment (TWINSCAN systems), which accounted for 38 percent of total shipment volume of new systems in 2003 compared to approximately 33 percent in 2002. The number of new systems recognized decreased from 183 units in 2002 to 126 units in 2003 due to:

| | a further decline in equipment demand by the
semiconductor industry in 2003 after a modest recovery shown in the
first half of 2002 for delivery in the second half of 2002; and |
| --- | --- |
| | the effect of the accounting treatment of new technology systems
(see Critical Accounting Policies) resulting in additional
recognition of EUR 138 million of revenues of 13 systems in 2002
that were initially deferred in 2001. |

The number of used systems sold increased from 22 units in 2002 to 43 in 2003. This increase reflects the uncertain market conditions in which our customers seek opportunities to quickly expand production capacity in their existing production facilities without significant capital expenditures to secure long-term growth. These systems are used in less critical resolution capabilities. The ASP for used systems increased by approximately 136 percent reflecting a shift from our older PAS 2500 towards our newer PAS 5500 family, including scanner systems. We estimate that the number of used systems sold will increase in 2004, provided that the number of systems available on the market for repurchase is not limited.

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Service sales showed a 15 percent decrease from EUR 218 million in 2002 to EUR 186 million in 2003. This decrease is mainly due to:

| | the decline in exchange rate of the USD versus the euro during 2003 which
resulted in lower
revenues from USD denominated service contracts, which account for
approximately
50 percent of our service revenues; |
| --- | --- |
| | the decline in service sales on our former activities in the Track business
as a result of the
expiration of our warranty and service obligations. In December 2002, we
decided to
terminate our activities in the Track business; however, decided to
continue to service our
existing customers for whom we had warranty or other service obligations.
Consequently,
customer support related to the Track business is not included in
discontinued operations; and |
| | an increase in the number of customers that opted for in-house servicing
instead of external
servicing. |

| Currently, approximately 90 percent of the global top 10 IC manufacturers are
ASML customers.
In 2003, sales to one customer accounted for EUR 314 million, or 20 percent of
net sales.
In 2002, sales to one customer accounted for EUR 377 million, or 19 percent of
net sales. |
| --- |
| Gross profit as a percentage of net sales in 2003 was equal to 2002 (23.9
percent).
The gross profit on new systems decreased from 24.3 percent to 21.7 percent due
to the
negative influence of severe price competition (2.2 percent negative impact on
our gross
profit), relatively more sales of newer technology systems having lower gross
profit
(4.4 percent negative impact on our gross profit) and under-utilization of our
production
facilities due to less sales (2.5 percent negative impact on our gross profit).
This decrease in
gross profit was offset by lower repayments of Technical development credits as
this program
was fully repaid during 2003 (1.5 percent positive impact on our gross profit),
lower costs of
sales due to the replacement of independent sales agents with our own employees
for the
purpose of servicing our Asian customers (1.0 percent positive impact on our
gross profit) and
a decrease in charges to provisions for obsolete inventory (4.0 percent
positive impact on our
gross profit). |
| The gross profit on service sales increased to 21.7 percent in 2003 from 7.3
percent in 2002.
This increase was primarily due to additional provisions in 2002 for obsolete
service parts and
training system write-downs. |
| Lithography order backlog |
| We started 2003 with an order backlog of 110 systems (103 new and 7 used), and
received
orders for delivery of 239 systems during the year. In 2003, we recorded 169
system sales
and 56 order cancellations or push-outs beyond twelve months, this resulting in
an order
backlog of 124 systems (103 new and 21 used) as of December 31, 2003. The total
value of
the backlog as of December 31, 2003 amounts to EUR 993 million, compared with a
backlog
of approximately EUR 1,089 million as of December 31, 2002. |
| Research and development |
| Research and development costs decreased from EUR 324 million in 2002 to EUR
306 million
in 2003 as a result of more cost-efficient programs and workforce reductions.
The level of |

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| research and development expenditures reflects our continuing effort to
introduce several
leading edge lithography products for 193 nanometer applications and the newest
versions
of the TWINSCAN platform, combined with continued investments in in 248
nanometer high
numerical aperture (NA) program, immersion, next generation 157 nanometer
lithography
solutions and EUV. |
| --- |
| Our future operating results will depend significantly on our ability to
produce products and
provide services that have a competitive advantage in our industry. To do this,
we believe that
we must continue to make substantial investments in our research and
development efforts.
Our research and development activities are intended to enable our customers to
achieve a
higher return on their capital investments and higher productivity through
cost-effective,
leading edge technology solutions. |
| Research and development credits decreased from EUR 26 million in 2002 to EUR
19 million
in 2003 due to a decreased volume for research and development expenditures
that qualified
for credits. Included in 2002 credits is a postponed credit (EUR 3.5 million)
on 2001
expenditures that was subject to certain criteria that were only achieved in
2002. We expect
the level of credits in 2004 to be similar or slightly higher than in 2003,
although the precise
amount remains subject to further negotiation with the relevant granting
authorities. |
| Selling, general and administrative costs |
| Selling, general and administrative costs decreased by 19.0 percent from EUR
263 million in
2002 to EUR 213 million in 2003, mainly as a result of workforce reductions and
decreased
legal fees associated with patent infringement cases. Selling, general and
administrative costs
as a percentage of net sales increased from 13.4 percent in 2002 to 13.8
percent in 2003,
as a result of the decline in net sales. |
| Restructuring costs |
| On December 18, 2002, ASML announced workforce reductions of approximately 700
positions
worldwide. With respect to this plan, we recorded in 2003 restructuring charges
for a total
amount of EUR 7 million of which EUR 4 million in cost of sales and EUR 3
million in
restructuring costs. As of December 31, 2003, this plan has been fully
effectuated. |
| On July 16, 2003, ASML announced further workforce reductions of approximately
550 positions
worldwide of which the majority is planned in the Netherlands. During 2003,
ASML recorded
a provision of EUR 15 million as an ongoing benefit arrangement of which EUR 4
million is
included in cost of sales and EUR 11 million is included in restructuring
costs. The amount of
the provision was based upon the details of the exit plan agreed on with our
Works Council
in the Netherlands for the workforce reductions announced in December 2002.
Currently,
the Board of Management and the Dutch Works Council are nearing the completion
of a joint
study on implementing these workforce reductions in the Netherlands.
Consequently,
the Dutch workforce reduction has been delayed. |
| During 2003, we recorded restructuring costs of approximately EUR 7 million
relating to the
consolidation of our office and warehouse facilities at our headquarters in
Veldhoven as we
ceased using certain of our facilities. The facility exit charges included
estimated future
obligations for non-cancelable lease payments and the impairment of property
and equipment |

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| (primarily leasehold improvements) for which there are insufficient cash flows
to support the
carrying cost. |
| --- |
| Net interest expense |
| Net interest expense decreased from EUR 37 million in 2002 to EUR 29 million in
2003 due to
an increase in interest income, which is partially offset by an increase in
interest expense.
Our interest income relates primarily to interest earned on our cash and cash
equivalents.
Interest income increased compared with 2002, primarily due to higher cash and
cash equivalent
balances throughout the year as a result of our improved working capital and
issuance in May
2003 of EUR 380 million principal amount of our 5.50% Convertible Subordinated
Notes due
2010. This was partially offset by a decrease in market short-term interest
rates. Our interest
expense relates primarily to our convertible notes. Our interest expense
increased in 2003
compared with 2002, primarily due to the issuance of the above-mentioned
Convertible
Subordinated Notes, partially offset by the repurchases and redemption of our
520 million USD
4.25 percent Convertible Subordinated Notes during the second half of 2003. |
| Income taxes |
| Income taxes represented 32.7 and 32.4 percent of income before taxes in 2002
and 2003,
respectively. This decrease results from a change in distribution of pre-tax
losses between
geographical areas. See Note 16 to our consolidated financial statements. |
| Discontinued operations |
| Results from discontinued operations comprise the results of our Thermal
business,
which we substantially divested in October 2003, and our Track business which
we terminated
in December 2002. Our decision to discontinue these businesses was the result
of the
downturn in the semiconductor market, which has led to significant losses in
these
businesses. Substantial future investments in these businesses would have been
required
to achieve a positive contribution to our future financial results. |

Year ended December 31
Revenues
Track	7,236		2,514
Thermal	105,929		38,198
Total	113,165		40,712
Loss from discontinued operations, net of taxes
Track loss from operations	(27,991	)	(1,456	)
Track exit costs (net of taxes)	(30,626	)	(1,944	)
Thermal loss from operations	(61,161	)	(21,906	)
Thermal exit costs (net of taxes)	0		(10,404	)
Total	(119,778	)	(35,710	)

In December 2002 we reviewed our long-lived assets used in the Thermal business for potential impairment and recorded no impairment charges. During 2003, we again reviewed our long-lived assets for impairment as we entered into negotiations with several potential buyers and accordingly recorded impairment charges of EUR 16 million. In October 2003, we completed the sale of our Thermal business to a privately held company

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| formed by VantagePoint Venture Partners. At the time of the sale, no gain or
loss was realized
as the net assets were stated at the value equal to the proceeds of the sale.
The net loss of
our Thermal business amounted to EUR 32 million in 2003 compared to EUR 61
million in 2002.
The termination of the Track business resulted in an exit plan that included
workforce
reduction, fixed asset impairments and inventory write-offs due to discontinued
product lines.
The exit plan included the disposal of remaining assets related to the Track
business.
In 2002, ASML decided to continue to service existing customers of its Track
business
for whom ASML had warranty or other service obligations. Consequently, customer
support
related to the Track business was not included in discontinued operations for
2002. In June
2003, ASML sold certain of its fixed assets and inventories related to its
Track business to
Rite Track. No gain or loss was realized on the sale. The net loss of the Track
business
amounted to EUR 3 million in 2003 compared to EUR 59 million for 2002. The net
loss for
2002 included total pre-tax estimated exit costs of EUR 47 million. These exit
costs included
asset impairments, inventory write downs, purchase and other commitment
settlements and
employee termination costs. The net loss in 2003 relates mainly to impairment
charges
recorded on a building in the United States, previously used by our Track
business.
This impairment was determined on the difference between the buildings
estimated fair value,
as indicated by an independent real estate appraiser and its carrying value. |
| --- |
| Results of operations from continuing operations in 2002 compared with 2001 |
| The semiconductor industry downturn, that began in 2001, showed, in the first
half of 2002,
a modest recovery in equipment demand for order intake for delivery in 2002 and
2003.
The second half of 2002, however, showed a further deepening of the downturn.
Our techno-
logical leadership in 2002 resulted in market gains in 2002, despite the
overall decline. |
| Consolidated sales and gross profit |
| The following table shows a summary of sales (revenues and units), gross profit
on sales and
average sales price on an annual basis for the years ended December 31, 2002
and 2001: |

	2001 — First	Second	Full	First	Second	Full
Year ended December 31	half year	half year	year	half year	half year	year
Net sales (EUR million)	831	758		1,589	788	1,171	1,959
Net product sales (EUR million)	700	636		1,336	674	1,067	1,741
Net service sales (EUR million)	131	122		253	114	104	218
Total units recognized	120	77		197	78	127	205
Total new systems recognized	108	72		180	73	110	183
Total used systems recognized	12	5		17	5	17	22
Gross profit on sales (% of sales)	29.7	(28.4	)	2.0	29.6	20.0	23.9
Average unit sales price for new
systems (EUR thousands)	5,910	8,114		6,792	8,581	9,141	8,917
Average unit sales price for used
systems (EUR thousands)	1,061	1,330		1,140	1,162	763	854

Consolidated net sales increased by 23.3 percent. The increase in sales was caused by a small increase in the number of shipments, from 197 units in 2001 to 205 in 2002,

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| and a relatively strong increase in ASP for new systems. The increase in the
ASP reflected a
shift (e.g., from 200 millimeter to 300 millimeter and/or 248 nanometer to 193
nanometer) in
our product portfolio toward an increased share of the latest technology
equipment,
which accounted for 30 percent of total shipment volume in 2002, compared to 4
percent in
2001. This technology includes products such as the leading edge, high
numerical aperture
lens products for the 193 nanometer technology node, as well as those for 300
millimeter
TWINSCAN systems. |
| --- |
| In 2002, approximately 70 percent of the global top 20 IC manufacturers were
ASML customers.
In 2002, sales to one customer accounted for EUR 377 million, or 19 percent of
net sales.
In 2001, sales to one customer accounted for EUR 202 million, or 13 percent of
net sales. |
| Our sales in 2002 was influenced by the accounting treatment of machines
previously
designated as new technology systems (see Critical Accounting Policies).
With the
installed base of such systems at 70 units as of December 31, 2002, ASML had
established
a track record of successful installations and decreased time spans between
shipment
and full installation at customer sites, enabling these systems to be
designated as proven
technology. This changed the timing of revenue recognition from customer sign
off (full
acceptance) to system shipment. Accordingly, EUR 138 million of revenues of 13
systems
were recognized in 2002 that were deferred as of December 31, 2001. If the
current
accounting treatment on these systems had been applied in 2001, this would have
resulted
in EUR 138 million of additional sales in 2001 and EUR 138 million lower sales
in 2002. |
| Total net sales for 2001 and 2002 include EUR 19 million in both years relating
to the sale
of 17 and 22 used systems, respectively. These systems were reacquired from
existing
customers and then resold to other customers utilizing these systems in areas
requiring the
less critical resolution capabilities provided by these machines. The increase
in the number
of used systems sold was primarily due to our expanding market share in China. |
| Service sales decreased 14 percent from EUR 253 million in 2001 to EUR 218
million in 2002.
This decrease is mainly due to an increase in the number of customers that
opted for in-house
servicing instead of external servicing. The decrease in service sales was
partly offset by the
expiration of warranties relating to the high number of systems shipped in 2000
and 2001. |
| Gross profit as a percentage of net sales increased from 2.0 percent in 2001 to
23.9 percent
in 2002. This increase was primarily due to restructuring costs recorded in
2001 for an amount
of EUR 402.7 million, mainly relating to inventory write-offs, purchase
commitments and fixed
assets write-offs. This increase was partially offset by provisions for slow
moving inventory of
EUR 78.5 million in the second half of 2002 and by technical development
credits (see Notes 1
and 15 to our consolidated financial statements) that had to be repaid in 2003
to Netherlands
granting authorities (2.0 percent negative impact on our margin). Furthermore,
gross margin
was also negatively affected (5.0 percent) by lower profit margin generated by
new
technologies at the beginning of their product life cycle. We shipped
significantly more of
these systems in 2002 compared with 2001. ASML also suffered from price
pressure, mainly
on 200-millimeter systems, that negatively affected margin by 2.0 percent.
Finally, the margin
was affected positively by 3.0 percent by lower purchase prices for parts and
components, of
which 0.5 percent partly was attributable to currency effects relating to the
strengthening of
the euro versus the U.S. dollar. In comparison with 2001, utilization of our
production facilities |

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| increased, resulting in a one percent margin increase. Additionally, the gross profit on service sales decreased to 7.3 percent in
2002 from
17.4 percent in 2001. This decrease was due to additional provisions for
obsolete service
parts and training system write-downs of EUR 28 million, partially offset by a
increase in
the sales margin of spare parts due to lower labor costs. |
| --- |
| Lithography order backlog |
| We started 2002 with an order backlog of 118 systems (117 new systems and 1
used system),
and we received orders for delivery of 261 systems during 2002. Combined with
205 system
sales and 64 order cancellations or push-outs beyond twelve months, this
resulted in an order
backlog of 110 systems as of December 31, 2002. Systems sales in 2002 included
13 systems
delivered in 2001 for which revenue was recognized in 2002. The total value of
the backlog
as of December 31, 2002 amounted to EUR 1.09 billion, compared with a backlog
of
approximately EUR 1.16 billion as of December 31, 2001. |
| Research and development |
| Research and development costs decreased from EUR 347 million (21.9 percent of
total net
sales) in 2001 to EUR 324 million (16.6 percent of total net sales) in 2002 as
a result of more
cost-efficient programs, mainly resulting from the 2001 restructuring. The
level of research and
development expenditures reflected our continuing effort to introduce several
leading edge
lithography products for 193 nanometer applications and the newest versions of
the TWINSCAN
platform, combined with continued investments in next generation 157 nanometer
lithography
solutions and EUV and the /850, 248 nanometer high numerical aperture (NA)
program. |
| Research and development credits increased from EUR 16 million in 2001 to EUR
26 million in
2002 due to the increased amount of research and development expenditures that
qualified for
credits. Included in the 2002 credits is a postponed credit (EUR 3.5 million)
on 2001
expenditures that was subject to certain criteria that were only achieved in
2002. |
| Selling, general and administrative costs |
| Selling, general and administrative costs increased by 7.0 percent from EUR 246
million in
2001 to EUR 263 million in 2002, mainly as a result of increased legal fees
associated with
patent infringement cases. |
| Net interest expense |
| During 2002 net interest expense increased compared to 2001, due to interest
charges
resulting from the issuance of our 5.75 percent Convertible Subordinated Notes
in October
2001, by a lower balance of cash and cash equivalents and lower average
short-term interest
rates. |
| Income taxes |
| Income taxes represented 30.1 and 32.7 percent of income before taxes in 2001
and 2002,
respectively. This increase results from a change in distribution of pre-tax
loss between
geographical areas. See Note 16 to our consolidated financial statements. |
| Discontinued operations |
| Our Thermal business incurred a net loss of EUR 61 million in 2002 compared to
a net loss of
EUR 43 million in 2001, mainly due to the industrys severe downturn. Our Track
business |

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| incurred a net loss of EUR 59 million in 2002 compared to a net loss of EUR 21
million in
2001, including total estimated exit costs of EUR 47 million. These exit costs
included asset
impairments, inventory write-downs, purchase and other commitment settlements
and
employee termination costs. The number of employees laid off under the plan to
discontinue
our Track business was 213. |
| --- |
| Foreign Exchange Management |
| We use the euro as our reporting currency in our consolidated financial
statements. We are
involved in transactions in currencies that differ from our reporting currency.
We have invested
in foreign entities, and as such have translation exposure on the valuation of
our foreign
currency denominated investments. We actively manage our exposure to foreign
exchange
risks. Further details on our foreign exchange management are disclosed in Note
4 to our
consolidated financial statements. See also Item 3.D. Risk Factors and Item
11
Quantitative and Qualitative Disclosures about Market Risk. |
| Principal Differences between IFRS and U.S. GAAP |
| Beginning in 2005, the European Commission will require companies that are
quoted on a
European stock market to publish their financial statements in accordance with
International
Financial Reporting Standards (IFRS). While we intend to continue publishing
U.S. GAAP
financial statements, we also will publish our consolidated financial
statements in accordance
with IFRS from January 1, 2005 onwards. |
| We are currently investigating the possible impact of differences identified
between IFRS
and U.S. GAAP. The principal differences currently identified that might affect
our
net profit or loss, as well as our shareholders equity, relate to the
treatment of development
costs, stock option plans, financial instruments, the option feature in our
convertible notes
and identifiable intangible assets acquired in our 2001 merger with SVG. |
| New U.S. GAAP Accounting Pronouncements |
| In December 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure.
SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation,
to provide alternative methods of transition to the SFAS No. 123 fair value
method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
requires
disclosure of the effects of an entitys accounting policy with respect to
stock-based
compensation on reported net income (loss) and earnings per share in annual and
interim
financial statements in the summary of significant accounting policies. As
permitted under
SFAS No. 148, we adopted only the disclosure provisions of that accounting
standard.
See Note 1 to our consolidated financial statements. |
| In April 2003, the FASB issued SFAS No. 149, Amendment of SFAS No. 133 on
Derivative
Instruments and Hedging Activities. The Statement amends and clarifies
financial accounting
and reporting for derivative instruments by requiring that contracts with
comparable
characteristics be accounted for similarly. In particular, this statement
clarifies the
circumstances under which a contract with an initial net investment meets the
characteristics
of a derivative, clarifies when a derivative contains a financing component,
amends the
definition of an underlying to conform it to the language used in FIN 45,
Guarantor
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees |

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| of Indebtedness of Others and amends certain other existing
pronouncements. SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003, except as stated below and for hedging relationships designated after June 30, 2003.
The adoption of SFAS No. 149 did not have a material impact on our consolidated results of
operations, financial condition or liquidity. |
| --- |
| In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 modifies the
accounting for certain financial instruments that, under previous guidance, issuers could
account for as equity. SFAS No. 150 requires that those instruments be classified as
liabilities on the balance sheet. The adoption of SFAS No. 150 did not have a material impact on our
consolidated results of operations, financial condition or liquidity. |
| In November 2002, the FASB published FIN 45, Guarantors Accounting and
Disclosure requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. FIN 45 also clarifies that at the
time a company issues a guarantee, the company must recognize an initial liability for the
fair value, or market value, of the obligations it assumes under that guarantee and must disclose
that information in its interim and annual financial statements. The provisions of FIN 45 are
required to be applied on a prospective basis to guarantees issued or modified on January 1, 2003 or
after. The expanded disclosure requirements of FIN 45 are effective for the year ended
December 31, 2002 (see Item 5.E. Off-Balance Sheet Arrangements and Note 12 to our
consolidated financial statements). Except for the disclosure requirements, adoption of FIN
45 did not have a material impact on our consolidated results of operations, financial
condition or liquidity. |
| In November 2002, the EITF 00-21 Revenue Arrangements with Multiple
Deliverables was released. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. Adoption of EITF Issue
No. 00-21 did not have any material impact on our financial statements. |
| In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46), an interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, which requires the consolidation by a business
enterprise of variable interest entities if the business enterprise is the primary beneficiary. The
FASB has amended FIN 46, now known as FIN 46 Revised December 2003 (FIN 46R). The requirements
of FIN 46 or FIN 46R are effective to those entities that are considered to be
special-purpose entities no later than as of the end of the first reporting period that ends
after December 15, 2003. We adopted FIN 46R as we are party to a transaction involving a variable
interest entity, that is a special-purpose entity, relating to the lessor of the Veldhoven
headquarters building that has been completed in 2003. See also Item 5.E. Off Balance Sheet
Arrangements. |

link3 "B. Liquidity and Capital Resources"

B. Liquidity and Capital Resources
Financial Condition, Liquidity and Capital Resources
The following discussion and analysis of financial condition should also be
viewed in the

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| context of the risks affecting our business strategy, described in Item 3.D.
Risk Factors.
ASMLs balance of cash and cash equivalents amounted to EUR 669 million and
EUR 1,028 million as of December 31, 2002 and 2003, respectively. |
| --- |
| Net cash flows provided by operating activities were EUR 509 million in 2003
compared
to EUR 54 million cash used in operating activities in 2002. The primary reason
of the cash
provided by operating activities in 2003 has been changes in working capital,
including
accounts receivable, inventories and current assets. Net accounts receivable
decreased from
EUR 557 million to EUR 314 million. ASMLs ratio of accounts receivable to
total net sales was
28.4 percent and 20.4 percent in 2002 and 2003, respectively. Gross inventories
decreased by
20.4% from December 31, 2002 to December 31, 2003. The decrease reflects our
continuing
efforts to reduce our inventory level by means of cycle time reduction and cost
of goods
reduction programs. |
| The provision for obsolescence decreased by 25% from December 31, 2003 to
December 31,
2002, principally reflecting scrapping of inventories. In 2002 and 2003, ASML
paid
EUR 4 million and EUR 12 million in taxes, respectively. In 2003, ASML received
EUR 176
million tax refund from the Dutch tax authorities, which is allowed under Dutch
tax law.
See Note 16 to our consolidated financial statements. |
| Net cash used in investing activities was EUR 80 million in 2002 and EUR 26
million in 2003.
The 2002 figure reflected the further expansion of production facilities during
that year as well
as expenditure in own use equipment (e.g., prototypes, training systems, and
demonstration
systems), to support sales, manufacturing and demonstration capabilities
relating to new
300 millimeter product lines. The 2003 figures mainly relate to expenditures in
own use
equipment. |
| Net cash used in financing activities in 2003 amounted to EUR 68 million. The
2003 amount
primarily reflects the complete redemption and repurchase of USD 520 million of
4.25 percent
Convertible Subordinated Notes due 2004, partially offset by the issuance of
EUR 380 million
of 5.5 percent Convertible Subordinated Notes due 2010. In 2002, proceeds from
financing
activities amounted to EUR 21 million mainly reflecting EUR 27 million in
proceeds from the
exercise of stock options and EUR 5 million repayment of long term debts. |
| On December 31, 2003, our principal sources of liquidity consisted of EUR 1,028
million of
cash and cash equivalents, and EUR 288 million of available credit facilities.
For further details
regarding our credit facilities, see Note 11 to our consolidated financial
statements. In addition
to cash and available credit facilities, we may from time to time raise
additional capital in debt
and equity markets. Our liquidity is affected by many factors, some of which
are based on the
normal ongoing operations of the business, and other of which relate to the
uncertainties of
global economies and the semiconductor and the semiconductor equipment
industries.
Although our cash requirements will fluctuate based on the timing and extent of
these factors,
we believe that cash generated from operations, together with the liquidity
provided by
existing cash balances, will be sufficient to satisfy our liquidity
requirements for the next
twelve months. In 2004, we have no repayment obligations on our outstanding
convertible
notes. We expect capital expenditures in 2004 to range between EUR 75 million
and
EUR 85 million. In addition, we maintain for the next twelve months operating
lease |

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| commitments for an amount of approximately EUR 47 million and certain open
inventory purchase commitments for an amount of approximately EUR 300 million with our
suppliers to ensure a smooth and continuous supply chain for key components. |
| --- |
| With respect to the announcement in July 2003 of a workforce reduction by
approximately 550 positions worldwide, of which the majority is planned in the Netherlands,
the Board of Management and the Dutch Works Council are nearing the completion of a joint
study on implementing these workforce reductions in the Netherlands. Consequently, the
Dutch workforce reduction has been delayed, and accordingly, the results of cost reductions
have been delayed. A restructuring provision of approximately EUR 15 million relating to
this workforce reduction is recorded in our statement of operations for the year ended
December 31, 2003. |
| In 2006, we have repayment obligations, amounting to USD 575 million, on our
5.75 percent Convertible Subordinated Notes due 2006 issued in October 2001, assuming no
conversions occur. These notes are convertible into 30,814,576 ordinary shares at USD 18.66
(EUR 14.77) per share at any time prior to maturity. At any time on or after October 22,
2004, the notes are redeemable at the option of ASML, in whole or in part, at 100 percent of its
principal amount, together with accrued interest, provided that our shares close above 130
percent of the conversion price for twenty trading days out of a thirty-day period. During
2003 none of the notes were converted into ordinary shares. We have additional repayment
obligations in 2010, amounting to EUR 380 million, on our 5.50 percent Convertible Subordinated
Notes due 2010 issued in May 2003, assuming no conversions occur. These notes are convertible
into an aggregate of 26,573,426 ordinary shares at a conversion price of EUR 14.30 per
share, subject to adjustment, at any time prior to maturity. Unless previously
converted, the notes mature on May 15, 2010. We currently intend to fund our future repayment
obligations with primarily cash on hand and cash generated through operations. In this respect,
we launched a working capital improvement program in 2002 which is continued in 2003 and
will continue in 2004, focusing on inventory control, early collection of receivables and
effective management of payments, in order to further strengthen our cash position. The
description of our long-term debt, lines of credit and borrowing arrangements is provided in
Note 11 to our consolidated financial statements. See also Item 3.D. Risk Factors. |
| Our contractual obligations and commercial commitments are disclosed in further
detail in Item 5.F. Tabular Disclosure of Contractual Obligations and Note 12 to our
consolidated financial statements. |
| A discussion of our funding, treasury policies and currencies in which cash and
cash equivalents are held and long-term debt and borrowing arrangements are included
by reference to Notes 4 and 11 to our consolidated financial statements. |

link3 "C. Research and Development, Patents and Licenses"

| C. Research and Development, Patents and Licenses |
| --- |
| Research and Development See Item 4.B. Business Overview, Research and Development and Item 5.A.
Operating
Results. |

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| Intellectual Property Matters |
| --- |
| See Item 3.D. Risk Factors, Defending Against Intellectual Property Claims by Others Could
Harm Our Business and Item 4.B. Business Overview,
Intellectual Property. |

link3 "D. Trend Information"

| D. Trend Information |
| --- |
| The year 2003 was an unprecedented third consecutive year in the worst period of contraction
in the history of the global semiconductor industry. |
| Over the last three months of 2003, the order intake has shown considerable strength for
systems to be shipped in the first half of 2004. Approximately 80 percent, or 100 systems,
of our backlog as of December 31, 2003 is expected to be shipped in the first half of 2004.
However, the visibility of our sales level for the second half of 2004 is still unclear.
Therefore, we cannot give a forecast of our expected level of sales for the full year 2004.
Our customers are currently still cautious on long-term orders. |
| The following table sets forth our backlog of systems as of December 31, 2002 and 2003. |

As of December 31 — Backlog sales of new systems (units)	103	103
Backlog sales of used systems (units)	7	21
Backlog sales of total systems (units)	110	124
Value of backlog new systems (Eur million)	1,077	946
Value of backlog used systems (Eur million)	12	47
Value of backlog of total systems (Eur million)	1,089	993

| Historically, orders have been subject to cancellation or delay by the customer. Due to
possible customer changes in delivery schedules and to cancellation of orders, our backlog
at any particular date is not necessarily indicative of actual sales
for any succeeding period. |
| --- |
| Based upon our backlog as of December 31, 2003, we expect continued growth in gross
margin in the first half of 2004. We believe that a further increase in gross margin can be
achieved by further working on increasing the value of ownership of our systems and on
programs focusing on the reduction of our costs of goods sold and by an increase in number
of systems sold. |
| For 2004, we expect selling, general and administrative expenses, ranging between EUR 50-55
million per quarter, dependent on the level of legal fees associated
with patent infringement cases. |
| For 2004, we expect a further decrease in research and development expenditures and
anticipate research and development costs to range between EUR
65-70 million per quarter. |
| In July 2003, we announced further restructuring measures to reduce costs company-wide
while lowering the break-even point and increasing flexibility. We plan to reduce our workforce
by approximately 550 positions worldwide of which the majority planned in the Netherlands.
The Board of Management and the Dutch Works Council are nearing the completion of a joint
study on implementing these workforce reductions in the Netherlands. |

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link3 "E. Off- Balance Sheet Arrangements"

| Consequently, the Dutch workforce reduction has been delayed, and accordingly,
the results
of cost reductions have been delayed. See Item 6.D.
Employees. |
| --- |
| E. Off- Balance Sheet Arrangements |
| We have various contractual obligations, some of which are required to be
recorded as
liabilities in our consolidated financial statements, including long- and
short-term debt. Others,
namely operating lease commitments and purchase obligations, are not generally
required to
be recognized as liabilities on our balance sheet but are required to be
disclosed. |
| Variable Interest Entities |
| Several operating leases for our buildings contain a purchase option. In
December 2003,
the FASB issued FIN 46R, Consolidation of Variable Interest Entities. Under
FIN 46R an
enterprise must consolidate a variable interest entity if that enterprise has a
variable interest
(or combination of variable interests) that will absorb a majority of the
entitys expected losses
if they occur, receive a majority of the entitys expected residual returns if
they occur, or both.
For each of the leases for our buildings, we have concluded that we are not the
primary
beneficiaries to the expected losses or to the expected residual returns or to
both. |
| We are party to a transaction involving a variable interest entity relating to
the lessor of the
Veldhoven headquarters building that has been completed in 2003. Total assets
of the variable
interest entity amount to approximately EUR 54 million and are funded through: |

	variable interest entitys equity of EUR 1.9 million;
	straight loans granted by the shareholders of the variable interest entity of
EUR 12.3 million,
partly redeemable over 15 years and quarterly interest-bearing;
	a third party loan of EUR 34.9 million, partly redeemable over 15 years and
quarterly
interest-bearing; and
	a subordinated loan provided by
ASML of EUR 5.4 million.

| The lease will expire in 2018. We have an option to purchase the property, at a
predetermined
price scheme, throughout the term of the lease. The purchase option at the end
of the lease
term amounts to EUR 24.5 million. In accordance with FIN 46R we have concluded
that we are
not the primary beneficiary in the lessor entity to the expected losses nor to
the expected
residual returns nor to both. As a result we did not consolidate the specific
assets and
liabilities of this variable interest entity in our financial
statements. |
| --- |
| Purchase Obligations |
| We enter into purchase commitments with vendors in the ordinary course of
business to ensure
a smooth and continuous supply chain for key components. Purchase obligations
include medium
to long-term purchase agreements. These contracts differ and may include
certain restrictive
clauses. Any identified losses that would result from purchase commitments that
are expected
to be forfeited are provided for in our financial statements. As of December
31, 2003, we had
purchase commitments for a total amount of approximately EUR 335 million, which
are not
recorded on our balance sheet. In our negotiations with suppliers we
continuously seek to align
our purchase commitments with our business objectives. See also Item 5.F.
Tabular Disclosure
of Contractual Obligations. |

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| Other Off-Balance Sheet Arrangements |
| --- |
| We have certain additional commitments and contingencies that are not recorded
on our balance
sheet but may result in future cash requirements. In addition to the operating
lease commitments
and the purchase obligations, these off-balance sheet arrangements consist of
product warranties,
a call option granted to a third party to acquire our optics business at fair
value and guarantees
of subsidiarys debt to a third party. |
| We provide guarantees to third parties in connection with transactions entered
into by our
subsidiaries in the ordinary course of business: These include bank loans
reflected in Note 11
of our consolidated financial statements. |

link3 "F. Tabular Disclosure of Contractual Obligations"

F. Tabular Disclosure of Contractual Obligations
Our contractual obligations as of December 31, 2003 can be summarized as
follows:

1 year	1 year	years	years	After 5
Long Term Debt	852,807	0	468,839	2,658	381,310
Operating Lease Obligations	386,112	47,005	72,448	67,699	198,960
Purchase Obligations	335,115	300,170	34,945	0	0
Total Contractual obligations	1,574,034	347,175	576,232	70,357	580,270

link3 "G. Safe Harbor"

G. Safe Harbor
See Special Note regarding
Forward-Looking Statements.

link2 "Item 6 Directors, Senior Management and Employees"

link3 "A. Directors and Senior Management"

| Item 6
Directors, Senior
Management and
Employees |
| --- |
| The members of our Supervisory Board and our Board of Management are as follows: |

Name	Title	Date of Birth	Member Since
Henk Bodt	Chairman of the	April 30, 1938	January 1995	2004
	Supervisory Board
	and Member of the
	Audit and Remuneration
	Committees
Jan A. Dekker	Member of the	May 10, 1939	April 1997	2006
	Supervisory Board
	and Member of the
	Audit Committee
Peter H. Grassmann	Member of the	November 21, 1939	April 1996	2006
	Supervisory Board

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Name	Title	Date of Birth	Member Since
Syb Bergsma	Member of the	October 6, 1936	April 1998	2004
	Supervisory Board
	and Chairman of the
	Audit Committee and
	Member of the
	Remuneration Committee
Jos W.B. Westerburgen	Member of the	June 24, 1942	March 2002	2005
	Supervisory Board
	and Chairman of the
	Remuneration Committee
Michael J. Attardo	Member of the	April 12, 1941	May 2001	2005
	Supervisory Board
	and Member of the
	Remuneration Committee
Doug J. Dunn	President and Chief	May 5, 1944	April 1999	N/A 1,2
	Executive Officer and
	Chairman of the Board
	of Management
Stuart K. McIntosh	Executive Vice	August 31, 1944	April 2001	N/A 2
	President Operations,
	President of Lithography
	and Member of the
	Board of Management
Peter T.F.M. Wennink	Executive Vice	May 30, 1957	July 1999	N/A 2
	President, Chief
	Financial Officer and
	Member of the Board
	of Management
Martin A. van den Brink	Executive Vice	May 21, 1957	July 1999	N/A 2
	President Marketing
	& Technology and
	Member of the Board
	of Management
David P. Chavoustie	Executive Vice	May 17, 1943	April 2000	N/A 2
	President Sales and
	Member of the Board
	of Management

| 1 | On January 15, 2004, we announced that Mr. Dunn has advised the Supervisory Board and Board of
Management that he plans to retire before the end of 2004. |
| --- | --- |
| 2 | There are no specified terms for members of the Board of Management. |

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	Director and Officer Biographies
Henk Bodt	Mr. Bodt was appointed as Chairman of our Supervisory Board in 1995. Mr. Bodt is a former
Executive Vice President of Philips. In addition to other positions, including Chairman and
Chief Executive Officer of the Consumer Electronics Division, he also served on the Board
of Management of Philips and on the Group Management Committee of Philips. He currently
serves on the Supervisory Boards of DSM N.V., Delft Instruments N.V. and Neo-Post SA.
Jan A. Dekker	Mr. Dekker has served on our Supervisory Board since 1997. Mr. Dekker is a former Chief
Executive Officer of TNO. He currently serves on the Supervisory Boards of Gamma Holding
N.V. and Koninklijke BAM-NBM N.V.
Peter
H. Grassmann	Mr. Grassmann has served on our Supervisory Board since 1996. Mr. Grassmann is a former
President and Chief Executive Officer of Zeiss. He currently serves on the Supervisory Boards
of Gambro B.V., Aradex AG, Febit AG, IONITY AG, and of the Senate of the Max-Planck-
Society. He is a member of the Advisory Board of EQT private equity funds Gmbh.
Syb Bergsma	Mr. Bergsma has served as a member of our Supervisory Board since 1998. Mr. Bergsma
is a former Executive Vice President Financial Affairs of Akzo Nobel N.V. Mr. Bergsma serves
currently as the Chairman of the Supervisory Boards of UPM Holding B.V., Generali
Verzekeringsgroep N.V., and Van der Moolen Holding N.V. Mr. Bergsma also serves as Vice
Chairman on the Supervisory Boards of European Assets Trust N.V. In addition, Mr. Bergsma
is the Chairman of the Boards of Stichting Continuïteit Numico and Stichting
Administratiekantoor Preferente Financieringsaandelen Ahold. He also serves on the Boards of
Stichting Preferente Aandelen Wolters Kluwer and Stichting
Administratiekantoor Océ.
Jos W.B.
Westerburgen	Mr. Westerburgen was appointed to our Supervisory Board in March 2002. Mr. Westerburgen
has extensive experience in the field of corporate law and tax. Mr. Westerburgen is former
Company Secretary and Head of Tax of Unilever, and a former member of the Peters
Committee on Corporate Governance in the Netherlands. Mr. Westerburgen currently serves
as a member of the Supervisory Board of Unilever Nederland B.V., and is also a member of
the Board of the Association Aegon.
Michael J. Attardo	Mr. Attardo was appointed to our Supervisory Board during 2001. He is the former President and
CEO of IBM Microelectronics and a former non-executive director of Silicon Valley Group, Inc.
Doug J. Dunn	Mr. Dunn was appointed to our Board of Management in 1999 and has served as our
President, Chief Executive Officer and Chairman of the Board of Management since January
2000. Prior to joining the Board of Management, Mr. Dunn served as Vice-Chairman of our
Supervisory Board from 1995 until 1997. Previously, Mr. Dunn also served on the Board of
Management of Philips as CEO of the Consumer Electronics Division, as a member of the
Group Management Committee of Philips and as a Chairman and CEO of the Management
Committee of the Philips Semiconductors Division and, from 1969 to 1980, held numerous
positions at Motorola and the General Electric Company. Mr. Dunn is currently a non-executive
member of the board of ARM Holdings PLC and Sendo Holdings PLC. He is also on the
Supervisory Board of STMicroelectronics N.V. In addition, Mr. Dunn is on the Board of MEDEA+

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| Stuart K. McIntosh | Mr. McIntosh was appointed as Executive Vice President Operations and President
Lithography Division during 2000 and was appointed as a member of our Board of
Management effective April 1, 2001. Prior to that he served as the Executive Vice President
and Chief Operating Officer of Philips Semiconductors. He also serves on the Advisory Board
of SEMI North America. |
| --- | --- |
| Peter T.F.M. Wennink | Mr. Wennink was appointed as Executive Vice President and Chief Financial Officer of ASML
in 1999. Mr. Wennink has an extensive background in finance and accounting. Prior to his
employment with ASML, Mr. Wennink worked as a partner at Deloitte & Touche, specializing
in the high technology industry with an emphasis on the semiconductor equipment industry.
Mr. Wennink is a member of the Netherlands Institute of Registered Accountants.
Mr. Wennink is currently on the Supervisory Board of Bank Insinger de Beaufort N.V. |
| Martin A. van den
Brink | Mr. van den Brink was appointed as Executive Vice President Marketing & Technology during
1999. Before then, he served as Vice President Technology since 1995. Mr. van den Brink
was appointed as a member of our Board of Management in July 1999. |
| David P. Chavoustie | Mr. Chavoustie has served as Executive Vice President Sales since 1998. He was appointed
as a member of our Board of Management in April 2000. Before then, he served as
Vice President Worldwide Sales of Vantis Corporation and as Vice President/General Manager
of the Embedded Processes Division of Advanced Micro Devices. Mr. Chavoustie currently
also serves on the Board of Directors of Three-Five Systems, Inc. and Brillian Corporation. |

link3 "B. Compensation"

B. Compensation
For details on compensation paid to or accrued for our members of the Board of Management
and our members of the Supervisory Board, see Note 18 to our consolidated financial statements.
For details on options granted to, and pension benefits of, the members of the Board of
Management, see Note 18 to our consolidated financial statements.
Bonus and Profit-sharing plans
For details on our bonus and profit sharing plans for our employees, see Note 13 to our
consolidated financial statements.
Pension plans
For details on our pension plans for our employees, see Note 13 to our consolidated financial
statements.

link3 "C. Board Practices"

| C. Board Practices |
| --- |
| Board Practices |
| We endorse the importance of good corporate governance, in which independence,
accountability and transparency are the most significant elements. Within the framework of
corporate governance, it is important that a relationship of trust exists between the Board of
Management and the Supervisory Board on the one hand and shareholders on the other. |

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| In addition to the exchange of ideas at the General Meeting of Shareholders, other important
forms of communication include the publication of our annual and quarterly financial results.
In addition, we pursue a policy of active communication with our shareholders. Our corporate
governance structure is intended to: | |
| --- | --- |
| | provide shareholders with regular, reliable and relevant transparent information regarding
our activities, structure, financial condition, performance and other information,
including information on our social, ethical and environmental records and policies; |
| | apply high quality standards for disclosure, accounting and auditing; and |
| | apply stringent rules with regard to insider securities trading. |
| ASML is incorporated under Netherlands law and has a two-tier board structure where
independent, non-executive members serve on the Supervisory Board, which in turn
supervises and advises the members of the Board of Management in performing their
management tasks. Supervisory Board members are prohibited from serving as officers
or employees of ASML, and members of the Board of Management cannot serve on the
Supervisory Board. | |
| Responsibility for the management of ASML lies with the Board of Management.
The Supervisory Board monitors the Board of Management and the general course of
corporate affairs. The Board of Management has a duty to keep the Supervisory Board
informed, consult with the Supervisory Board on important matters and submit certain
important decisions to the Supervisory Board for its prior approval. The supervision of the
Board of Management by the Supervisory Board includes (I) achievement of the Companys
objectives, (II) corporate strategy and risk inherent to the business activities, (III) the structure
and operation of the internal risk management and control systems, (IV) the financial reporting
process and (V) compliance with the legislation and regulations. | |
| Members of the Board of Management are appointed by the Supervisory Board and serve
until voluntary retirement, or suspension or dismissal by the Supervisory Board, in the case
of dismissal, after consultation with the General Meeting of Shareholders. Appointments to
the Supervisory Board are made by the Supervisory Board itself, subject to certain rights of
objection retained by the General Meeting of Shareholders and the Works Council. Members of
the Supervisory Board generally serve for a term of four years from the date of their appointment,
or a shorter period as set forth in the rotation schedule as adopted by the Supervisory Board,
and may be re-appointed by, and serve at the discretion of, the Supervisory Board.
The Supervisory Board has an Audit Committee and a Remuneration Committee. Members of
these committees are appointed from and among the Supervisory Board members. | |
| Members of the Board of Management and Supervisory Board, as well certain senior
management members, are insured under the ASMLs Directors and Officers Insurance Policy.
Although the insurance policy provides for a wide coverage, our directors and officers may
occur additional uninsured liabilities. ASML has indemnified its Board of Management and
Supervisory Board against any claims arising in connection with their position as director and
officer of the Company, provided that such claim is not attributable to willful misconduct, or
intentional recklessness. | |

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Corporate Governance Developments
ASML continuously monitors and assesses applicable corporate governance rules, including,
recommendations, and initiatives regarding principles of corporate governance. These include
those that have been developed in the United States both by NASDAQ National Market
(Nasdaq) and by the SEC pursuant to the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act)
some of which already are applicable and some of which will have to be implemented by
ASML as a foreign issuer over the next two years.
On March 10, 2003, the Dutch government commissioned a committee known as the
Tabaksblat Committee to conduct a review of corporate governance in the Netherlands.
The Tabaksblat Committee issued its definitive report The Dutch Corporate Governance
Code (the Code) on December 9, 2003, which will come into force with effect from January
1, 2004. Dutch listed companies are required to apply the Code, unless circumstances justify
a deviation therefrom. Although a full report on compliance with the Code is required in 2005,
the Tabaksblat Committee recommends that companies highlight in their statutory annual
report 2003, how the company is going to implement the Code and which difficulties it might
encounter while doing so, and discuss this in their 2004 annual meeting of shareholders.
Pursuant to the Codes recommendations, ASML provides a separate chapter on corporate
governance, which is included in ASMLs annual report over the financial year 2003. The Code
contains recommendations with regard to corporate governance, including the following topics:
	to strengthen the
role of the Supervisory Board and its committees and to increase
independence, quality and expertise;
	to strengthen the role of the shareholders with respect to control on the functioning of the
Board of Management and the Supervisory Board, as well as with respect to nomination
and remuneration of members of the Board of Management and the Supervisory Board;
	to facilitate and stimulate shareholders to use their voting power and to actively participate
in the general shareholders meeting; and
	to define the role of the external auditor vis-à-vis the Supervisory Board as its principal contact.
The Company is familiarizing itself with, and when required implements, the Dutch Corporate
Governance Code and the changes to the U.S. corporate governance rules based on the
Sarbanes-Oxley Act, and subsequent SEC and Nasdaq rules that have been issued pursuant
thereto.
Audit Committee
The Audit Committee is composed of three members of the Supervisory Board. Our external
auditor, our Chief Executive Officer, our Chief Financial Officer and our Corporate Controller
may also attend the meetings of the Audit Committee. The Audit Committee assists the Supervisory Board in:
	overseeing the integrity of our financial statements and related non-financial disclosure;
	verifying the qualifications, independence and performance of the external auditor of our
financial statements; and
	overseeing the integrity of our systems of disclosure controls and procedures and the
system of internal controls over financial reporting.

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| During the year 2003, the Audit Committee has met to review our quarterly earnings
announcements and our audited annual consolidated financial statements, to discuss the
system of internal controls over financial reporting and related audit findings, to approve
the external audit plan and related audit fees and to pre-approve any non-audit services
to be rendered by our external auditor. The current members of our Audit Committee are
Syb Bergsma (chairman), Henk Bodt and Jan Dekker. The members of the Audit Committee
are all independent, non-executive members of the Supervisory Board. The Supervisory Board
has determined that Syb Bergsma qualifies as the Audit Committee financial expert pursuant
to Section 407 of the Sarbanes-Oxley Act and the rules promulgated thereunder. |
| --- |
| Remuneration Committee |
| The Remuneration Committee has prepared a remuneration policy for the Board of Management,
which will be submitted to the 2004 General Shareholders Meeting for discussion and adoption. |
| The Remuneration Committee recommends, reviews and authorizes specific compensation
and benefits levels for Board of Management members. Furthermore, the Remuneration
Committee reviews and authorizes the general compensation and benefits programs for
the Board of Management. The current members of our Remuneration Committee are
Jos Westerburgen (chairman), Henk Bodt, Syb Bergsma and Michael Attardo. |
| The Remuneration Committee prepares and the Supervisory Board establishes ASMLs
general compensation philosophy for members of the Board of Management, and oversees
the development and implementation of compensation programs for members of the Board of
Management. The Remuneration Committee reviews and proposes to the Supervisory Board
corporate goals and objectives relevant to the compensation of members of the Board of
Management, including the Chief Executive Officer. The Committee further evaluates the
performance of members of the Board of Management in view of those goals and objectives,
and makes recommendations to the Supervisory Board on the compensation levels of the
members of the Board of Management based on this evaluation. |
| In proposing to the Supervisory Board the actual remuneration elements and levels applicable
to the members of the Board of Management, the Remuneration Committee considers,
among other factors, the remuneration policy, the desired levels of and emphasis on particular
aspects of the ASMLs short and long-term performance and its current compensation and
benefits structures and levels benchmarked against the relevant markets. External
compensation survey data and, where necessary, external consultants are used to benchmark
ASMLs remuneration levels and structures. |
| Disclosure Committee |
| ASML has a Disclosure Committee to ensure compliance with applicable disclosure
requirements arising under United States and Dutch law. The Disclosure Committee reports
to and assists our Chief Executive Officer and Chief Financial Officer in the maintenance and
evaluation of disclosure controls and procedures. The Audit Committee is kept informed about
the outcome of the Disclosure Committee meetings. The Disclosure Committee gathers all
relevant financial and non-financial information and assesses materiality, timeliness and
necessity for disclosure of such information. The Disclosure Committee comprises various |

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| members of senior management. Furthermore, members of the Disclosure Committee are in
close contact with our external legal counsel and our external auditor. | |
| --- | --- |
| During the year 2003, the Disclosure Committee met to review our quarterly earnings announcements,
our audited annual consolidated financial statements and other public announcements containing
financial information we made. In addition, specific meetings were held to assess disclosure controls
and procedures and internal controls over financial reporting. In order to prepare this assessment,
an Internal Control Committee was formed, comprising three members of the Disclosure Committee. | |
| Exemptions from Certain Nasdaq Corporate Governance Rules | |
| Nasdaq rules provide that Nasdaq may provide exemptions from the Nasdaq corporate governance
standards to a foreign issuer when those standards are contrary to a law, rule or regulation of any
public authority exercising jurisdiction over such issuer or contrary to generally accepted business
practices in the issuers country of domicile. ASML has received from Nasdaq exemptions from certain
Nasdaq corporate governance standards that are contrary to the laws, rules, regulations or generally
accepted business practices of The Netherlands. These exemptions and the practices followed by ASML
are described below: | |
| | ASML is exempt from Nasdaqs quorum requirements applicable to meetings of ordinary shareholders.
In keeping with Netherlands law and Netherlands generally accepted business practice, ASMLs Articles
of Association provide that there are no quorum requirements generally applicable to General Meetings
of Shareholders. |
| | ASML is exempt from Nasdaqs requirements regarding the solicitation of proxies and provision of
proxy statements for meetings of shareholders. ASML does not solicit proxies or prepare proxy
statements for General Meetings of Shareholders. Netherlands law does not have a regulatory regime
for the solicitation of proxies and the solicitation of proxies is not a generally accepted business
practice in The Netherlands. |
| | ASML is exempt from Nasdaqs requirements that the establishment of, or material amendments to,
stock option or purchase plans and other equity compensation arrangements pursuant to which options
or stock may be acquired by directors, officers or employees be approved by shareholders. ASMLs
Articles of Association provide that the Companys Board of Management may issue shares, including
share options, only if it has been granted the general authority to do so by the General Meeting of
the Shareholders.
Once this grant of authority has been obtained, each issuance of shares must then be
approved by ASMLs Supervisory Board and by the Meeting of the Priority Shareholders. |

link3 "D. Employees"

| D. Employees |
| --- |
| As of December 31, 2003, we had 5,059 employees in our continuing operations, including temporary
contract employees, employed primarily in product development activities at our headquarters in
Veldhoven. As of December 31, 2001, and December 31, 2002, the total number of employees in continued
operations was 6,039 and 5,971, respectively. For a more detailed description of employee
information, see Notes 13 and 19 to to our consolidated financial statements, which are incorporated
herein by reference. We rely on our ability to vary the number of temporary employees to respond to
fluctuating market demand for our |

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| products. The average number of temporary employees during 2003 was 203 compared to
263 during 2002. |
| --- |
| Our future success will depend on our ability to attract, train, retain and motivate highly
qualified employees, who are in great demand. We are particularly reliant for our continued
success on the services of several key employees, including a number of systems development
specialists with advanced university qualifications in engineering, optics and computing. |
| With the decision to discontinue our Track business and to sell our Thermal business,
we started reducing our workforce at the end of 2002. Furthermore, to manage the effects
of the industrys continuing downturn during 2002, we reduced our lithography-related
workforce by approximately 700 positions worldwide and, in July 2003 announced a further
workforce reduction by approximately 550 positions worldwide. |
| ASML Netherlands B.V., our operating subsidiary in the Netherlands, has a Works Council,
as legally required. A Works Council is a representative body of the employees of
a Dutch company elected by the employees. The Board of Management of any Dutch
company that runs an enterprise with a Works Council must seek the non-binding advice of
the Works Council before taking certain decisions with respect to the company, such as those
related to a major restructuring, a change of control, or the appointment or dismissal of a
member of the Board of Management. Other decisions directly involving employment matters
that apply either to all employees, or certain groups of employees, such as those affecting
employee compensation systems, or pension or profit sharing plans, may only be taken with
the Works Councils approval. Absent such prior approval, the decision may nonetheless be
taken with the prior approval of the District Court. |
| With respect to the announcement in July 2003 of a workforce reduction by approximately
550 positions worldwide, of which the majority is planned in the Netherlands, the Board of
Management and the Dutch Works Council are nearing the completion of a joint study on
implementing these workforce reductions in the Netherlands. Consequently, the Dutch
workforce reduction has been delayed. |
| See Note 19 to our consolidated financial statements for a breakdown of our employees by
segment and function. |

link3 "E. Share Ownership"

| E. Share Ownership |
| --- |
| Information with respect to share ownership of members of our Supervisory Board and Board
of Management is included in Item 7 Major Shareholders and Related Party Transactions
and Note 18 to our consolidated financial statements, which are incorporated herein by
reference. |

link2 "Item 7 Major Shareholders and Related Party Transactions "

link3 "A. Major Shareholders"

Item 7	A. Major Shareholders
Major
Shareholders
and Related Party
Transactions	The following table sets forth the total number of ordinary shares owned by each shareholder
whose beneficial ownership of ordinary shares exceeds 5 percent of the ordinary shares
issued and outstanding, as well as the ordinary shares owned by the members of the

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Supervisory Board and members of the Board of Management (which includes those persons specified in Item 6 Directors, Senior Management and Employees), as a group, as of December 31, 2003:

Identity of Person or Group — Capital Group International, Inc 1	28,455,070	5.9 %
FMR Corp. 2	58,304,695	12.1 %
Members of ASMLs Supervisory Board and
Board of Management, as a group (7 persons) 3	1,811,662	*

*	Less than 1 percent.
1	Based solely on the Schedule 13-G/A jointly filed by Capital Group
International, Inc. with the Commission on
November 13, 2003.
2	Based solely on the Schedule 13-G/A filed by FMR Corp. with the Commission on
February 13, 2003.
3	Five members of our Board of Management own 1,724,260 options to purchase ASML
shares. See Note 18 to
our consolidated financial statements for information on options held by members
of our Board of Management
on an individual basis. Two members of our Board of Management own 49,680 of our
outstanding shares.
Two members of the Supervisory Board hold 37,722 of our outstanding shares or
options on shares.
None of the other members of the Supervisory Board hold any of our outstanding
shares or options on shares.
Our major shareholders do not have voting rights different from other
shareholders.
Until our public offering in 1995, in which Philips ownership was reduced to
approximately
56.7 percent, we were a wholly-owned subsidiary of Philips. In public offerings
in March 1996,
February 1997 and June 2000, Philips ownership was further reduced to
approximately
35.3 percent, 23.9 percent and 7.2 percent, respectively. Philips subsequently
lowered its
share ownership to below 5 percent as of December 31, 2003.
We do
not issue share certificates, except for registered New York
Shares. For more information see Item 10.B. Memorandum and Articles of Association.
Obligations of Shareholders to Disclose Holdings under
Netherlands Law
Holders of our shares may be subject to reporting obligations under the
Netherlands 1996 Act
on Disclosure of Holdings in Listed Companies (the Major Holdings Act) and the
Netherlands
1995 Act on the Supervision of the Securities Trade (the Securities Trade Act).
The Major Holdings Act applies to any person or entity that, directly or
indirectly, acquires
or disposes of an interest in the voting rights and/or the capital of a public
limited company
incorporated under the laws of the Netherlands that is officially listed on a
stock exchange
within the European Union (the EU). Disclosure is required when, as a result
of an acquisition
or disposal, the percentage of voting rights or capital interest acquired or
disposed of by
a person or an entity reaches, exceeds or falls below 5, 10, 25, 50 or 66-2/3
percent.
With respect to ASML, the Major Holdings Act would require any person or entity
whose
interest in the voting rights and/or capital of ASML reached, exceeded or fell
below those
percentage interests to notify in writing both ASML and the Netherlands
Authority for the
Financial Markets (Autoriteit Financiële Markten, the AFM) immediately after
the acquisition
or disposal of the triggering interest in ASMLs share capital.
On July 3, 2003, a draft bill to amend the Major Holding Act was submitted to
the Second
Chamber of the Dutch Parliament. According to the Explanatory Notes to the
proposed bill,

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| it is anticipated that the following percentage ranges, which trigger a
notification obligation,
will be introduced to replace the existing percentages: 0 percent to less than 5
percent,
5 percent to less than 10 percent, 10 percent to less than 15 percent, 15
percent to less
than 20 percent, 20 percent to less than 25 percent, and 25 percent or more.
Under the
proposed bill, above 25 percent, all direct or indirect transactions in our
share capital or voting
rights must be reported. |
| --- |
| For the purpose of calculating the percentage of capital interest or voting
rights, the following
interests must be taken into account: shares (or depositary receipts for shares)
(I) directly held
(or acquired or disposed of) by any person, (II) held (or acquired or disposed
of) by such
persons subsidiaries or by a third party for such persons account or by a
third party with
whom such person has concluded an oral or written voting agreement, and (III)
which such
person, or any subsidiary or third party referred to above, may acquire pursuant
to any option
or other right held by such person (or acquired or disposed of, including, but
not limited to,
on the basis of convertible bonds). Special rules apply to the attribution of
shares (or depositary
receipts for shares) which are part of the property of a partnership or other
community of
property. A holder of a pledge or right of usufruct in respect of shares (or
depositary receipts
for shares) can also be subject to the reporting obligations, if such person
has, or can acquire,
the right to vote on the shares or, in case of depositary receipts, the
underlying shares.
If a pledgee or usufructarian acquires such (conditional) voting rights, this
may trigger the
reporting obligations for the holder of the shares (or depositary receipts for
the shares). |
| In addition, pursuant to the Securities Trade Act and a decree based thereon, a
shareholder
who directly or indirectly holds a capital interest of more than 25 percent in
our capital must,
by means of a standard form, within ten days after the month in which the
transaction occurs,
notify the AFM of such transaction in our common shares or securities the value
of which is
co-dependent on the value of our ordinary shares (including, without limitation,
an acquisition
or disposal of our shares or depositary receipts issued for our shares or
convertible bonds
issued by us). If that shareholder is a legal entity and not an individual, the
obligations under
the Securities Trade Act also apply to members of its management and supervisory
boards. In
addition, these obligations apply to the following persons related to such 25
percent
shareholder (if the 25 percent shareholder is not a legal entity): (I) spouses,
(II) relations by
blood or affinity to the first degree and other persons who share a household
with these
persons, and (III) relations by blood or affinity to the first degree who do not
share a
household with these persons but hold at least 5 percent of our shares (or
depositary receipts
for our shares) in our capital or will obtain this percentage through the
transaction. |
| The AFM keeps a public registry of and publishes all notifications made pursuant
to the Major
Holdings Act and the Securities Trade Act. |
| Non-compliance with the reporting obligations under the Major Holdings Act or
the Securities
Trade Act could lead to criminal fines, administrative fines, imprisonment or
other sanctions.
In addition, non-compliance with the reporting obligations under the Major
Holdings Act may
lead to civil sanctions, including suspension of the voting rights relating to
the shares held
by the offender, or the shares underlying any depositary receipts held by the
offender,
for a period of not more than three years and a prohibition on the acquisition
by the offender |

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link3 "B. Related Party Transactions"

| of our shares (or depositary receipts for shares) or the voting on our ordinary shares for a
period of not more than five years. |
| --- |
| B. Related Party Transactions |
| There have been no material transactions during our most recent fiscal year, nor are there
presently any proposed material transactions to which ASML or any of its subsidiaries was
or is a party and in which any director or officer or any relative or spouse thereof had or will
have a direct or indirect material interest. During our most recent fiscal year, there has been no,
and at present there is no, outstanding indebtedness to ASML owed or owing by any director
or officer of ASML or any association thereof other than the virtual financing arrangement with
respect to share options described under Note 13 to our consolidated
financial statements. Our Chief Executive Officer, Mr. Dunn, is currently on the Supervisory Board of
STMicroelectronics N.V. (STM). We have entered into sales transactions, including system
shipments and service, with STM conducted at arms length. During the years 2003 and 2002,
ASML realized net sales on STM of less than 5 percent of our respective net sales. |

link3 "C. Interests of Experts & Counsel"

C. Interests of Experts & Counsel
Not applicable

link2 "Item 8 Financial Information"

link3 "A. Consolidated Statements and Other Financial Information"

Item 8	A. Consolidated Statements and Other Financial Information
Financial
Information	Consolidated Statements
	See Item 18 Financial Statements.
	Legal Proceedings
	See Item 4.B. Business Overview and Note 14 to our consolidated financial statements as
incorporated herein by reference.
	Dividend Policy
	ASML has no current intention to pay dividends on its ordinary shares. For more information
see Item 10.B. Memorandum and Articles of Association and Item 10.D. Exchange Controls.

link3 "B. Significant Changes"

B. Significant Changes
No significant changes have occurred since the date of our consolidated financial statements.
See Item 5.D. Trend Information.

link2 "Item 9 The Offer and Listing"

link3 "A. Listing Details"

Item 9	A. Listing Details
The Offer and
Listing	Our ordinary shares are listed for trading in the form of New York Shares on Nasdaq and
in the form of registered shares (Amsterdam Shares) on the Official Segment of the stock
market of Euronext Amsterdam. The principal trading market of our ordinary shares is
Euronext Amsterdam. For more information see Item 10.B Memorandum and Articles of
Association.

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| Historical information relating to the ordinary shares has been adjusted to
give retroactive effect to the three-for-one stock split in April 2000. |
| --- |
| The following table contains high and low sales prices of the ordinary shares on Nasdaq,
as well as high and low prices of the ordinary shares on Euronext Amsterdam. |

Annual High and Low Prices of Shares on Nasdaq and Euronext Amsterdam

USD		EUR
High	Low	High	Low
1999	38.29	10.42	38.00	8.77
2000	50.25	17.63	52.00	22.20
2001	30.62	9.51	32.32	9.70
2002	25.80	4.95	29.79	5.13
2003	20.39	6.11	17.04	5.39
2004 (through January 29)	22.67	19.09	17.92	15.50

(Source: Bloomberg)

Quarterly High and Low Prices of Shares on Nasdaq and Euronext Amsterdam

USD		EUR
High	Low	High	Low
1st quarter 2002	25.61	17.14	29.18	18.90
2nd quarter 2002	25.80	13.45	29.79	13.21
3rd quarter 2002	16.18	5.35	16.36	5.25
4th quarter 2002	12.15	4.95	12.37	5.13
1st quarter 2003	9.75	6.11	9.38	5.39
2nd quarter 2003	11.06	6.57	9.52	5.98
3rd quarter 2003	16.93	9.55	15.29	8.20
4th quarter 2003	20.39	13.18	17.04	11.09
1st quarter 2004 (through January 29)	22.67	19.09	17.92	15.50

(Source: Bloomberg)

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Monthly High and Low Prices of Shares on Nasdaq and Euronext Amsterdam

USD		EUR
High	Low	High	Low
July 2003	13.31	9.55	11.67	8.20
August 2003	16.11	11.78	14.90	10.35
September 2003	16.93	12.99	15.29	11.18
October 2003	17.70	13.18	15.12	11.09
November 2003	19.19	17.09	16.69	14.27
December 2003	20.39	17.72	17.04	14.53
January 2004 (through January 29, 2004)	22.67	19.09	17.92	15.50

link3 "B. Plan of Distribution"

link3 "C. Markets"

link3 "D. Selling Shareholder"

link3 "E. Dilution"

link3 "F. Expenses of the Issue"

(Source: Bloomberg)
B. Plan of Distribution
Not applicable
C. Markets
See Item 9.A. Listing Details.
D. Selling Shareholder
Not applicable
E. Dilution
Not applicable
F. Expenses of the Issue
Not applicable

link2 "Item 10 Additional Information"

link3 "A. Share Capital"

link3 "B. Memorandum and Articles of Association"

Item 10
Additional
Information	Not applicable
B. Memorandum and Articles of Association
The information required by Item 10.B. is incorporated by reference to ASMLs Current Report
on Form 6-K, filed with the Commission on March 14, 2003.
ASML is subject to the relevant provisions of Dutch law applicable to large corporations
(Structuurregime). These provisions have the effect of concentrating control over certain
corporate decisions and transactions in the hands of the Supervisory Board. The Supervisory
Board is self-electing; however, the General Meeting of Shareholders and the Works Council
each have a right of recommendation and a right to object to a proposed appointment of a
new member of the Supervisory Board.

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| Members of the Board of Management are appointed by the
Supervisory Board. The Supervisory Board shall notify
the General Meeting of Shareholders of intended
appointments to the Board of Management. General
Meetings of Shareholders are held at least once a year.
ASML does not solicit from or nominate proxies for its
shareholders. However, shareholders and other persons
entitled to attend General Meetings of Shareholders may
be represented by proxies with written authority. |
| --- |
| Extraordinary General Meetings of Shareholders may be
held as often as deemed necessary by the Supervisory
Board or Board of Management and must be held if the
Meeting of Priority Shareholders or one or more
Ordinary or Cumulative Preference Shareholders jointly
representing at least 10 percent of the issued share
capital make a written request to that effect to the
Supervisory Board and the Board of Management
specifying in detail the business to be dealt with. |
| Resolutions are adopted at General Meetings of
Shareholders by an absolute majority of the votes cast
(except where a different proportion of votes are
required by the Articles of Association or Dutch law)
and there are generally no quorum requirements
applicable to such meetings. Each Ordinary, Cumulative
Preference and Priority Share confers the right to one
vote. |
| Current Authorizations to Issue and Repurchase Ordinary Shares |
| Our Board of Management has the power to issue ordinary
shares and Preference Shares if and insofar as the
Board of Management has been authorized to do so by the
General Meeting of Shareholders (whether by means of an
authorizing resolution or by an amendment to our
Articles of Association). The Board of Management
requires the approval, however, of the Supervisory
Board and the Meeting of Priority Shareholders for such
an issue. The Board of Management, subject to these
approvals, is currently authorized to issue ordinary
shares and/or rights thereto through September 25,
2004, up to a maximum of 10 percent of our issued share
capital as of March 25, 2003 plus an additional 10
percent of our issued share capital as of March 25,
2003 in connection with or in the occasion of mergers
and acquisitions. At our annual General Meeting of
Shareholders to be held on March 18, 2004, our
shareholders will be asked to extend this authority
through September 18, 2005. |
| Holders of our ordinary shares have a pro rata
preemptive right of subscription to any issuance of
ordinary shares for cash, which right may be limited or
eliminated. These shareholders have no pro rata
preemptive subscription right with respect to any
ordinary shares issued for consideration other than
cash or in the case of ordinary shares issued to
employees. If authorized for this purpose by the
General Meeting of Shareholders (whether by means of an
authorizing resolution or by an amendment to our
Articles of Association), the
Board of Management has the power, on approval by the
Supervisory Board and the Meeting of Priority
Shareholders, to limit or eliminate the preemptive
rights of holders of ordinary shares. The Board of
Management is currently authorized, subject to these
approvals, to limit or eliminate preemptive rights of
holders of ordinary shares through September 25, 2004.
A further designation may be effective for up to five
years and may be renewed. At our annual General Meeting
of Shareholders to be held on March 18, 2004, our
shareholders will be asked to extend this authority
through September 18, 2005. |

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| We may repurchase ordinary shares at any time, subject
to compliance with the requirements of Netherlands law
(and provided the aggregate nominal value of the
ordinary shares held by ASML or a subsidiary at any
one time amounts to no more than one-tenth of our
issued share capital). Any such purchases are subject
to the approval of the Supervisory Board and the
authorization (whether by means of an authorizing
resolution or by an amendment to our Articles of
Association) of shareholders at our General Meeting of
Shareholders, which authorization may not be for more
than 18 months. The Board of Management is currently
authorized, subject to Supervisory Board approval, to
repurchase up to 10 percent of our issued share
capital through September 25, 2004 at a price between
the nominal value of the ordinary shares purchased and
110 percent of the market price of these securities on
Euronext Amsterdam or Nasdaq. At our annual General
Meeting of Shareholders to be held on March 18, 2004,
our shareholders will be asked to extend this
authority through September 18, 2005. |
| --- |
| Shareholder Approval for Share and Share Option Arrangements
for Board of Management |
| As of January 2004, ASML shall submit to the
shareholders meeting for approval a proposal regarding
the arrangements in the form of shares or rights to
acquire shares available to the Board of Management, in
accordance with the Dutch Corporate Governance Code
effective as of January 2004. This proposal includes
how many shares or rights to acquire shares may be
awarded to the Board of Management and which criteria
apply to an award or a modification. We have not in the
past and do not intend to establish stock option or
purchase plans or other equity compensation
arrangements for members of our Supervisory Board. |
| Nasdaq rules require shareholder approval of stock option plans
available to employees,
in general. However, Nasdaq has granted ASML an exemption from
this requirement. |

link3 "C. Material Contracts"

| C. Material Contracts |
| --- |
| Paying Agent, Conversion Agent and Registrar Agreement
between ASML Holding N.V. and The Bank of New York
relating to EUR 380,000,000 5.50 percent Convertible
Subordinated Notes due 2010 |
| In May 2003, we issued EUR 380,000,000 of 5.50 percent
Convertible Subordinated Notes due 2010 in an offering
that included an offering outside the United States
pursuant to Regulation S under the Securities Act of
1933 (the Securities Act). The Bank of New York is
acting as pricing agent for the 5.5 percent Notes. The
notes pay interest at an annual rate of 5.5 percent
with interest payable annually on May 15 of each year,
commencing on May 15, 2004, and are convertible into an
aggregate of 26,573,426 of our ordinary shares at a
conversion price of EUR 14.30 per share, subject to
adjustment, at any time prior to maturity. At any time
on or after May 22, 2006 the 5.5 percent
Notes are redeemable at our option, provided that the
closing price of our shares on Euronext Amsterdam is
above 150 percent of the conversion price for twenty
trading days out of a thirty-trading day period. |
| Agreement between Zeiss and ASML Holding N.V |
| On October 24, 2003, ASML Holding N.V. entered into an agreement
with Carl Zeiss SMT AG.
The agreement builds upon the existing strategic alliance between
the parties and modifies |

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the pricing and margin determinations detailed in their 1997 agreement. Furthermore, the agreement alters the existing contractual framework between the parties by providing new warranty terms, intellectual property rights, and exclusivity rights to current optical system products. The agreement also includes pricing terms for future optical systems.

link3 "D. Exchange Controls"

| D. Exchange Controls |
| --- |
| There are currently no limitations, either under the
laws of the Netherlands or in the Articles of
Association of ASML, to the rights of non-residents to
hold or vote ordinary shares. Cash distributions, if
any, payable in euro on Veldhoven registered shares
and on ASMLs registered shares listed on Euronext
Amsterdam may be officially transferred from the
Netherlands and converted into any other currency
without being subject to any Netherlands legal
restrictions. However, for statistical purposes, such
payments and transactions must be reported by ASML to
the Netherlands Central Bank. Furthermore, no
payments, including dividend payments, may be made to
jurisdictions subject to certain sanctions, adopted by
the government of the Netherlands, implementing
resolutions of the Security Council of the United
Nations. Cash distributions, if any, on New York
Shares shall be paid in U.S. dollars, converted at the
rate of exchange on Euronext Amsterdam at the close of
business on the date fixed for that purpose by the
Board of Management in accordance with the Articles of
Association. ASML has no current intention to pay
dividends on its ordinary shares. For more information
see Item 10.B. Memorandum and Articles of
Association. |

link3 "E. Taxation"

| E. Taxation |
| --- |
| Netherlands Taxation |
| The statements below represent a summary of current
Netherlands tax laws. The description is limited to
the material tax implications for a holder of ordinary
shares who is not, or is not deemed to be, a resident
of the Netherlands for Netherlands tax purposes (a
Non-resident Holder). This description does not
address special rules that may apply to special
classes of holders of ordinary shares and should not
be read as extending by implication to matters not
specifically referred to herein. As to individual tax
consequences, each investor in ordinary shares should
consult his or her tax counsel. |
| General |
| The acquisition of ordinary shares by a non-resident
of the Netherlands should not be treated as a taxable
event for Netherlands tax purposes. The income
consequences in connection with owning and disposing
of our ordinary shares are discussed below. |
| Substantial Interest |
| A person that, directly or indirectly, owns 5% or
more of our share capital, or holds options to
purchase 5% or more of our share capital, is
considered to have a substantial interest in our
shares or our options, as applicable. A deemed
substantial interest is present if (part of) a
substantial interest has been disposed of, or is
deemed to be disposed of, in a transaction where no
tax is recognized. Special attribution rules exist in
determining the presence of a substantial interest. |

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| Income Tax Consequences for Non-Resident Holders on
Owning and Disposing of
the Ordinary Shares |
| --- |
| An individual who is a Non-resident Holder
will not be subject to Netherlands income
tax on received income in respect of our
ordinary shares or capital gains derived
from the sale, exchange or other
disposition of our ordinary shares,
provided that such holder: |

| | does not
carry on and has not carried on a business
in the Netherlands through a permanent
establishment or a permanent
representative to which the ordinary
shares are attributable; |
| --- | --- |
| | does not hold
and has not held a substantial interest in
our share capital or, in the event the
Non-resident Holder holds or has held a
substantial interest in our share capital,
such interest is or was a business asset
in the hands of the holder; |
| | does not
share and has not shared directly (not
through the beneficial ownership of
ordinary shares or similar securities) in
the profits of an enterprise managed and
controlled in the Netherlands which owned
or was deemed to have owned ASMLs
ordinary shares; |
| | does not carry out and
has not carried out any activities which
generate taxable profit or taxable wages
to which the holding of ASMLs ordinary
shares was connected; |
| | does not carry out
and has not carried out employment
activities in the Netherlands, does not
serve and has not served as a director or
board member of any entity resident in the
Netherlands, and does not serve and has
not served as a civil servant of a
Netherlands public entity with which the
holding of ASMLs ordinary shares is or
was connected; and |
| | is not an individual
that has opted to be taxed as a resident
of the Netherlands. |

| Corporate income tax for corporate Non-resident Holders |
| --- |
| Income derived from ordinary shares or
capital gains derived from the sale,
exchange or disposition of ordinary
shares by a corporate Non-resident Holder
is taxable if: |

| | the holder carries on a
business in the Netherlands through a
permanent establishment or a permanent
agent in the Netherlands (Netherlands
enterprise) and the ordinary shares are
attributable to this permanent
establishment or permanent agent, unless
the participation exemption (discussed
below) applies; or |
| --- | --- |
| | the holder has a
substantial interest in ASML, which is
not allocable to his enterprise; or |
| | certain assets of the holder are deemed
to be treated as a Netherlands enterprise
under Netherlands tax law and the
ordinary shares are attributable to this Netherlands enterprise. |

| To qualify for the Netherlands participation
exemption, the Holder must generally hold at least
5% of the nominal paid-in capital of ASML and meet
other requirements. |
| --- |
| Under most Netherlands tax treaties the
right to tax capital gains realized by a
Non-resident Holder from the sale,
exchange or other disposition of
ordinary shares is allocated to the
holders country of residence and not
the Netherlands. |

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| Dividend Withholding Tax |
| --- |
| In general, a dividend distributed by us in respect
of our ordinary shares will be subject
to a withholding tax imposed by the Netherlands at a
statutory rate of 25%. |
| Dividends include: |

	dividends in cash or in kind;
	deemed and constructive dividends;
	consideration for the repurchase of ordinary shares
(including a repurchase by a direct or indirect
subsidiary) in excess of the recognized average
paid-in capital unless such repurchase is for
temporary investment or exempt;
	proceeds from the
redemption of ordinary shares in excess of recognized
paid-in capital;
	stock dividends equal to their
nominal value (unless distributed out of recognized
paid-in share premium);
	repayment of paid-in capital
not recognized as capital for Netherlands dividend
withholding tax purposes; and
	liquidation proceeds
in excess of average paid-in capital recognized as
capital for Netherlands dividend withholding tax
purposes.

A reduction of Netherlands dividend withholding tax can be obtained if:

| | the participation exemption applies and the ordinary
shares are attributable to a business carried out in
the Netherlands; |
| --- | --- |
| | the dividends are distributed to a
qualifying EU corporate holder satisfying the
conditions of the EU Parent-Subsidiary Directive; or |
| | the rate is reduced by treaty; or |
| | surtax was due on
the dividend distribution and the recipient is a
resident of the Netherlands Antilles or Aruba, a Member
State of the EU or a country with which the Netherlands
has concluded a treaty for the avoidance of double
taxation. |

| A Non-resident Holder of ordinary shares can be
eligible for a partial or complete exemption or refund
of all or a portion of the above withholding tax under
a tax treaty that is in effect between the Netherlands
and the Non-resident Holders country of residence. The
Netherlands has concluded such treaties with the United
States, Canada, Switzerland, Japan, all European Union
member states, and other countries. |
| --- |
| Under the Treaty between the United States of America
and the Kingdom of the Netherlands for the Avoidance
of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income (the Tax
Treaty), dividends paid by us to a Non-resident
Holder that is a resident of the United States as
defined in the Tax Treaty (other than an exempt
organization or exempt pension trust, as discussed
below) are generally eligible for a reduction of the
25% Netherlands withholding tax to 15% or, in the case
of certain U.S. corporate shareholders owning at least
10% of our voting power, to 5%, provided that the
shareholder does not have an enterprise or an interest
in an enterprise that is, in whole or in part, carried
on through a permanent establishment or permanent
representative in the Netherlands to which the
dividends are attributable. The Tax Treaty provides
for a complete exemption from tax on dividends
received
by exempt pensions trusts and exempt organizations, as
defined therein. Except in the case of exempt
organizations, the reduced dividend withholding rate
(or exemption from withholding) can be applied at the
source upon payment of the dividends, provided that
the proper forms have been filed in advance of the
payment. |

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| Exempt organizations remain subject to the statutory withholding
rate of 25% and are required
to file for a refund of such withholding. |
| --- |
| A Non-resident Holder may not claim the benefits of
the Tax Treaty unless (I) it is a resident of the
United States as defined therein and (II) its
entitlement to those benefits is not limited by the
provisions of article 26 (limitation on benefits) of
the Tax Treaty. |
| Dividend Stripping Rules |
| Under Netherlands tax legislation regarding
anti-dividend stripping, no exemption from, or refund
of, Netherlands dividend withholding tax is granted if
the recipient of dividends paid by ASML is not
considered the beneficial owner of such dividends. |
| Surtax |
| As a result of Netherlands tax reform effective from
January 1, 2001, ASML will be subject to a 20%
corporate income tax, or Surtax, on excessive
(evaluated based on certain criteria, including
previous dividend distributions) dividends ASML
distributes during the period from January 1, 2001 to,
and including, December 31, 2005. |
| Gift or Inheritance Taxes |
| Netherlands gift or inheritance taxes will not be levied on the
transfer of ordinary shares by
way of gift, or upon the death of a Non-resident Holder, unless: |

| (1) | the transfer is construed as an inheritance or
as a gift made by or on behalf of a person who, at
the time of the gift or death, is deemed to be,
resident of the Netherlands; or |
| --- | --- |
| (2) | the ordinary
shares are attributable to an enterprise or part
thereof that is carried on through a permanent
establishment or a permanent representative in the
Netherlands. |

| For purposes of Netherlands gift and inheritance tax,
an individual of Netherlands nationality is deemed to
be a resident of the Netherlands if he has been a
resident thereof at any time during the ten years
preceding the time of the gift or death. For purposes
of Netherlands gift tax, a person not possessing
Netherlands nationality is deemed to be a resident of
the Netherlands if he has resided therein at any time
in the twelve months preceding the time of the gift. |
| --- |
| Value Added Tax |
| No Netherlands value added tax is imposed on dividends in respect
of ASMLs shares or on
the transfer of ASMLs ordinary shares. |
| Residence |
| A Non-resident Holder will not become resident, or
be deemed to be resident, in the Netherlands solely
as a result of holding ASMLs ordinary shares or of
the execution, performance, delivery and/or
enforcement of rights in respect of ASMLs ordinary
shares. |
| United States Taxation |
| The following is a discussion of the material U.S.
federal income tax consequences relating to the
acquisition, ownership and disposition of ordinary
shares by a U.S. Holder (as defined below). This
discussion deals only with ordinary shares held as
capital assets and does not |

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| deal with the tax consequences applicable to all
categories of investors, some of which (such as
tax-exempt entities, passive foreign investment
companies, banks, broker-dealers, investors owning
directly, indirectly or constructively 10% or more of
our outstanding voting shares, investors who hold
ordinary shares as part of hedging or conversion
transactions and investors whose functional currency
is not the U.S. dollar) may be subject to special
rules. In addition, the discussion does not address
any alternative minimum tax or any state, local or
non-United States tax consequences. The following
discussion is based on U.S. tax laws, and judicial and
administrative interpretations thereof as in effect on
the date hereof, all of which are subject to change,
potentially retroactively. |
| --- |
| This discussion is based on the Internal Revenue Code
of 1986, as amended to the date hereof, final,
temporary and proposed Treasury Department regulations
promulgated thereunder, and administrative and judicial
interpretations thereof, changes to any of which
subsequent to the date hereof, possibly with
retroactive effect may affect the tax consequences
described herein. In addition, there can be no
assurance that the Internal Revenue Service will not
challenge one or more of the tax consequences described
herein, and we have not obtained, nor do we intend to
obtain, a ruling from the Internal Revenue Service or
an opinion of counsel with respect to the U.S. federal
income tax consequences of acquiring or holding shares.
Prospective purchasers of ordinary shares are advised
to consult their tax advisers with respect to their
particular circumstances and with respect to the
effects of U.S. federal, state, local or non-U.S. tax
laws to which they may be subject. |
| As used herein, the term U.S. Holder means a
beneficial owner of ordinary shares that for U.S.
federal income tax purposes is: |

| (1) | an individual
citizen or resident of the United States, |
| --- | --- |
| (2) | a
corporation or other entity treated as a corporation
for U.S. federal income tax purposes created or
organized in or under the laws of the United States or
of any political subdivision thereof, |
| (3) | an estate of
which the income is subject to U.S. federal income
taxation regardless of its source, |
| (4) | a trust whose
administration is subject to the primary supervision
of a court within the United States and which has one
or more U.S. persons who have the authority to control
all of its substantial decisions. |

| If an entity treated as a partnership for U.S. federal
income tax purposes owns ordinary shares, the U.S.
federal income tax treatment of a partner in such
partnership will generally depend upon the status of
the partner and the activities of the partnership. A
partnership that owns ordinary shares and the partners
in such partnership should consult their tax advisors
about the U.S. federal income tax consequences of
holding and disposing of the ordinary shares. |
| --- |
| Taxation of Dividends |
| U.S. Holders will include in gross income as
foreign-source dividend income the gross amount of any
distribution (before reduction for Netherlands
withholding taxes) ASML makes out of its current or
accumulated earnings and profits (as determined for
United States federal income tax purposes) when the
distribution is actually or constructively received by
the U.S. Holder. Distributions will not be eligible for
the dividends-received deduction generally allowed to |

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| United States corporations in respect of dividends
received from other United States corporations. The
amount of the dividend distribution includible in
income of a U.S. Holder should be the U.S. dollar value
of the foreign currency (e.g. euro) paid, determined by
the spot rate of exchange on the date of the
distribution, regardless of whether the payment is in
fact converted into U.S. dollars. Generally, any gain
or loss resulting from currency exchange fluctuations
during the period from the date the dividend payment is
includible in income to the date such payment is
converted into U.S. dollars will be treated as ordinary
income or loss. Such gain or loss will generally be
income from sources within the United States for U.S.
foreign tax credit purposes. Distributions in excess of
current and accumulated earnings and profits, as
determined for United States federal income tax
purposes, will be treated as a non-taxable return of
capital to the extent of the U.S. Holders basis in the
ordinary shares and thereafter as taxable capital gain.
ASML does not maintain calculations of its earnings and
profits under United States federal income tax
principles. |
| --- |
| Subject to limitations provided in the U.S. Internal
Revenue Code, a U.S. Holder may generally deduct from
its United States federal taxable income, or credit
against its United States federal income tax liability,
the amount of any Netherlands withholding taxes.
However, Netherlands withholding tax may be deducted
only if the U.S. Holder does not claim a credit for any
Netherlands or other non-U.S. taxes paid or accrued in
that year. In addition, Netherlands dividend
withholding taxes will likely not be creditable against
the U.S. Holders United States tax liability to the
extent ASML is not required to pay over the amount
withheld to the Netherlands Tax Administration.
Currently, a Netherlands corporation that receives
dividends from qualifying non-Netherlands subsidiaries
may credit source country tax withheld from those
dividends against Netherlands withholding tax imposed
on a dividend paid by a Netherlands corporation, up to
a maximum of 3% of the dividend paid by the Netherlands
corporation. The credit reduces the amount of dividend
withholding that ASML is required to pay to the
Netherlands Tax Administration but does not reduce the
amount of tax ASML is required to withhold from
dividends. |
| Recently enacted U.S. tax legislation (the 2003 Tax
Act) reduces to 15% the maximum tax rate for certain
dividends received by individuals through taxable years
beginning on or before December 31, 2008, so long as
certain holding period requirements are met. Dividends
received from qualified foreign corporations
generally qualify for the reduced rate. A non-U.S.
corporation (other than a foreign personal holding
company, foreign investment company, or passive foreign
investment company) generally will be considered to be
a qualified foreign corporation if (I) the shares of
the non-U.S. corporation are readily tradable on an
established securities market in the United States or
(II) the non-U.S. corporation is eligible with respect
to substantially all of its income for the benefits of
a comprehensive income tax treaty with the United
States
which contains an exchange of information program. The
Tax Treaty has been identified as a qualifying treaty.
Individual U.S. Holders should consult their tax
advisors regarding the impact of the provisions of the
2003 Tax Act on their particular situations. |
| Taxation on Sale or Other Disposition of Ordinary Shares |
| Upon a sale or other disposition of ordinary shares, a
U.S. Holder will generally recognize capital gain or
loss for U.S. federal income tax purposes in an amount
equal to the difference between the amount realized,
if paid in U.S. dollars, or the U.S. dollar value of
the amount realized (determined at the spot rate on
the settlement date of the sale) if proceeds are paid |

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| in currency other than the U.S. dollar, as the case may
be, and the U.S. Holders tax basis (determined in U.S.
dollars) in such ordinary shares. Generally, the
capital gain or loss will be long-term capital gain or
loss if the holding period of the U.S. Holder in the
ordinary shares exceeds one year at the time of the
sale or other disposition. The deductibility of capital
losses is subject to limitations for U.S. federal
income tax purposes. Gain or loss from the sale or
other disposition of ordinary shares generally will be
treated as U.S. source income or loss for U.S. foreign
tax credit purposes. Generally, any gain or loss
resulting from currency fluctuations during the period
between the date of the sale of the ordinary shares and
the date the sale proceeds are converted into U.S.
dollars will be treated as ordinary income or loss from
sources within the United States. Each U.S. Holder
should consult its tax advisor with regard to the
translation rules of its adjusted basis and the amount
realized upon a sale or other disposition of its
ordinary shares if purchased in, or sold or disposed of
for, a currency other than U.S. dollar. |
| --- |
| Information Reporting and Backup Withholding |
| Information returns may be filed with the Internal
Revenue Service (IRS) in connection with payments on
the ordinary shares or proceeds from a sale,
redemption or other disposition of the ordinary
shares. A backup withholding tax may apply to these
payments if the beneficial owner fails to provide a
correct taxpayer identification number to the paying
agent and to comply with certain certification
procedures or otherwise establish an exemption from
backup withholding. Any amounts withheld under the
backup withholding rules will be refunded (or credited
against the beneficial owners U.S. federal income tax
liability, if any) provided that the required
information is furnished to the IRS. |
| The discussion set forth above is included for
general information only and may not be applicable
depending upon a holders particular situation.
Holders should consult their tax advisors with
respect to the tax consequences to them of the
purchase, ownership and disposition of shares
including the tax consequences under state, local
and other tax laws and the possible effects of
changes in U.S. federal and other tax laws. |

link3 "F. Dividends and Paying Agents"

F. Dividends and Paying Agents
Not applicable

link3 "G. Statement by Experts"

G. Statement by Experts
Not applicable

link3 "H. Documents on Display"

| H. Documents on Display |
| --- |
| We are subject to certain of the reporting
requirements of the Exchange Act. As a foreign
private issuer, we are exempt from the rules under
the Exchange Act prescribing certain disclosure and
procedural requirements for
proxy solicitations, and our officers, directors and
principal shareholders are exempt from the reporting
and short-swing profit recovery provisions
contained in Section 16 of the Exchange Act, with
respect to their purchases and sales of shares. In
addition, we are not required to file reports and
financial statements with the Commission as
frequently or as promptly as U.S. companies whose
securities are registered under the Exchange Act.
However, we will file with the Commission, within six
months after the end of each fiscal year, an annual
report on Form 20-F containing financial |

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| statements audited by an independent accounting firm.
We publish unaudited interim financial information
after the end of each quarter. We furnish this
quarterly financial information to the Commission under
cover of a Form 6-K. |
| --- |
| You may read and copy any document we file with the
Commission at its public reference facilities at 450
Fifth Street, N.W., Washington, DC 20549, Woolworth
Building, 233 Broadway, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. You may also obtain
copies of the documents at prescribed rates by writing
to the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington DC 20549. The
Commission also maintains a website that contains
reports and other information regarding registrants
that are required to file electronically with the
Commission. The address of this website is
http://www.sec.gov. Please call the Commission at
1-800-SEC-0330 for further information on the operation
of the public reference facilities. |

link3 "I. Subsidiary Information"

I. Subsidiary Information
See Item 4.C. Organizational Structure

link2 "Item 11 Quantitative and Qualitative Disclosures About Market Risk"

| Item 11
Quantitative and Qualitative Disclosures About Market Risk |
| --- |
| Foreign exchange risk |
| We operate globally and are thus exposed to foreign
exchange risk arising from volatility in various
currency combinations. Foreign currency-denominated
assets and liabilities, together with expected cash
flows from highly probable purchases and sales, give
rise to this foreign exchange risk exposure. |
| We price most of our product sales in euro, however we
anticipate that a portion of our
revenues from net sales, cost of sales and expenses
will remain denominated in U.S. dollars |

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| for the foreseeable future. According to our foreign
exchange policy guidelines, we hedge material foreign
exchange transaction risk exposure, such as sales
transactions, forecasted purchase cash flows and
accounts receivable and payable. This exposure is
mainly hedged with derivative financial instruments
such as foreign exchange forward contracts and foreign
exchange options. The effectiveness of all outstanding
hedge contracts is closely monitored throughout the
life of the hedges. The majority of financial
instruments that we use to hedge foreign exchange risk
have duration of less than a year. As of December 31,
2003, we anticipate EUR 0.7 million of other
comprehensive income to represent the total anticipated
loss to be charged to cost of sales and EUR 3 million
to represent the total anticipated gain to be released
to cost of sales over the next 12 months as the
forecasted sale and purchase transactions occur. |
| --- |
| Since we have subsidiaries outside the Eurozone, the
euro denominated value of our shareholders equity is
also exposed to fluctuations in exchange rates. Equity
changes caused by movements in foreign exchange rates
are shown as a translation difference in our
consolidated financial statements included in Item 18.
We use, from time to time, foreign currency-denominated
loans to hedge material translation exposure arising
from foreign net investments. |
| Interest rate risk |
| Our exposure to the market risk of changes in interest
rates relates primarily to our debt obligations.
Interest rate swaps that are being used to hedge the
fair value of fixed loan coupons payable are designated
as fair value hedges, with changes in fair value
recorded under interest income and expense in our
statement of operations. The change in fair value is
intended to offset the change in the fair value of the
underlying fixed loan coupons, which is recorded
accordingly. Interest rate swaps that are being used to
hedge changes in the variability of future interest
receipts are designated as cash flow hedges. The
critical terms of the hedging instruments are the same
as those for the underlying assets. Accordingly, all
changes in fair value of these derivative instruments
are recorded as other comprehensive income. The
accumulated changes in fair value of the derivatives
are intended to offset changes in future interest cash
flows on the assets. The hedging relationship between
interest rate swaps and hedged debt obligations is
highly effective. See Item 5.A. Operating Results,
Foreign Exchange Management and Notes 1, 4 and 11 to
our consolidated financial statements, which are
incorporated herein by reference. |
| Credit risk |
| Financial instruments contain an element of risk of the
counterparties being unable to meet their obligations.
This financial credit risk is monitored and
minimized per type of financial instrument by limiting
our counterparties to a sufficient number of major
financial institutions. We do not expect the
counterparties to default given their high credit
quality. |
| Furthermore, we are exposed to credit risk on our
customers. We monitor our customer base and use
protective measures, such as letters of credit. Where
deemed necessary, we establish provisions for potential
losses. |

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| Sensitivity analysis derivative financial instruments |
| --- |
| The following table summarizes the Companys derivative financial
instruments, their market values and their sensitivity to changes
in foreign exchange rate or interest rates as of December 31, 2002
and 2003: |


						change resulting			resulting from a
						from a 1% non-			10% weakening of
						favorable increase			EUR against other
Derivative	Notional Amount		Fair Value			in interest rate			currency
December 31	2002	2003	2002	2003		2002		2003	2002		2003
Forward contracts 1	223,000	(54,173	) 2	845	444		N/A		N/A	5,246		(4,398	)
Currency options	41,000	8,314		782	(217	)	N/A		N/A	(12	)	(173	)
Interest rate swaps	982,000	981,285		5,684	6,102		(18,659	)	21,801	N/A		N/A

(Source: Bloomberg)
1	Includes forward contracts on U.S. Dollars, Swedish Krona,
British Pounds, Israeli Shekel, Japanese Yen and Singapore
dollars.
2	Net amount of forward contracts assigned as a hedge to
sales and purchase transactions, and to monetary assets and
liabilities.
The fair value of forward contracts (used for hedging purposes) is
the estimated amount that a bank would receive or pay to terminate
the forward contracts at the reporting date, taking into account
current interest rates, current exchange rates and the current
creditworthiness of the counterparties.
The fair value of currency options (used for hedging purposes) is
the estimated amount that a bank would receive or pay to terminate
the option agreements at the reporting date, taking into account
current interest rates, current exchange rates, volatility and the
current creditworthiness of the counterparties.
The fair value of interest rate swaps (used for hedging purposes)
is the estimated amount that a bank would receive or pay to
terminate the swap agreements at the reporting date, taking into
account current interest rates and the current creditworthiness of
the counterparties.

link2 "Item 12 Description of Securities Other Than Equity Securities"

Item 12
Description of
Securities Other
Than Equity
Securities

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link1 "Part II"

Part II

link2 "Item 13 Defaults, Dividend Arrearages and Delinquencies"

Item 13 Defaults, Dividend Arrearages and Delinquencies None

link2 "Item 14 Material Modifications to the Rights of Security Holders and Use of Proceeds"

Item 14 Material Modifications to the Rights of Security Holders and Use of Proceeds None

link2 "Item 15 Evaluation of Disclosure controls and Procedures"

Item 15	Evaluation of Disclosure controls and Procedures
Controls and Procedures	Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) as of December 31, 2003 (the Evaluation Date). Based on such
evaluation, those officers have concluded that, as of the Evaluation Date, our disclosure
controls and procedures are effective in alerting them on a timely basis to material information
relating to ASML (including its consolidated subsidiaries) required to be included in our
periodic filings under the Exchange Act.
	Changes in Internal Controls over Financial Reporting
	During the year ended December 31, 2003 there have not been any significant changes in our
internal controls over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal controls over financial reporting.

link2 "Item 16"

link3 "A. Audit Committee Financial Expert"

| Item 16 |
| --- |
| The members of the Audit Committee are all independent, non-executive members of the
Supervisory Board. The Supervisory Board has determined that Mr. Syb Bergsma qualifies as
the Audit Committee Financial Expert. |

link3 "B. Code of Ethics"

| B. Code of Ethics |
| --- |
| ASMLs Code on Ethical Business Conduct |
| In 2001, ASML adopted its Principles of Ethical Business Conduct, which contain ASMLs
ethical principles in relation to various subjects. These Principles have been worked out into
day-to-day guidelines (called Internal Guidelines on Ethical Business Conduct) and were
introduced in March 2003. The Internal Guidelines apply to ASML employees worldwide,
including ASMLs Chief Executive Officer and Chief Financial Officer. In 2003, no amendments
have been made to, and no waivers were granted in respect of, ASMLs Principles of Ethical
Business Conduct, nor to ASMLs Internal Guidelines on Ethical Business Conduct. Our
Principles on Ethical Business Conduct are posted on our website. |

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The Internal Guidelines on Ethical Business Conduct contain, among others, written standards that are reasonably designed to deter wrongdoing and to promote:

| | honest and ethical conduct, including the ethical handling of actual or apparent conflicts of
interest between personal and professional relationships; |
| --- | --- |
| | full, fair, accurate, timely, and understandable disclosure in reports and documents that
ASML files with, or submits to, the SEC and in other public communications made by ASML; |
| | compliance with applicable governmental laws, rules and regulations; |
| | prompt internal reporting of violations on the Internal Guidelines on Ethical Business
Conduct to an appropriate person or persons identified in these guidelines; and |
| | accountability for adherence to the guidelines. |

link3 "C. Principal Accountant Fees and Services"

| C. Principal Accountant Fees and Services |
| --- |
| Deloitte & Touche has served as our independent public
accountants for each of the years ended in the three-year period
ended December 31, 2003. The following table presents the
aggregate fees for professional audit services and other services
rendered by Deloitte & Touche in 2003 and 2002. |

Year ended December 31 — (Amounts in thousands)	2002 1	2003 1
Audit Fees	1,134	1,041
Audit-related Fees	24	104
Tax Fees	2,443	1,472
All Other Fees	0	89
Total	3,601	2,706

| 1 All fee amounts are excluding VAT. |
| --- |
| Audit fees |
| Audit fees primarily relate to the audit of the ASMLs annual
financial statements set forth in our Annual Report on Form 20-F,
agreed upon procedures work on our quarterly financial results,
services related to statutory and regulatory filings of our
subsidiaries, services in connection with accounting consultations
and the offering of our EUR 380 million 5.50 percent Convertible
Subordinated Notes due 2010. |
| Audit-related fees |
| Audit related fees mainly comprise services in connection with consultations on
implementing the requirements under Sarbanes-Oxley Section 404. |

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Tax fees
Tax Fees can be detailed as follows:

Year ended December 31 — Corporate Income Tax compliance services	919	576
Tax assistance for expatriate employees	476	476
Other tax advisory and compliance	1,048	420
Total 2	2,443	1,472

1	All fee amounts are excluding VAT.
2	As from January 1, 2004 onwards, Deloitte & Touche will reduce its services in providing tax assistance for
expatriate employees. Accordingly, we expect to incur lower fees from Deloitte & Touche relating to these
services in 2004 and beyond.
Other fees
Other fees reflect expenditures for training and local compliance services
(non-tax-related).
The Audit Committee has approved the external audit plan and
related audit fees for the year 2003. The Audit Committee has
adopted a policy regarding audit and non-audit services, provided
by Deloitte & Touche. This policy ensures the independence of our
auditors by expressly setting forth all services that the auditors
may not perform and reinforcing the principle of independence
regardless of the type of work performed. Certain non-audit
services such as tax-related services and acquisition advisory are
permitted. ASML has chosen to use alternative suppliers for tax
services that would ultimately involve the audit firm in rendering
an audit opinion on tax services performed by the same firm or
services that are of strategic nature. The Audit Committee
pre-approves non-audit services not specifically permitted under
this policy and reviews the annual external audit plan and any
subsequent engagements.

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link1 "Part III"

Part III

link2 "Item 17. Financial Statements"

Item 17. Financial Statements Not applicable

link2 "Item 18. Financial Statements"

Item 18. Financial Statements In response to this item, the Company incorporates herein by reference the consolidated financial statements of the Company set forth on pages F-2 through F-44 hereto.

link2 "Item 19. Exhibit "

Item 19.	Description
Exhibits
1	Articles of Association of ASML Holding N.V. (English translation)
(Incorporated by reference to Amendment No. 6 to the Registrants
Registration Statement on Form 8-A/A, filed with the Commission on June 18,
2002 (File No. 0-25566))
2.1	Paying Agent, Conversion Agent and Registrar Agreement between ASML
Holding N.V. and the Bank of New York relating to the Registrants 5.75%
Convertible Subordinated Notes due 2006 (Incorporated by reference to
Exhibit 2.3. of the Registrants Annual Report on Form 20-F for the year ended
December 31, 2001
2.2	Paying Agent, Conversion Agent and Registrar Agreement between ASML
Holding NV and the Bank of New York relating to the Registrants 5.50 percent
Convertible Subordinated Notes due 2010*
4.1	Agreement between ASML Lithography B.V. and Carl Zeiss, dated March 17,
2000 (Incorporated by reference to exhibit 4.2 to the Registrants Annual Report on Form
20-F for the fiscal year ended December 31, 2000)#
4.2	Agreement between
ASML Holding N.V. and Carl Zeiss, dated October 24, 2003*#
4.3	Form of Indemnity Agreement between ASML Holding N.V. and members of its
Board of Management*
4.4	Form of Indemnity Agreement between ASML Holding N.V. and members of its
Supervisory Board*
4.5	Employee Agreement between ASML Holding N.V. and Doug J. Dunn*
4.6	Employee Agreement between ASML Holding N.V. and Stuart K. McIntosh*
4.7	Employee Agreement between ASML Holding N.V. and David P. Chavoustie*
4.8	Form of Employee Agreement for members of the Board of Management*
4.9	ASML New Hires and Incentive Stock Option Plan For Management (Version
2003) (Incorporated by reference to exhibit 4.4 to the Registrants Statement
on Form S-8, filed with the Commission on September 2, 2003
(File No. 333-109154))
8.1	List of Subsidiaries*
12.1	Certification of CEO and CFO Pursuant to Rule 13(a)-14(a) of the Securities
Exchange Act of 1934*
13.1	Certification of CEO and CFO Pursuant to Rule 13a-14(b) of the Securities
Exchange Act of 1934 and 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002*
14.1	Consent of Deloitte & Touche*

Filed herewith

Certain information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission

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link1 "Signatures"

| Signatures |
| --- |
| ASML Holding N.V. hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this
annual report on its behalf. |
| ASML Holding N.V. (Registrant) |
| /s/ Peter T.F.M. Wennink |
| ● |
| By: Peter T.F.M. Wennink Principal Accounting and Chief Financial Officer |
| Dated: January 30, 2004 |

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Index to Financial Statements
Financial Statements

| F-2 | Consolidated statements of operations for the years ended December 31,
2001, 2002 and 2003 |
| --- | --- |
| F-3 | Consolidated statements of comprehensive income (loss) for the years ended
December 31, 2001, 2002 and 2003 |
| F-3 | Consolidated balance sheets as of December 31, 2002 and 2003 |
| F-4 | Consolidated Statements of shareholders equity for the years ended
December 31, 2001, 2002 and 2003 |
| F-5 | Consolidated statements of cash flows for the years ended
December 31, 2001, 2002 and 2003 |
| F-6 | Notes to the consolidated financial statements |
| F-44 | Independent Auditors Report |

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Consolidated Statements of Operations 1

	For the years ended December 31 — (Amounts in thousands, except per share data)	2001 — EUR	EUR		EUR		USD
	Net product sales	1,335,608		1,740,633		1,356,905		1,713,697
	Net service sales	253,639		218,039		185,832		234,695
	Total net sales	1,589,247		1,958,672		1,542,737		1,948,392
	Cost of product sales	1,348,837		1,289,030		1,028,362		1,298,765
	Cost of service sales	209,397		202,038		145,593		183,876
3	Total cost of sales	1,558,234		1,491,068		1,173,955		1,482,641
	Gross profit on sales	31,013		467,604		368,782		465,751
	Research and development costs	347,333		324,419		305,839		386,258
15	Research and development credits	(16,223	)	(26,015	)	(19,119	)	(24,146	)
	Selling, general and administrative costs	245,962		263,243		212,609		268,513
	Merger and acquisition costs	41,477		0		0		0
3	Restructuring charges	3,082		0		24,485		30,923
	Operating loss	(590,618	)	(94,043	)	(155,032	)	(195,797	)
	Interest income	41,786		31,177		40,481		51,126
	Interest expense	(48,993	)	(67,958	)	(69,630	)	(87,939	)
	Minority interest in net results from subsidiaries	3,606		0		0		0
	Loss from continuing operations before income taxes	(594,219	)	(130,824	)	(184,181	)	(232,610	)
16	Benefits from income taxes	179,017		42,779		59,675		75,366
	Net loss from continuing operations	(415,202	)	(88,045	)	(124,506	)	(157,244	)
2	Loss from discontinued operations before income taxes	(103,001	)	(183,624	)	(59,026	)	(74,547	)
16	Benefits from income taxes	39,211		63,846		23,316		29,447
	Net loss from discontinued operations	(63,790	)	(119,778	)	( 35,710	)	(45,100	)
	Net loss	(478,992	)	(207,823	)	(160,216	)	(202,344	)
	Basic net loss from continuing operations per ordinary share	(0.89	)	(0.18	)	(0.26	)	(0.33	)
	Basic net loss from discontinued operations per ordinary share	(0.14	)	(0.26	)	(0.07	)	(0.09	)
	Basic net loss per ordinary share	(1.03	)	(0.44	)	(0.33	)	(0.42	)
	Diluted net loss from continuing operations per ordinary share	(0.89	)	(0.18	)	(0.26	)	(0.33	)
	Diluted net loss from discontinued operations per ordinary share	(0.14	)	(0.26	)	(0.07	)	(0.09	)
	Diluted net loss per ordinary share	(1.03	)	(0.44	)	(0.33	)	(0.42	)
	Number of ordinary shares used in computing
per share amounts (in thousands)
	Basic 3	465,866		476,866		482,240		482,240
	Diluted 3	465,866		476,866		482,240		482,240

1	See Note 2 Discontinued operations and Note 3 Restructuring to the consolidated financial statements.
2	Solely for the convenience of the reader, certain euro amounts presented as of and for the year ended December 31, 2003, have been translated
into U.S. dollars using the exchange rate on December 31, 2003, of USD 1.00 = EUR 0.7918.
3	All net income per ordinary share amounts have been retroactively adjusted to reflect the issuance of shares in connection with ASMLs merger
with SVG in May 2001.

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Consolidated Statements of Comprehensive Income

For the years ended December 31 — (Amounts in thousands)	2001 — EUR	EUR		EUR		USD
Net loss	(478,992	)	(207,823	)	(160,216	)	(202,344	)
Foreign currency translation	26,855		(9,269	)	(12,318	)	(15,557	)
Gain (loss) on derivative instruments	(111	)	15,128		(7,158	)	(9,040	)
Comprehensive income (loss)	(452,248	)	(201,964	)	(179,692	)	(226,941	)

Consolidated Balance Sheets

	As of December 31	2002	2003	2003
	(Amounts in thousands, except share and per share data)	EUR	EUR	USD
	Assets
	Cash and cash equivalents	668,760	1,027,806	1,298,063
5	Accounts receivable, net	556,664	314,495	397,190
6	Inventories, net	730,025	595,017	751,474
16	Current tax assets	178,706	0	0
16	Deferred tax assets short term	0	49,590	62,629
7	Other current assets	175,095	157,912	199,434
2	Assets from discontinued operations	106,094	5,007	6,324
	Total current assets	2,415,344	2,149,827	2,715,114
16	Deferred tax assets	314,795	325,271	410,799
7	Other assets	61,757	30,711	38,786
8	Intangible assets, net	14,069	14,590	18,426
9	Property, plant and equipment, net	495,723	347,883	439,357
	Total assets	3,301,688	2,868,282	3,622,482
	Liabilities and Shareholders Equity
	Accounts payable	213,423	220,153	278,041
3,10	Accrued liabilities and other	448,848	442,383	558,705
16	Deferred tax liabilities short term	4,465	2,285	2,886
16	Current tax liabilities	19,947	8,247	10,416
2	Liabilities from discontinued operations	66,091	13,451	16,988
	Total current liabilities	752,774	686,519	867,036
16	Deferred tax liabilities	133,516	169,641	214,247
13	Other deferred liabilities	15,391	10,850	13,703
11	Convertible subordinated debt	1,064,040	842,543	1,064,086
11	Other long term debt	20,451	17,522	22,129
	Total liabilities	1,986,172	1,727,075	2,181,201
12,14	Commitments and contingencies
	Cumulative Preference Shares, EUR 0.02 nominal value;
900,000,000 shares authorized;
none outstanding as of December 31, 2002 and 2003	0	0	0
	Priority Shares, EUR 0.02 nominal value;
23,100 shares authorized,
issued and outstanding as of December 31, 2002 and 2003	1	1	1
	Ordinary Shares, EUR 0.02 nominal value; 900,000,000 shares
authorized 482,182,485 shares issued and outstanding as
of December 31, 2002 and 482,513,502 as of December 31, 2003	9,643	9,650	12,187
	Share premium	870,453	875,829	1,106,124
	Retained earnings	276,326	116,110	146,641
	Accumulated other comprehensive income	159,093	139,617	176,328
21	Total shareholders equity	1,315,516	1,141,207	1,441,281
	Total liabilities and shareholders equity	3,301,688	2,868,282	3,622,482

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Consolidated Statements of Shareholders Equity


					Other
		Shares	Share	Retained	Comprehensive
	Shares	Amount	Premium	Earnings	Income	Total
(Amounts in thousands)	Number	EUR	EUR	EUR	EUR	EUR
Balance at December 31, 2000	463,395	9,269	551,343	944,609	160,991		1,666,212
Components of comprehensive income:
Net loss				(478,992	)		(478,992	)
Foreign Currency Translation					26,855		26,855
Gain (loss) on derivative instruments					(111	)	(111	)
Issuance of ordinary shares	3,218	64	21,585				21,649
Adjustment for pooling of interests
fourth quarter 2000 SVG	365	7	6,636	18,532	(34,501	)	(9,326	)
Balance at December 31, 2001	466,978	9,340	579,564	484,149	153,234		1,226,287
Components of comprehensive income:
Net loss				(207,823	)		(207,823	)
Foreign Currency Translation					(9,269	)	(9,269	)
Gain (loss) on derivative instruments					15,128		15,128
Issuance of Ordinary Shares	15,204	304	290,889				291,193
Balance at December 31, 2002	482,182	9,644	870,453	276,326	159,093		1,315,516
Components of comprehensive income:
Net loss				(160,216	)		(160,216	)
Foreign Currency Translation					(12,318	)	(12,318	)
Gain (loss) on derivative instruments					(7,158	)	(7,158	)
Issuance of Ordinary Shares	332	7	5,376				5,383
Balance at December 31, 2003	482,514	9,651	875,829	116,110	139,617		1,141,207

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Consolidated Statements of Cash Flows

Year ended December 31 — (Amounts in thousands)	2001 — EUR	EUR		EUR		USD
Cash Flows from Operating Activities
Net income (loss) from continued operations	(415,202	)	(88,045	)	(124,506	)	(157,244	)
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization	126,759		166,035		144,800		182,874
Impairment charges	12,200		20,651		12,100		15,282
Allowance for doubtful debts	3,310		0		9,113		11,509
Allowance for obsolete inventory	367,140		112,164		32,431		40,959
Changes in assets and liabilities that provided (used) cash:
Accounts receivable	308,978		(57,183	)	211,627		267,273
Deferred income taxes	(156,676	)	(22,361	)	(79,577	)	(100,501	)
Inventories	(380,006	)	(77,408	)	95,291		120,347
Other assets	(111,673	)	31,365		44,945		56,763
Accrued liabilities	89,494		(41,683	)	(8,948	)	(11,301	)
Accounts payable	48,301		(71,927	)	7,231		9,132
Income taxes payable	(92,240	)	(25,759	)	164,826		208,166
Net cash provided by (used in) operating activities
from continuing operations	(199,615	)	(54,151	)	509,333		643,259
Cash Flows from Investing Activities
Purchases of property, plant and equipment	(312,857	)	(138,587	)	(71,440	)	(90,225	)
Proceeds from sale of property, plant and equipment	21,672		58,735		48,837		61,678
Investments in financial fixed assets	(34,404	)	0		0		0
Purchase of intangible assets	(506	)	0		(3,099	)	(3,914	)
Net cash used in investing activities
from continuing operations	(326,095	)	(79,852	)	(25,702	)	(32,461	)
Cash Flows from Financing Activities
Proceeds from issuance of convertible subordinated notes	652,176		0		380,000		479,919
Payment of underwriting commission	(14,237	)	0		(8,550	)	(10,798	)
Net proceeds from issuance of shares and stock options	26,351		26,630		6,360		8,032
Redemption and/or repayment of debt	0		(5,203	)	(445,966	)	563,230
Net cash provided by financing activities
from continuing operations	664,290		21,427		(68,156	)	(86,077	)
Net cash flows	138,580		(112,576	)	415,475		524,721
Minority interest	(121,119	)	0		0		0
Effect of changes in exchange rates on cash	17,604		(1,869	)	(69,165	)	(87,351	)
Net cash used by SVG for the quarter
ended December 31, 2000 1	(38,772	)	0		0		0
Net cash flow (used) provided by discontinued
operations	(69,815	)	(127,473	)	12,736		16,086
Net increase (decrease) in cash and cash equivalents	(73,522	)	(241,918	)	359,046		453,456
Cash and cash equivalents at beginning of the year	984,200		910,678		668,760		844,607
Cash and cash equivalents at end of the year	910,678		668,760		1,027,806		1,298,063
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest	33,444		66,614		48,980		61,859
Taxes	73,922		3,642		11,974		15,123
Supplemental non-cash investing and financing activities:
Conversion of Bonds into 13,634,782 and 536 ordinary shares
respectively in 2002 and 2003	0		265,411		16		20

1 The decrease in net cash used by SVG for the quarter ended December 31, 2000 consists of EUR 31,659 provided by operating activities, EUR (16,336) used for investing activities, EUR (58,430) used for discontinued activities and EUR 4,335 provided by financing activities.

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	Notes to the Consolidated
	Financial Statements
	1. Summary of significant accounting policies
	The accompanying consolidated financial statements include the Financial Statements of
ASML Holding N.V. Veldhoven, the Netherlands, and its consolidated subsidiaries (together
referred to as ASML or the Company). ASML is a worldwide business engaged in the
development, production, marketing, sale and servicing of advanced semiconductor
equipment systems, mainly consisting of lithography systems. ASMLs principal operations
are in the Netherlands, the United States and Asia.
	ASML follows accounting principles generally accepted in the United States of America
(U.S. GAAP). ASMLs reporting currency is the euro. The accompanying consolidated
financial statements are stated in thousands of euro (EUR) unless indicated otherwise except
that, solely for the convenience of the reader, certain euro amounts presented as of and for
the year ended December 31, 2003 have been translated into United States dollars (USD)
using the exchange rate in effect on December 31, 2003 of USD 1.00 = EUR 0.7918.
These translations should not be construed as representations that the euro amounts could
be converted into U.S. dollars at that rate.
	On May 21, 2001, ASML merged with SVG, a company active in the Lithography, Track and
Thermal business. The merger with SVG is accounted for under the pooling of interests
method. For accounting and financial reporting purposes, the companies are presented as if
they were merged for all periods presented.
	On December 18, 2002 ASML announced the proposed divestiture of its Thermal business,
including related customer support activities, and the termination of its activities in the Track
business. As a result of this decision, the presentation of the Companys financial statements
and the notes thereto have been retroactively adjusted to reflect the effects of the decision to
discontinue these operations. In October 2003, ASML substantially completed the divestiture
of its Thermal business. See Note 2.
Principles of	The consolidated financial statements include the accounts of ASML Holding N.V. and all of its
consolidation	majority-owned subsidiaries. All inter-company profits, transactions and balances have been
eliminated in the consolidation.
Use of estimates	The preparation of ASMLs consolidated financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities on the balance sheet
dates and the reported amounts of revenue and expense during the reported periods.
Actual results could differ from those estimates.
Foreign currency	The financial information for subsidiaries outside the euro-zone is generally measured
translation	using local currencies as the functional currency. The financial statements of those foreign
subsidiaries are translated into euro in the preparation of ASMLs consolidated financial

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| | statements. Assets and liabilities are translated into
euro at the exchange rate in effect on the respective
balance sheet dates. Income and expenses are translated
into euro based on the average rate of exchange for the
corresponding period. The resulting translation
adjustments are recorded directly in shareholders
equity. Currency differences on inter-company loans
that have the nature of a long-term investment are also
accounted for directly in shareholders equity. |
| --- | --- |
| Derivative | The Company principally uses derivative foreign currency hedging instruments for the |
| financial | management of foreign currency risks. Applying Statement of Financial Accounting Standards |
| instruments | (SFAS) No. 133 Accounting for Derivative Instruments and Hedging Activities and SFAS
No. 138 Accounting for Certain Derivative Instruments
and Certain Hedging Activities an amendment of SFAS No.
133 the Company measures all derivative foreign
currency hedging instruments based on fair values
derived from market prices of the instruments. The
Company adopts hedge accounting for all hedges that are
highly effective in offsetting the identified hedged
risks as required by the SFAS No. 133 effectiveness
criteria. |
| | Cash Flow Hedges |
| | Forwards and options used to hedge the impact of the
fluctuations in exchange rates on cash flows from
purchase activities and sales transactions in
non-functional currencies are treated as cash flow
hedges. The critical terms of the hedging instruments
are the same as those for the underlying transactions,
and thus these hedging relationships are perfectly
effective. The changes in fair value of the derivatives
are intended to offset changes in the expected cash
flows from the underlying transactions. The change in
the fair value of cash flow hedges are deferred in
other comprehensive income until the underlying
exposure is recognized in the statement of operations. |
| | When the underlying hedged transaction is recognized,
the related gain or loss on the cash flow hedge
accumulated in other comprehensive income is released
to the statement of operations. Gains and losses on
hedges on sales transactions are recognized in revenue,
while gains and losses on hedges on forecasted purchase
transactions are recognized in cost of sales. In the
event that the underlying hedged transaction does not
occur, or it becomes probable that it will not occur,
the gain or loss on the related cash flow hedge is
immediately released from accumulated other
comprehensive income and included in the statement of
operations. |
| | Interest rate swaps that are being used to hedge
changes in the variability of future interest receipts
are designated as cash flow hedges. The critical terms
of the hedging instruments are the same as those for
the underlying assets. Accordingly, all changes in fair
value of these derivative instruments are
recorded as other comprehensive income. The accumulated
changes in fair value of the derivatives are intended
to offset changes in future interest cash flows on the
assets. |
| | Fair Value Hedges |
| | Forwards used to hedge accounts receivable, accounts
payable and other monetary assets and liabilities
denominated in non-functional currencies are designated
as fair value hedges. Both the changes in the fair
value of these hedges and their underlying exposure are
recognized in the statement of operations. |

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| | Interest rate swaps that are being used to hedge the fair value of fixed loan coupons payable
are designated as fair value hedges, with changes in fair value recorded under interest income
and expense in the statement of operations. The change in fair value is intended to offset the
change in the fair value of the underlying fixed loan coupons, which is recorded accordingly. |
| --- | --- |
| | The Company records any ineffective portion of foreign currency hedging instruments in cost
of sales in the statement of operations. Ineffectiveness of hedging instruments had a positive
impact of EUR 0 million, EUR 0.8 million and EUR 3 million on cost of sales in 2003, 2002 and
2001, respectively. The ineffective portion of interest rate swaps is recorded in interest income
(expense). The Company did not have benefits or costs due to ineffectiveness of interest rate
swaps in 2003 and 2002. |
| Cash and cash | Cash and cash equivalents consist primarily of highly liquid investments, such as bank |
| equivalents | deposits and commercial paper, with insignificant interest rate risk and remaining maturities
of three months or less at the date of acquisition. |
| Inventories | Inventories are stated at the lower of cost (first-in, first-out method) or market value.
Cost includes net prices paid for materials purchased, charges for freight and customs duties,
production labor cost and factory overhead. Allowances are made for slow moving,
obsolete or unsaleable inventory. |
| Intangible assets | Intangible assets include acquired intellectual property rights that are valued at cost and are
amortized on a straight-line basis over the term of the rights ranging from 3 to 10 years. |
| Property, plant | Property, plant and equipment are stated at cost, less accumulated depreciation and |
| and equipment | amortization. Depreciation is calculated using the straight-line method based on the estimated
useful lives of the related assets. In the case of leasehold improvements, the estimated useful
lives of the related assets do not exceed the remaining term of the corresponding lease.
The following table presents the assigned economic lives of ASMLs property, plant and
equipment: |

Category	Assigned economic life
Buildings and constructions	5 40 years
Machinery and equipment	2 5 years
Office furniture/fixtures	3 5 years
Leasehold improvements	5 10 years

Certain internal and external costs associated with the purchase and/or development of internally used software are capitalized when both the preliminary project stage is completed and management has authorized further funding for the project, which it has deemed probable to be completed and to be usable for the intended function. These costs are amortized on a straight-line basis over the period of related benefit, which ranges primarily from two to five years.

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| Evaluation of long-lived
assets for impairment | The Company evaluates its long-lived assets, which include property, plant and equipment
and intangible assets, for impairment whenever events or changes in circumstances indicate
that the carrying amount of those assets may not be recoverable. Recoverability of these
assets is measured by a comparison of the carrying amount of the asset to future
undiscounted net cash flows expected to be generated by the asset. If those assets are
considered to be impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair value of the asset. Assets held
for sale are reported at the lower of the carrying amount or fair value less the cost to sell. |
| --- | --- |
| Recognition of revenues,
income and expenses | ASML distinguishes between revenues from new and
proven technology systems. Revenue for proven
technology systems is recognized upon shipment, since title passes to the customer at that moment, and the customer has unconditionally accepted the system
during a factory test prior to shipment. Revenues on new technology systems are deferred
until installation and acceptance at the customers premises are completed. As soon as
a track record has been established regarding the successful and timely installation and
acceptance of equipment previously identified as new technology, ASML considers the
equipment to be proven technology. At that time, ASML changes the timing of revenue
recognition to the shipment date in accordance with its revenue policy for proven technology
and recognizes previously deferred revenue. In the second half of 2002, the TWINSCAN
technology, which was previously identified as new technology, has been marked proven
technology. |
| | The fair value of installation services provided to the customers is initially deferred and is
recognized when the installation is completed. Sales from service contracts are recognized
when performed. Revenue from prepaid service contracts is recognized over the life of the
contract. |
| Cost of sales | Costs of product sales comprise direct product costs such as materials, labor, cost of
warranty, depreciation, shipping and handling costs and related overhead costs. Repayments
of certain technical development credits, which are calculated as a percentage of sales, are
also charged to cost of product sales (see Research and development costs and credits,
below). ASML accrues for the estimated cost of the warranty on its systems, which includes
the cost of labor and parts necessary to repair systems during the warranty period. The
amounts recorded in the warranty accrual are estimated based on actual historical expenses
incurred and on estimated probable future expenses related to current sales. Actual warranty
costs are charged against the accrued warranty reserve. Costs of service sales comprise
direct service costs such as materials, labor, depreciation and overhead costs relating to
providing extended warranty and maintenance services. |
| Restructuring | ASML applies the criteria defined in SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities and SFAS No. 112, Employers Accounting for Postemployment
Benefits, in order to determine when a liability for restructuring or exit costs should be
recognized. With respect to employee termination costs, the Company adopts SFAS No.146
(effective since January 1, 2003) in the case of benefit arrangements that, in substance,
do not constitute an ongoing benefit arrangement. SFAS No. 112 is adopted when termination
benefits are provided under an ongoing benefit arrangement. SFAS No. 146 establishes that
a liability for a cost associated with an exit or disposal activity shall be recognized and |

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| | measured initially at its fair value in the period in which the liability is incurred; that is,
when a detail plan exists, has been committed to by management and has been communicated
to the employees. SFAS No. 112 establishes that a liability for termination benefits provided
under an ongoing benefit arrangement covered by SFAS No. 112 is recognized when the
likelihood of future settlement is probable and can be reasonably
estimated. Other exit costs include purchase and other commitments to be settled or fulfilled.
Related costs are estimated based on expected settlement fees and committed payments,
taking into account future potential benefits, if any, from those commitments. |
| --- | --- |
| Research and development costs and credits | Costs relating to research and development are charged to operating expense as incurred.
Funds received from third parties in research activities are required to advance the design
of new technology systems to the point that it meets specific functional and economic
requirements and is ready for manufacturing. These funds are recorded as research and
development credits in the period in which the related research and development costs are
incurred. Subsidies and other governmental credits for research and development costs
relating to approved projects are recorded as research and development credits in the period
when the research and development cost to which the subsidy or credit relates occurs.
Technical development credits (Technische Ontwikkelingskredieten or TOKs) received from
the Netherlands government to offset the cost of certain research and development projects
are contingently repayable, including accrued interest, as a percentage of the revenues from
future sales, if any, of equipment developed in such projects. These repayments are charged
to cost of sales at the time such sales are recorded (see Note 15). No repayments are required
if such sales do not occur. |
| Income taxes | The asset and liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are recognized for the tax effect of incurred net operating
losses and for tax consequences attributable to differences between the balance sheet
carrying amounts of existing assets and liabilities and their respective tax bases. If it is more
likely than not that the carrying amounts of deferred tax assets will not be realized,
a valuation allowance will be recorded to reduce the carrying amounts
of those assets Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in the results of operations in the period that includes the enactment date. |
| Stock options | ASML applies Accounting Principles Board Opinion (APB) 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option plans. SFAS No. 123,
Accounting for Stock-Based Compensation, amended by SFAS No. 148, Accounting for
Stock-Based Compensation Transition and Disclosure allows companies to elect to
recognize the fair value of the stock options granted to employees as an expense, or to
account for stock option plans using the intrinsic value method under APB 25 and provide pro
forma disclosure of the impact of the fair value method on net income and earnings per share. |

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Under the provisions of APB 25, no significant compensation expense was recorded for ASMLs stock-based compensation plans for the years ended December 31, 2003, 2002 and 2001. Had compensation cost been determined based upon the fair value at the grant date for awards under the plan consistent with the methodology prescribed under SFAS No. 148, ASMLs net income (loss) and calculation for net income (loss) per ordinary share would have been as follows (net of related tax effects):

Year ended December 31
(Amounts in thousands,
except per share data)	2001	2002		2003
Net income (loss)
As reported	(478,992	)	(207,823	)	(160,216	)
Pro forma	(550,028	)	(284,000	) 1	(177,912	)
Basic net income (loss) per ordinary share
As reported	(1.03	)	(0.44	)	(0.33	)
Pro forma	(1.18	)	(0.60	)	(0.37	)
Diluted net income (loss) per ordinary share
As reported	(1.03	)	(0.44	)	(0.33	)
Pro forma	(1.18	)	(0.60	)	(0.37	)

1 Contains compensation for extension of stock option plans that consequently creates a new measurement date.

Certain ASML stock option plans, where employees can buy options, contain terms and conditions that enable exercise within 6 weeks after the vesting period in case an employee terminates his contract during the vesting period. These stock options are not cancelled in case of termination because employees have bought these options. In prior years the related compensation expense was recognized ratably over the vesting period as it is the Companys intent to provide stock options for future services. However, according to APB 25, SFAS No. 123 and related discussions, this compensation expense needs to be recognized at the date of grant as the terms and conditions indicate that the options are granted for past services. In 2003, the Company revised the pro forma net income and pro forma per share amounts for 2001 and 2002 to adjust the above-mentioned change in calculation of the pro forma compensation expense.

The estimated weighted average fair value of options granted during 2001, 2002 and 2003 was EUR 20.68, EUR 11.55 and EUR 6.66 respectively, on the date of grant using the Black-Scholes option-pricing model, with the following assumptions in 2001, 2002 and 2003 respectively: no dividend yield, volatility of 74.0, 87.4 percent and 85.2 percent, risk-free interest rate of 4.95, 3.18 and 3.60 percent, no assumed forfeiture rate and an expected life of two years after the vesting period.

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Net income (loss) per ordinary share Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average ordinary shares outstanding for that period. Diluted net income (loss) per share reflects the potential dilution that could occur if options issued under ASMLs stock compensation plan were exercised, and if ASMLs convertible notes were converted, unless the exercise of the stock options or conversion of the notes would have an anti-dilutive effect. The dilutive effect is calculated using the treasury method. As a result of the losses incurred by the Company, there is no difference between basic and diluted earnings in 2003, 2002 and 2001 because the assumed conversion of loans and exercise of stock options would have been anti-dilutive. A summary of the basic and diluted weighted average number of shares is as follows:

Year ended December 31 — (Amounts in thousands)	2001	2002	2003
Basic weighted average shares outstanding	465,866	476,866	482,240
Diluted weighted average shares outstanding	465,866	476,866	482,240

| | Excluded from the diluted weighted average share outstanding calculation are cumulative
preference shares contingently issuable to the preference share foundation, since they
represent a different class of stock than the ordinary shares. See further discussion in
Note 21. |
| --- | --- |
| Comprehensive income | Comprehensive income consists of net income (loss) and other comprehensive income (loss).
Other comprehensive income (loss) refers to revenues, expenses, gains and losses that are
not included in net income, but recorded directly in shareholders equity. For the years ended
December 31, 2003, 2002 and 2001, comprehensive income consists of net income (loss),
unrealized gains and losses on derivative financial instruments and foreign currency translation
adjustments. |
| Segment disclosure | Prior to 2002, ASML reported in two business segments, Lithography and Track & Thermal.
As ASML decided in 2002 to terminate its Track business and to divest its Thermal business,
they are presented as discontinued operations and no longer disclosed as a separate
segment. ASML operates in three general geographic areas. See Note 17. |

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| Newly adopted accounting pronouncements |
| --- |
| In April 2003 the FASB issued SFAS No. 149, Amendment of SFAS No. 133 on Derivative
Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting
and reporting for derivative instruments by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, this statement clarifies the
circumstances under which a contract with an initial net investment meets the characteristics
of a derivative, clarifies when a derivative contains a financing component, amends the
definition of an underlying to conform it to the language used in FIN No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others and amends certain other existing pronouncements. SFAS No. 149
is effective for contracts entered into or modified after June 30, 2003, except as stated below
and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149
did not have a material impact on the Companys consolidated results of operations, financial
condition or liquidity. |
| In May 2003 the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. SFAS No. 150 modifies the accounting
for certain financial instruments that, under previous guidance, issuers could account for as
equity. SFAS No. 150 requires that those instruments be classified as liabilities in statements
of financial position. The adoption of SFAS No. 150 did not have a material impact on the
Companys consolidated results of operations, financial condition or liquidity. |
| In November 2002, the FASB published FIN 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.
FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan
guarantees such as standby letters of credit. FIN 45 also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair value, or market
value, of the obligations it assumes under that guarantee and must disclose that information in
its interim and annual financial statements. The disclosure provisions of FIN 45 were effective
for financial statements of interim or annual periods that ended after December 15, 2002. The
provisions for initial recognition and measurement are effective on a prospective basis for
guarantees that are issued or modified after December 31, 2002, irrespective of a guarantors
year-end. The adoption of FIN 45 did not have a material impact on the Companys
consolidated results of operations, financial condition or liquidity. |
| In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation
No. 46, Consolidation of Variable Interest Entities (FIN 46), an interpretation of Accounting |

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| Research Bulletin No. 51, Consolidated Financial Statements, which requires the
consolidation by a business enterprise of variable interest entities if the business enterprise
is the primary beneficiary. The FASB has amended FIN 46, now known as FIN 46 Revised
December 2003 (FIN 46R). The requirements of FIN 46 or FIN 46R are effective to those
entities that are considered to be special-purpose entities no later than as of the end of the
first reporting period that ends after December 15, 2003. The Company adopted FIN 46R
as it is party to a transaction involving a variable interest entity relating to the lessor of the
Veldhoven headquarters building that has been constructed in 2003. See Note 12. |
| --- |
| 2. Discontinued operations |
| On December 18, 2002 ASML announced the proposed sale of its Thermal business and
the termination of its activities in the Track business. Both discontinued businesses met
the criteria of SFAS No. 144 and have been classified accordingly. |
| In December 2002 the Company reviewed its long-lived assets used in the Thermal business
for potential impairment and recorded no impairment charges. During 2003, ASMLs
management again reviewed its long-lived assets for impairment as the Company entered
into negotiations with several potential buyers and accordingly recorded pre-tax impairment
charges of EUR 16.0 million. In October 2003, the Company completed the sale of its Thermal
business to a privately held company formed by VantagePoint Venture Partners. At the time
of the sale, no gain or loss was realized as the net assets were stated at the value equal to the
proceeds of the sale. The net loss of the Thermal business amounted to EUR 32.3 million in
2003 compared to EUR 61.2 million in 2002. |
| The termination of the Track business resulted in an exit plan that included workforce
reductions, fixed asset impairments and inventory write-offs due to discontinued product lines.
The exit plan included the disposal of remaining assets related to the Track business. In 2002,
ASML decided to continue to service its existing customers for whom ASML has warranty or
other service obligations. Consequently, customer support related to the Track business was
not included in discontinued operations for 2002. In June 2003, ASML sold certain of its fixed
assets and inventories related to its Track business to Rite Track. No gain or loss was realized
on the sale. The net loss of the Track business amounted to EUR 3.4 million in 2003 compared
to EUR 58.6 million for 2002. The net loss from operations for 2002 included total pre-tax
estimated exit costs of EUR 47.0 million. These exit costs included asset impairments,
inventory write downs, purchase and other commitment settlements and employee termination
costs. The net loss in 2003 relates mainly to impairment charges recorded on a building in the
United States, previously used by the Companys Track business. This impairment was
determined on the difference between the buildings estimated fair value, as indicated by
an independent real estate appraiser and its carrying value. |
| The tax effects arising from, asset impairment costs, employee termination costs, inventory
write-off and losses from discontinued operations mostly reside and will remain with ASML
U.S. group companies. These losses can be offset against future profits from continuing
operations of these U.S. group companies. |

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Summarized results of operations for discontinued operations are as follows:

Year ended December 31
Revenues
Track	51,472		7,236		2,514
Thermal	203,642		105,929		38,198
Total	255,114		113,165		40,712
Loss from discontinued operations,
net of taxes
Track loss from operations	(20,946	)	(27,991	)	(1,456	)
Track exit costs (net of taxes)	0		(30,626	)	(1,944	)
Thermal loss from operations	(42,844	)	(61,161	)	(21,906	)
Thermal exit costs (net of taxes)	0		0		(10,404	)
Total	(63,790	)	(119,778	)	(35,710	)

Summarized assets and assumed liabilities from discontinued operations are as follows:

As of December 31
Assets
Intangible assets	2,101	4,410	0
Tangible fixed assets	48,675	32,994	3,167
Inventories	90,619	34,693	0
Receivables	59,552	33,064	1,840
Other	7,875	933	0
Total Assets	208,822	106,094	5,007
Liabilities
Accounts payable	14,801	10,463	0
Accrued liabilities	53,053	41,741	13,451
Installation and warranty	25,862	13,887	0
Total Liabilities	93,716	66,091	13,451

ASML organizes its financing activity at the corporate level and does not allocate funding to individual net assets identified as assets from discontinued operations. The following table represents cash flows directly attributable to ASMLs discontinued operations.

| Year ended December 31 — Net cash provided by (used in)
operating activities of discontinued operations | (35,937 | ) | (121,039 | ) | 12,736 |
| --- | --- | --- | --- | --- | --- |
| Net cash used in investing activities of
discontinued operations | (33,878 | ) | (6,434 | ) | 0 |
| Net cash provided by (used in) discontinued
operations | (69,815 | ) | (127,473 | ) | 12,736 |

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3. Restructuring
As a result of the industrys prolonged downturn, ASML announced on July 16, 2003
restructuring measures to further reduce costs company-wide by further reducing its
workforce with approximately 550 positions worldwide. The Company recorded a provision
of EUR 15 million of which EUR 3.7 million is included in cost of sales and EUR 11.3 million is
included in restructuring costs. The Board of Management and the Dutch Works Council are
nearing the completion of a joint study on implementing these workforce reductions in the
Netherlands. Consequently, the Dutch workforce reduction has been delayed.
During 2003, ASML recorded a charge of approximately EUR 7 million in restructuring costs
relating to the consolidation of its office and warehouse facilities at its headquarters in Veldhoven
as the Company ceased using certain of its facilities. The facility exit charges included:
	estimated future obligations for non-cancelable lease payments (net of estimated sublease
income of EUR 25 million). The Companys management estimated the cost of exiting by
referring to the contractual terms of the lease agreements and by evaluating the sublease
agreements concluded for these facilities or, where applicable, by referring to amounts
being negotiated; and
	the impairment of property and equipment (primarily leasehold improvements) for which
there are insufficient cash flows to support the carrying cost. The property and equipment
impairment was determined based on the difference between the assets estimated fair
value and their carrying value.
On December 18, 2002 ASML announced measures to contain costs for its lithography
business, including customer support, to lower the breakeven point by adjusting labor
capacity and increasing operating flexibility. ASML recorded provisions of EUR 78.5 million
during 2002 for slow-moving and obsolete lithography inventory and impairments of tangible
fixed assets that were recorded as cost of sales. ASML further announced its intention to
reduce its lithography-related workforce by approximately 700 positions worldwide
(11.7 percent). The related lay-off costs were largely recorded in 2003 since the final details
on the plan had not been finally determined by December 31, 2002. With respect to this plan,
the Company recorded in 2003 restructuring charges for a total amount of EUR 6.7 million of
which EUR 4 million in cost of sales and EUR 2.7 million in restructuring costs. This
restructuring plan was completed in 2003.
On October 16, 2001, as a consequence of the downturn in the semiconductor industry,
ASML announced cost reductions and a restructuring plan which resulted in the consolidation
of manufacturing facilities and discontinuance of certain product lines related to SVG.
As a result of this restructuring plan, the Company recorded a restructuring provision in
2001 for an amount of EUR 402.7 million mainly relating to inventory write-offs, purchase
commitments, fixed asset write-offs and severance payments. This restructuring provision
was recorded in cost of sales for an amount of EUR 399.6 million and in restructuring costs for
an amount of EUR 3.1 million and was mainly used in 2001 and 2002.

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The following table summarizes the restructuring provision as of December 31, 2003, 2002 and 2001:

commitments		closure costs		payments		Total
Balance as of December 31, 2000	0		0		0		0
Utilization of the year	0		(1,512	)	(5,955	)	(7,467	)
Additions	51,761		3,565		15,125		70,451
Adjustments	0		0		0		0
Effect of foreign currency translation	0		5		11		16
Balance as of December 31, 2001	51,761		2,058		9,181		63,000
Utilization of the year	(27,126	)	(2,044	)	(6,580	)	(35,750	)
Adjustments	(6,337	)	2,116		(1,686	)	(5,907	)
Effect of foreign currency translation	(8,272	)	(330	)	(915	)	(9,517	)
Balance as of December 31, 2002	10,026		1,800		0		11,826
Utilization of the year	(4,711	)	(3,475	)	(6,906	)	(15,092	)
Additions	0		6,833		22,182		29,015
Adjustments	(3,326	)	1,653		0		(1,673	)
Effect of foreign currency translation	(1,111	)	(395	)	(5	)	(1,511	)
Balance as of December 31, 2003	878		6,416		15,271		22,565

| | Adjustments to the 2001 restructuring plan amounting to EUR 5,907
and EUR 1,673 have been recognized in 2002 and 2003 respectively and
are classified as cost of sales. These adjustments relate mainly to
more favorable settlement agreements with vendors on purchase
commitments than the Company had estimated. |
| --- | --- |
| | 4. Market risk and derivatives |
| | Market risk represents the risk of a change in the value of a financial instrument, derivative
or non derivative, caused by fluctuations in currency exchange rates and interest rates.
The Company addresses market risk in accordance with established policies and thereby
enters into various derivative transactions. No such transactions are entered into for trading
purposes. |
| Foreign currency management | The Company uses the euro as its invoicing currency in order to limit the exposure to foreign
currency movements. Exceptions may occur on a customer by customer basis. To the extent
that invoicing is done in a currency other than the euro, the Company is exposed to foreign
currency risk. |
| | It is the Companys policy to hedge material transaction exposures, such as sales transactions
and forecasted cash flows from sales and accounts receivable/accounts payable. ASML
hedges these exposures through the use of foreign exchange options and forward contracts.
The use of a mix of foreign exchange options and forwards is aimed at reflecting the likelihood
of the transactions occurring. The effectiveness of all outstanding hedge contracts is
monitored closely throughout the life of the hedges. |

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| | During the twelve months ended December 31, 2003, no gains or losses were recognized in
cost of sales relating to hedges of forecasted transactions that did not occur. As of December 31,
2003, EUR 0.7 million of other comprehensive income represents the total anticipated loss to be
charged to cost of sales, and EUR 3 million is the total anticipated gain to be released to cost
of sales over the next twelve months as the forecasted revenue and
purchase transactions occur. It is the Companys policy to hedge material re-measurement exposures. These net exposures
from certain monetary assets and liabilities in non-functional currencies are hedged with
forward contracts. Furthermore, the Company uses forward contracts to hedge its 320 million
Swedish Krona loan to Micronic. |
| --- | --- |
| | It is the Companys policy to manage material translation exposures resulting predominantly
from ASMLs U.S. dollar net investments. Up until December 5, 2003, a proportion of ASMLs
USD 520 million 4.25 percent Convertible Subordinated Notes due 2004 was assigned to
certain of the Companys net U.S. dollar investments. For the period from December 5, 2003
through December 31, 2003 a proportion of ASMLs USD 575 million 5.75 percent Convertible
Subordinated Notes due 2006 was assigned to certain of the Companys net U.S. dollar
investments as ASMLs USD 520 million 4.25 per cent Convertible Subordinated Notes due
2004 has been fully redeemed. As a result, fluctuations in the Companys balance sheet ratios
resulting from changes in exchange rates are reduced. |
| Interest rate management | The Company has both assets and liabilities that bear interest, which expose the Company
to fluctuations in the prevailing market rate of interest. The Company uses interest rate swaps
to align the interest typical terms of interest bearing assets with the interest typical terms of
interest bearing liabilities. The Company still retains residual financial statement exposure risk
to the extent that the asset and liability positions do not fully offset. It is the Companys
policy to enter into interest rate swaps to hedge this residual exposure. For this purpose,
the Company uses interest rate swaps, both to hedge changes in market value of fixed loan
coupons payable due to changes in interest rates as well as to hedge the variability of future
interest receipts as a result of changes in market interest rates. |
| Financial
instruments as
of December 31,
2003 | Primary financial instruments recorded on the balance sheet include cash and cash
equivalents, accounts receivable and accounts payable. The carrying amount of these financial
instruments approximates their fair value due to the short-term nature of these instruments.
The following table summarizes the estimated fair values of the Companys financial
instruments: |

As of December 31	2002		2003
	Notional		Notional
Financial Instruments	Amount	Fair Value	Amount	Fair Value
Forward contracts 1	223,000	845	(54,173	) 2	444
Currency options	41,000	782	8,314		(217	)
Interest rate swaps	982,000	5,684	981,285		6,102

(Source: Bloomberg)
1	Includes forward contracts on U.S. Dollars, Swedish Krona,
British Pounds, Israeli Shekel, Japanese Yen and Singapore
dollars.
2	Net amount of forward contracts assigned as a hedge to
sales and purchase transactions, and to monetary assets and
liabilities.

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| | The fair value of forward contracts (used for hedging purposes) is the estimated amount that a
bank would receive or pay to terminate the forward contracts at the reporting date, taking into
account current interest rates, current exchange rates and the current creditworthiness of the
counterparties. |
| --- | --- |
| | The fair value of currency options (used for hedging purposes) is the estimated amount that a
bank would receive or pay to terminate the option agreements at the reporting date, taking
into account current interest rates, current exchange rates, volatility and the current
creditworthiness of the counterparties. The fair value of interest rate swaps (used for hedging purposes) is the estimated amount
that a bank would receive or pay to terminate the swap agreements at the reporting date,
taking into account current interest rates and the current creditworthiness of the
counterparties. |
| Credit risk | Financial instruments contain an element of risk of the counterparties being unable to meet
their obligations. This financial credit risk is monitored and minimized per type of financial
instrument by limiting ASMLs counterparties to a sufficient number of major financial
institutions. ASML does not expect the counterparties to default
given their high credit quality. Furthermore, the Company is exposed to credit risk on its customers. ASML monitors its
customer base and uses protective measures, such as letters of credit. Where deemed
necessary, provisions for potential losses are recorded. |
| | 5. Accounts receivable |
| | Accounts receivable consist of the following: |

As of December 31 — Gross accounts receivable	556,988		320,691
Allowance for doubtful debts	(324	)	(6,196	)
Net accounts receivable	556,664		314,495

A summary of activity in the allowance for doubtful debt:

Year ended December 31 — Balance at beginning of year	(1,439	)	(2,754	)	(324	)
Utilization of the provision	0		2,430		3,241
Additional provision in the year	(1,315	)	0		(9,113	)
Balance at end of year	(2,754	)	(324	)	(6,196	)

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6. Inventories
Inventories consist of the following:

As of December 31 — Raw materials	267,054		229,740
Work-in-process	366,440		319,209
Finished products	381,795		259,690
Total inventories, gross	1,015,289		808,639
Allowance for obsolescence and/or
lower market value	(285,264	)	(213,622	)
Total inventories, net	730,025		595,017

A summary of activity in the allowance for obsolescence is as follows:

Year ended December 31 — Balance at beginning of year	(131,819	)	(500,491	)	( 285,264	)
Provision of the year 1	(393,005	) 1	(112,164	) 1	( 32,431	)
Effect of exchange rates	(4,013	)	36,673		22,976
Utilization of the provision	28,346		290,718		81,097
Balance at end of year	(500,491	)	(285,264	)	( 213,622	)

1 Refer to Note 3, Restructuring
7. Other assets
Other non-current assets consist of the following:

As of December 31 — Loan to Micronic AB 1	35,176	0
Compensation plan assets 2	10,994	8,720
Prepaid expenses	14,915	16,130
Subordinated loan granted to lessor
in respect of Veldhoven headquarters 3	0	5,445
Other	672	416
Total other long-term assets	61,757	30,711

| 1 | The loan to Micronic has a notional amount of 320 million Swedish Krona
and is non-interest bearing. |
| --- | --- |
| | The loan is repayable in 2004 or can be converted into 1 million
shares of Micronic upon the first request of ASML and has therefore
been classified as other current assets. |
| 2 | For further details on compensation plan refer to Note 13. |
| 3 | For further details on loan granted to lessor in respect of Veldhoven
headquarters refer to Note 12. |

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Other current assets consist of the following:

As of December 31 — Loans to Zeiss	76,443	71,268
VAT	34,654	16,528
Loan
to Micronic AB 1	0	35,242
Prepaid expenses	43,745	31,813
Other	20,253	3,061
Total other current assets	175,095	157,912

| 1 The loan to Micronic has a notional amount of 320 million Swedish Krona
and is non-interest bearing. |
| --- |
| The loan is repayable in 2004 or can be converted into 1 million shares of
Micronic upon the first request of ASML. |
| The non-interest bearing loans to Zeiss are repayable by future shipments of
lenses or can be redeemed in cash depending on the specific contractual terms of the
individual loans. |
| 8. Intangible assets |
| In 1999, ASML obtained, through its purchase of the business of
MaskTools, the intellectual property rights relating to Optical
Proximity Correction technology. This technology enhances leading
edge lithography systems to accurately and reliably print line
widths below 0.2 micron. These rights have been valued at cost and
are amortized on a straight-line basis over their estimated useful
life of 10 years. |
| In 2003, ASML acquired a patent portfolio, relating to dual stage technology.
This patent portfolio has been valued at cost and is amortized on a straight-line basis over its
estimated life of 3 years. |

As of December 31
Cost
Balance, January 1	20,475	20,475
Additions	0	3,099
Balance, December 31	20,475	23,574
Accumulated amortization
Balance, January 1	4,200	6,406
Amortization	2,206	2,578
Balance, December 31	6,406	8,984
Net book value December 31	14,069	14,590

Estimated amortization expenses relating to intangible assets for the next five years are as follows:

2004:	3,653
2005:	3,575
2006:	2,100
2007:	2,100
2008:	2,100
Thereafter:	1,062

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9. Property, plant and equipment
Property, plant and equipment consist of the following:


and		and		Leasehold		furniture and
constructions		equipment		improvements		fixtures		Total
Cost
Balance, January 1	166,980		598,746		112,819		154,051		1,032,596
Additions 1	524		48,208		6,209		16,499		71,440
Disposals	(2,041	)	(125,249	)	(21,860	)	(372	)	(149,522	)
Reclassifications	0		(6,213	)	2,845		3,368		0
Effect of exchange rates	(15,351	)	(37,778	)	(1,476	)	(4,959	)	(59,564	)
Balance,
December 31, 2003 1	150,112		477,714		98,537		168,587		894,950
Accumulated depreciation
Balance, January 1	60,599		309,111		56,597		110,566		536,873
Depreciation	4,580		94,639		12,551		22,690		134,460
Impairment	0		12,100		0		0		12,100
Disposals	(394	)	(79,029	)	(21,119	)	(143	)	(100,685	)
Reclassifications	0		(2,612	)	205		2,407		0
Effect of exchange rates	(7,206	)	(23,008	)	(955	)	(4,512	)	(35,681	)
Balance,
December 31, 2003	57,579		311,201		47,279		131,008		547,067
Net Book Value
December 31, 2002	106,381		289,635		56,222		43,485		495,723
December 31, 2003	92,533		166,513		51,258		37,579		347,883

1 Includes as of December 31, 2003 assets under construction for buildings and constructions of EUR 591, machinery & equipment of EUR 2,310, leasehold improvements of EUR 38 and office furniture and fixtures of EUR 8,383.

| During 2003, the Company recorded impairment charges of EUR 12.1
million in cost of sales on machinery and equipment, for which
there are insufficient cash flows to support the carrying cost. The
impairment charges were determined based on the difference between
the assets estimated fair value and their carrying value. |
| --- |
| 10. Accrued liabilities and other |
| Accrued liabilities and other consist of the following: |

As of December 31 — Deferred revenue	35,274	44,542
Warranty and installation	69,684	33,331
Materials and costs to be paid	73,620	65,554
Advances from customers	126,860	187,677
Personnel related items	60,814	53,229
Investment credits payable	31,651	12,282
Restructuring	11,826	22,565
Other	39,119	23,203
Total accrued liabilities and other	448,848	442,383

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| 11. Long-term debt and borrowing
arrangements |
| --- |
| The Companys obligations to make principal
repayments under long-term debt and borrowing
arrangements as of December 31, 2003, for the
next
five years and thereafter, assuming no conversions
occur and excluding the fair value of interest
rate
swaps used to hedge the fair value, are as
follows: |

2004	0
2005	2,317
2006	466,522
2007	2,132
2008	526
Thereafter	381,310
Total	852,807

Convertible debt securities The following table summarizes the Companys outstanding Convertible Subordinated Notes as of December 31, 2003, including fair value of interest rate swaps used to hedge the fair value of the underlying fixed loan coupon:

| As
of December 31 | | | |
| --- | --- | --- | --- |
| 4.25 percent convertible | | | |
| Notional amount | 495,757 | 0 | |
| Fair value
interest rate swaps | 0 | 0 | |
| Total | 495,757 | 0 | |
| 5.75 percent convertible | | | |
| Notional amount | 548,298 | 455,285 | |
| Fair value
interest rate swaps | 19,985 | 8,411 | |
| Total | 568,283 | 463,696 | |
| 5.50 percent convertible | | | |
| Notional amount | 0 | 380,000 | |
| Fair value
interest rate swaps | 0 | (1,153 | ) |
| Total | 0 | 378,847 | |
| Total
convertible debt | 1,064,040 | 842,543 | |

| In April 1998, ASML completed an offering of EUR
272
million principal amount of its 2.5 percent
Convertible Subordinated Notes due 2005, with
interest payable annually commencing April 9,
1999.
In April 2002, ASML exercised its option to redeem
and did thereby call for redemption on May 3,
2002,
all of the Companys remaining outstanding
bonds (EUR
268.5 million) at a redemption price of
100.00
percent of the principal amount of the bonds plus
accrued interest. Before May 3, 2002,
bondholders
converted bonds for a total of EUR
265.4 million into
13,634,782 ordinary shares. |
| --- |
| In November 1999, ASML completed an offering of
USD
520 million principal amount of its
4.25 percent
Convertible Subordinated Notes due
November 30, 2004,
with interest payable semi-annually on
November 30
and May 30 of each year, commencing on
May 30, 2000.
In July and August 2003, ASML repurchased USD
139.6
million. In October 2003, ASML called for
redemption
on December 5, 2003, all of the bonds that
remained
outstanding, at a redemption price of
100.85 percent
of their principal amount plus accrued
interest. |

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| Before December 5, 2003, bondholders
converted bonds
for a total of USD 120 thousand into 1,430
ordinary
shares, of which USD 20 thousand were converted
into
536 shares in 2003. On December 5, 2003, the
Company
redeemed the remaining USD
380.3 million. |
| --- |
| In October 2001, ASML completed an offering of USD
575 million principal amount of its
5.75 percent
Convertible Subordinated Notes due
October 15, 2006,
with interest payable semi-annually on
April 15 and
October 15 of each year, commencing on
April 15,
2002. The notes are convertible into 30,814,576
ordinary shares at USD 18.66 (EUR 14.77) per share
at
any time prior to maturity. At any time on or
after
October 22, 2004, the notes are redeemable at
the
option of ASML, in whole or in part, at
100 percent
of its principal amount, together with accrued
interest, provided that the Companys shares
close
above 130 percent of the conversion price for
twenty
trading days out of a thirty-day period. During
2003
none of the notes were converted into ordinary
shares. |
| In May 2003, ASML completed an offering of EUR 380
million principal amount of its 5.50 percent
Convertible Subordinated Notes due 2010, with
interest payable annually on May 15 of each
year,
commencing on May 15, 2004. The notes are
convertible
into an aggregate of 26,573,426 ordinary shares at
a
conversion price of EUR 14.30 per share, subject
to
adjustment, at any time prior to maturity. Unless
previously converted, the notes are redeemable at
100% of its principal amount on May 15, 2010.
ASML
may call the notes for early redemption at any
time
after May 22, 2006, provided that ASMLs
shares close
above 150% of the conversion price for twenty
trading
days out of a thirty-day period. |
| Interest rate swaps are used to hedge the risk
from
interest rate fluctuations. As of
December 31, 2003,
deferred interest rate swap proceeds amounting to
EUR
7.3 million have been recorded in the balance
sheet
as an addition to the Companys outstanding
Convertible Subordinated Notes. |
| The following table summarizes the estimated fair
values of ASMLs Convertible Subordinated
Notes: |

	2002 — Notional		2003 — Notional
As of December 31	Amount	Fair Value	Amount	Fair Value
4.25 percent convertible	495,757	429,467	N/A	N/A
5.75 percent convertible	548,298	467,443	455,285	596,992
5.50 percent convertible	N/A	N/A	380,000	541,975

| | (Source: Bloomberg) The fair value of the Companys long-term
debt is
estimated based on the quoted market prices as of
December 31, 2002 and December 31, 2003,
respectively. |
| --- | --- |
| Other long
term debt | These loans do not contain any
covenants. |
| | In February 1997, the Company received a USD 6.5
million (EUR 5.1 million) loan from the
Connecticut
Development Authority. The loan has a ten-year
term,
bears interest at 8.25 |

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| | percent, and is secured by the Companys
Wilton,
Connecticut, U.S. facility. At December 31,
2003, the
Companys outstanding debt with respect to
this loan
amounted to USD 2.7 million (EUR
2.1 million). |
| --- | --- |
| | In 1999, the Company assumed three yen-denominated
loans in connection with its merger with SVG.
Approximately EUR 3.7 million (JPY
503 million) is
outstanding at December 31, 2003, which is
secured by
land and buildings in Japan, is payable in monthly
installments through the year 2011, bearing
interest
at 2.5 percent. Approximately EUR
10 million (JPY
1,350 million) and EUR 1.5 million (JPY
200 million)
are outstanding at December 31, 2003. These
loans are
unsecured, repayable in 2006 and 2007, and bear
interest at 3.1 percent and 2.2 percent,
respectively, payable semi-annually. |
| | These loans do not contain any
covenants. |
| Lines of
credit | At December 31, 2003, the Company had credit
available facilities for a total of EUR
288 million
(2002, EUR 288 million), all of which expire
in 2005.
These credit lines bear interest at the European
Interbank Offered Rate (EURIBOR) plus a
margin. No
amounts were outstanding under these credit
facilities at the end of 2003 and 2002. The credit
facilities contain certain restrictive covenants,
including a requirement that the Company maintains
a
minimum financial condition ratio of 40%,
calculated
in accordance with a contractually agreed formula.
ASML was in compliance with these covenants at
December 31, 2002 and 2003. ASML does not
currently
anticipate any difficulty in continuing to meet
these
covenant requirements. |
| | 12. Commitments, contingencies and
guarantees |
| | The Company has various contractual obligations,
some
of which are required to be recorded as
liabilities
in the Companys consolidated financial
statements,
including long- and short- term debt. Others,
namely
operating lease commitments and purchase
obligations,
are generally not required to be recognized as
liabilities on the Companys balance sheet
but are
required to be disclosed. |
| Lease
Commitments and
Variable Interests | The Company leases equipment and buildings under
various operating leases. Operating leases are
charged to expense on a straight-line basis. See
Tabular Disclosure of Contractual Obligations
below. |
| | The Company has concluded several operating leases
for its buildings that contain a purchase option.
In
December 2003, the FASB issued FIN 46R,
Consolidation of Variable Interest
Entities. FIN
46R introduces a new concept of a variable
interest
entity. An enterprise must consolidate a variable
interest entity if that enterprise has a variable
interest (or combination of variable interests)
that
will absorb a majority of the entitys
expected
losses if they occur, receive a majority of the
entitys expected residual returns if they
occur, or
both. For each of the individual leases for its
buildings, the Company concluded that it is not
the
primary beneficiary to the expected losses or to
the
expected residual returns or to both. |
| | The Company is party to a transaction involving a
variable interest entity relating to the lessor of
the Veldhoven headquarters building that has been
completed in 2003. |

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| | Total assets of the variable interest entity
amount
to approximately EUR 54 million and are
funded
through: |
| --- | --- |
| | variable interest entitys equity of EUR
1.9
million; |
| | straight loans granted by the shareholders of
the
variable interest entity of EUR 12.3 million,
partly
redeemable over 15 years and quarterly
interest-bearing; |
| | a third party loan of EUR 34.9 million,
partly
redeemable over 15 years and quarterly
interest-bearing; and |
| | a subordinated loan provided by the Company of
EUR
5.4 million. |
| | The lease will expire in 2018. The Company has an
option to purchase the property, at a
predetermined
price scheme, throughout the term of the lease.
The
purchase option at the end of the lease term
amounts
to EUR 24.5 million. In accordance with FIN
46R the
Company has concluded that it is not the primary
beneficiary in the lessor entity to the expected
losses or to the expected residual returns or to
both. As a result the Company did not consolidate
the
specific assets and liabilities of this variable
interest entity in its financial
statements. |
| Purchase Obligations | The Company enters into purchase commitments with
vendors in the ordinary course of business to
ensure
a smooth and continuous supply chain for key
components. Purchase obligations include medium to
long-term purchase agreements. These contracts
differ
and may include certain restrictive clauses. Any
identified losses that would result from purchase
commitments that are expected to be forfeited are
provided for in the Companys financial
statements.
As of December 31, 2003, the Company had
purchase
commitments for a total amount of approximately
EUR
335 million, which are not recorded on the
Companys
balance sheet. In its negotiations with suppliers
the
Company continuously seeks to align its purchase
commitments with its business
objectives. |
| | See Tabular Disclosure of Contractual Obligations
below. |
| Other
Off-Balance Sheet Arrangements | The Company has certain additional commitments and
contingencies that are not recorded on its balance
sheet but may result in future cash requirements.
In addition to the operating lease commitments and
the purchase obligations, these off-balance sheet
arrangements consist of product warranties, a call
option granted to a third party to acquire our
optics
business at fair value and guarantees of
subsidiarys
debt to a third party. |
| | The Company provides guarantees to third parties
in
connection with transactions entered into by its
subsidiaries in the ordinary course of
business:
These include bank loans reflected in Note
11. |
| Tabular
Disclosure of
Contractual
Obligations | The Companys off-balance sheet arrangements
with
respect to operating lease obligations and
purchase
obligations as of December 31, 2003 can be
summarized as follows: |

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Total	1 year	years	Years	years
Operating Lease
Obligations	386,112	47,005	72,448	67,699	198,960
Purchase
Obligations	335,115	300,170	34,945	0	0
Total
Contractual Obligations	721,227	347,175	107,393	67,699	198,960

| | Operating lease obligations include leases of
equipment and facilities. Rental expense was EUR
61
million, EUR 56 million and EUR
53 million for the
years ended December 31, 2001, 2002 and 2003,
respectively. |
| --- | --- |
| | 13. Employee benefits |
| | In February 1997, SVG adopted a non-qualified
deferred compensation plan that allowed a select
group of management and highly compensated
employees
and directors to defer a portion of their salary,
bonus and commissions. The plan allowed SVG to
credit
additional amounts to participants account
balances,
depending on the amount of the employees
contribution, up to a maximum of 5 percent of
an
employees annual salary and bonus. In
addition,
interest is credited to the participants
account
balances at 120 percent of the average
Moodys
corporate bond rate. For calendar years 2001, 2002
and 2003, participants accounts were
credited at
9.54 percent, 8.89 percent and
8.50 percent,
respectively. SVGs contributions and related
interest became 100 percent vested in May
2001 with
the merger of SVG and ASML. During fiscal years
2001,
2002 and 2003, the expense incurred under this
plan
was EUR 2 million, EUR 1 million and EUR
0.9 million,
respectively. As of December 31, 2002 and
2003, the
Companys liability under the deferred
compensation
plan was EUR 14 million and EUR
9 million,
respectively. |
| | In July 2002, ASML adopted a non-qualified
deferred
compensation plan for its U.S. employees that
allows
a select group of management or highly compensated
employees to defer a portion of their salary,
bonus,
and other benefits. The plan allows ASML to credit
additional amounts to the participants
account
balances. The participants invest their funds
between
the investments available in the plan.
Participants
elect to receive their funds in future periods
after
the earlier of their employment termination or
their
withdrawal election, at least 3 years after
deferral.
There were minor plan expenses in 2003. On
December
31, 2002 and 2003, the Companys liability
under the
deferred compensation plan was EUR 1 million
and EUR
2 million, respectively. |
| Pension
plans | ASML and its consolidated subsidiaries maintain
various retirement plans covering substantially
all
of its employees. Employees in the Netherlands
participate in a multi-employer union plan
determined
in accordance with the respective collective
bargaining agreements. This plan is subject to a
salary cap. Employees with a salary exceeding this
cap also participate in an ASML defined
contribution
pension plan. |
| | For employees working outside the Netherlands,
ASML
maintains a defined contribution pension plan,
with
employer contribution based on a percentage of
salary. For employees participating in the United
States pension plan, the Company may make, at its
sole discretion, an additional contribution to the
plan if the Company meets certain financial
performance criteria. No such additional
contributions were made in 2001, 2002 or
2003. |

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The Companys pension costs for all employees were:

| Year ended December 31 — Pension plan
based on multi-employer
union plan | 17,528 | 15,059 | 16,514 |
| --- | --- | --- | --- |
| Pension plans
based on defined contribution | 6,609 | 7,265 | 6,636 |
| Total | 24,137 | 22,324 | 23,150 |

| Bonus
plan | ASML has a performance-related bonus plan for
senior
management, who are not members of the Board of
Management. Under this plan, the ultimate bonus
amount is dependant on the actual performance on
corporate, departmental and personal targets. The
bonus for senior management can range between 0
percent and 60 percent of their annual
salary. For
the years 2001 and 2002, no bonuses were granted.
A
bonus for senior management is accrued for in the
statement of operations for the year ended
December
31, 2003 for an amount of EUR 6.5 million,
expected
to be paid in the first quarter of
2004. |
| --- | --- |
| Profit-sharing plan | ASML has a profit-sharing plan covering all
employees. Under the plan, employees who are
eligible receive an annual profit-sharing bonus,
based on a percentage of net income to sales
ranging
from 0 to 20 percent of annual salary. The
profit-sharing percentage for each of the years
2001,
2002 and 2003 was 0 percent. |
| Stock
options | Each year, the Board of Management determines,
by category of ASML personnel, the total available
number of options that can be granted in that
year.
The determination is subject to the approval of
the
Supervisory Board and the holders of priority
shares
of the Company. |
| 1998 | In 1998, the Company issued 3,348,576 options to
purchase ordinary shares, consisting of options to
purchase 2,097,831 ordinary shares for eligible
employees of ASML and options to purchase
1,250,745
ordinary shares for key personnel and management.
This issuing of options included a feature whereby
eligible employees were given the right to elect
to
receive options to purchase ordinary shares in
lieu
of distribution under the profit-sharing plan. The
options have fixed exercise prices equal to the
closing price of the Companys ordinary
shares on
Euronext Amsterdam on the applicable grant dates.
Stock options granted to eligible employees vested
over a three-year period with any unexercised
stock
options expiring six years after the grant date.
Stock options granted to key personnel in 1998
vested
over a three and four-year period with any
unexercised stock options expiring six years after
the grant date. |
| 1999 | In 1999, stock options were authorized to purchase
up
to 3,000,000 ordinary shares, including a feature
whereby eligible employees were given the right to
elect to receive options to purchase ordinary
shares
in lieu of distribution under the profit sharing
plan. The options have fixed exercise prices equal
to
the closing price of the Companys ordinary
shares on
Euronext on the applicable grant dates. Granted
stock
options vested over a three-year period with any
unexercised stock options expiring six years after
the grant date. |

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| 2000 | In 2000, options were authorized to purchase up to
4,500,000 ordinary shares. Granted stock options
vest
over a three-year period with any unexercised
stock
options expiring six years after the grant
date |
| --- | --- |
| 2001 | In 2001, options were authorized to purchase up to
6,000,000 ordinary shares, including a feature
whereby eligible employees were given the right to
elect to receive options to purchase ordinary
shares
in lieu of distribution under the profit sharing
plan. Options granted under these plans have fixed
exercise prices that are equal either to the
closing
price of the Companys ordinary shares on
Euronext on
the applicable grant date, or 135 percent of
the
closing price of the Companys ordinary
shares on
Euronext on the applicable grant dates. Granted
stock
options vest over a three-year period with any
unexercised stock options expiring six years after
the grant date, with the exception of a designated
part of grants made in July 2001 that have a
graded
vest of 1/3 (one third) after the first year, 1/3
(one third) after the second year and 1/3 (one
third)
in the third year. During 2001, 232,520 options to
purchase ordinary shares were granted to the Board
of
Management. No options were exercised during
2001 by members of the Board of Management. |
| 2002 | In 2002, options were authorized to purchase up to
6,000,000 ordinary shares, including a feature
whereby eligible employees were given the right to
elect to receive options to purchase ordinary
shares
in lieu of a percentage of their salary. Options
granted under these plans have fixed exercise
prices
equal to the closing price of the Companys
ordinary
shares on Euronext on the applicable grant dates.
A
designated part of the granted stock options vest
over a one year period with any unexercised stock
options expiring six years after the grant date.
The
remaining part of the granted stock options vest
over
a three-year period with any unexercised stock
options expiring six years after the grant
date. |
| 2003 | In 2003, options were authorized to purchase up to
6,000,000 ordinary shares, including a feature
whereby eligible employees were given the right to
elect to receive options to purchase ordinary
shares
in lieu of a percentage of their salary. Options
granted under these plans have fixed exercise
prices
equal to the closing price of the Companys
ordinary
shares on Euronext on the applicable grant dates.
Granted stock options vest over a three-year
period
with any unexercised stock options expiring ten
years
after the grant date. |
| Stock
Option Extension Plans | In 2002, employees were offered an extension of
the
option period for options granted in 1997 up to
and
including 2000. For the years 1997 up to and
including 1999, this extension is either until
October 21, 2008, or October 21, 2005.
For 2000, the
option period is extended until 2012. Employees
who
accepted the extension became subject to
additional
exercise periods in respect of their options and a
higher strike price. |
| Financing
of Stock option
Plans | Option plans that were issued before 2001 were
constructed with a virtual financing arrangement
whereby ASML financed the tax value of the options
granted to employees subject to the Netherlands
tax-regime. The loans issued under this
arrangement
are repayable to ASML on the exercise date of the
respective option, provided that the option was
actually exercised. If the options expire
unexercised, the respective loans are
forgiven. |

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| The following three tables have not been
restated for
discontinued operations: |
| --- |
| Stock option transactions are summarized as
follows: |

| shares | | exercise price per share
(EUR) | |
| --- | --- | --- | --- |
| Outstanding,
December 31, 2000 | 17,069,039 | | 28.84 |
| granted | 5,883,550 | | 32.78 |
| exercised | (1,488,107 | ) | 9.75 |
| cancelled | (265,212 | ) | 23.22 |
| Outstanding,
December 31, 2001 | 21,199,270 | | 26.01 |
| Granted | 4,483,070 | | 19.30 |
| exercised | (1,539,132 | ) | 9.45 |
| cancelled | (266,760 | ) | 17.46 |
| Outstanding,
December 31, 2002 | 23,876,448 | | 25.13 |
| Granted | 2,516,980 | | 9.66 |
| exercised | (335,977 | ) | 10.98 |
| cancelled | (1,486,427 | ) | 21.82 |
| Outstanding,
December 31, 2003 | 24,571,024 | | 24.58 |
| Exercisable,
December 31, 2003 | 15,494,969 | | 23.99 |
| Exercisable,
December 31, 2002 | 9,551,860 | | 14.77 |
| Exercisable,
December 31, 2001 | 6,870,466 | | 15.22 |

Information with respect to stock options outstanding at December 31, 2003 is as follows:

Options			Weighted — average	Weighted — average
outstanding	Number	Number	remaining	exercise price
Range of exercise	outstanding	exercisable	contractual	of outstanding
prices (EUR)	December 31, 2003	December 31, 2003	life (years)	options (EUR)
2.35 - 9.29	647,930	177,550	7.91	7.43
9.30 -
12.79	6,134,015	4,087,415	6.03	11.40
12.80 -
31.79	11,692,260	7,285,834	3.56	22.51
31.80 -
47.15	6,096,819	3,944,170	6.30	44.00
Total	24,571,024	15,494,969	4.97	24.58

	14. Contingencies
Legal
Contingencies	ASML is party to various legal proceedings
generally
incidental to its business. Since late 2001,
ASML has been a party to a series of litigation
and
administrative proceedings in which Nikon alleges
ASMLs infringement of Nikon patents relating
to
photolithography. These are discussed below. ASML
also faces exposure from other actual or potential
claims and legal proceedings. Although the
ultimate
disposition of these other claims and proceedings
cannot be predicted with certainty, it is the
opinion
of the Companys management that the outcome
of any
such

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| other claim that is pending or threatened, either
individually or on a combined basis, is expected
not
to have a materially adverse effect on ASMLs
consolidated financial condition. On occasion,
certain ASML customers have received notices of
infringement from third parties. These notices
allege
that the ASML equipment used by those customers in
the manufacture of semiconductor products, and/or
the
methods relating to use of the ASML equipment,
infringes one or more patents issued to those
third
parties. ASML has been advised that, if these
claims
were successful, it could be required to indemnify
such customers for some or all of any losses
incurred
or damages assessed against them as a result of
that
infringement. |
| --- |
| The Company accrues for legal costs related to
litigation in its statement of operations at the
time
when the related legal services are actually
provided
to ASML. |
| Ultratech case U.S |
| On May 23, 2000, Ultratech Stepper, Inc.
(Ultratech) filed a lawsuit in the
United States
District Court for the Eastern District of
Virginia
(which was subsequently transferred to the United
States District Court for the Northern District of
California) against ASML. Ultratech alleged that
ASML
is infringing Ultratechs rights under a
United
States patent, through the manufacture and
commercialization in the U.S. of advanced
photolithography equipment embodying technology
that,
in particular, is used in Step & Scan
equipment.
Ultratechs complaint seeks injunctive relief
and
damages. On August 16, 2002, the Court
granted ASMLs
motion for summary judgment of non-infringement
based
upon the previously reported favorable
interpretation
by the Court as to the scope and meaning of the
claims of the asserted patent. A final judgment on
those favorable rulings was subsequently entered
in
ASMLs favor and ASMLs challenge to the
validity and
enforceability of the patent was dismissed without
prejudice in light of the finding of no
infringement.
Ultratech has taken an appeal to the United States
Court of Appeals for the Federal Circuit from the
judgment in ASMLs favor, where the matter
has been
briefed and now awaits oral argument and
disposition
by the Court. |
| Management continues to believe that
Ultratechs
claims are without merit and that ASMLs
defenses are
strong. ASML will continue to assert these
defenses
vigorously. |
| Nikon case U.S |
| On December 21, 2001, Nikon Corporation
(Nikon) and
two of its United States subsidiaries filed a
so-called Section 337 complaint against ASML
with the
United States International Trade Commission
(ITC).
On January 23, 2002, the ITC instituted an
investigation based on Nikons complaint. The
complaint in the ITC investigation alleges that
ASMLs photolithography machines imported
into the
United States infringe seven United States patents
held by Nikon. Nikons patents relate to
several
different aspects of photolithography equipment.
Nikon seeks to exclude the importation of
infringing
products. ASML believes that the asserted patents
are
both not infringed and invalid. A trial before an
administrative law judge on these issues was
completed in November 2002. |
| On January 29, 2003, the administrative law
judge
(ALJ) in the ITC proceedings ruled
that ASML had
not violated Section 337. After Nikon and
ASML
petitioned for review of the ALJs decision
by the
full Commission, the ITC adopted the ALJs
decision
that ASML did not infringe any valid, enforceable
patent of Nikons and had not violated
Section 337. |

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| Nikon has appealed the ITCs decision to the
United
States Court of Appeals for the Federal Circuit.
ASMLs motion to intervene in that appeal was
allowed. A decision from the Court of Appeals in
not
expected before mid 2004. |
| --- |
| On December 21, 2001, Nikon also filed a
separate
patent infringement action in the United States
District Court for the Northern District of
California alleging infringement of four different
Nikon patents and seeking injunctive relief and
damages. On March 22, 2002, Nikon amended its
complaint to allege infringement of an additional
patent. On April 8, 2002, ASML answered this
complaint denying infringement, asserting
affirmative
defenses of invalidity and unenforceability, and
alleging counterclaims. |
| On April 5, 2002, ASML filed a counterclaim
in the
ITC action alleging that Nikons
photolithography
machines sold in the United States infringe five
ASML
patents. According to ITC procedure, these
counterclaims were initially transferred to the
United States District Court for the District of
Arizona. On October 17, 2002, these claims
were
transferred to the United States District Court
for
the Northern District of California, where they
are
now pending. |
| On October 18, 2002, Nikon filed a second
patent
infringement action in the United States District
Court for the Northern District of California
alleging infringement of six out of the seven
patents
from the ITC action and two additional patents. On
December 2, 2002, ASML answered this second
complaint
denying infringement of these additional patents
and
asserting affirmative defenses of invalidity and
unenforceability. |
| ASML intends to vigorously pursue its claims and
believes it has meritorious defenses against
Nikons
claims. Discovery in the California litigation is
currently ongoing; however, trial is not expected
to
commence before late 2004. In the event a final
non-appealable decision were to be rendered that
was
adverse to ASML, it could substantially restrict
or
prohibit ASMLs sales (from and into) the
United
States, which in turn could have a material
adverse
effect on the Companys financial position
and
results of operations, the amount which currently
cannot be estimated. |
| Nikon case Japan |
| On July 8, 2003, Nikon withdrew its
counterclaim
against ASML filed in October 2002, alleging that
ASMLs photolithography machines infringe 12
Japanese
patents held by Nikon. On November 19, 2003,
Nikon
filed a new complaint against ASML and its
subsidiary
in Japan alleging that ASMLs
photolithography
machines sold in Japan infringe patents held by
Nikon. This litigation is in the early stage, and
a
final decision is not expected before 2006. In the
event a final non-appealable decision in the
Japanese
proceeding was rendered that was adverse to ASML,
it
could substantially restrict or eliminate
ASMLs
ability to achieve future sales growth in Japan,
which could in turn have a material adverse effect
on
the Companys results of operations, the
amount which
currently cannot be estimated. |
| The patent infringement action filed by ASML on
August 19, 2002, seeking damages and
injunctive
relief against Nikon to cease the manufacture and
sale of photolithography machines, and another
patent
infringement action filed by ASML on
January 16,
2003, seeking injunctive relief against Nikon, are
still pending at the Tokyo District
Court. |

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| | The Company expects a decision by the Tokyo
District
Court on the first mentioned case will be rendered
around the second quarter of 2004. If the decision
is
adverse to ASML, ASML may appeal to the Tokyo High
Court. In January 2004, ASML filed a new complaint
against Nikon in the Tokyo District Court. Final
non-appealable decisions in these cases are not
expected before 2005. |
| --- | --- |
| | Nikon case Korea |
| | On October 8, 2002, Nikon filed a patent
infringement
action against ASML and its Korean subsidiary in
the
Seoul District Court alleging that ASMLs
photolithography machines infringe five of
Nikons
patents, four of which are related to Nikons
patents
asserted in its U.S. litigation. The complaint
seeks
to prohibit ASML from the manufacture, use, sale,
import or export of infringing products, the
destruction of the manufacturing facilities for
these
products and damages. Exchanges of briefs from
both
sides have taken place on the preliminary issues;
exchanges of several additional briefs are
expected.
ASML filed invalidation actions against two Nikon
patents related to this to this District Court
action
in April 2003 with the Korean Intellectual
Property
Office, and the initial exchanges of briefs have
occurred. |
| | On January 15, 2003, ASML filed a complaint
against
Nikon and its Korean subsidiary alleging that
Nikon
infringes one of ASMLs patents, seeking
injunctive
relief against Nikon to cease the manufacture and
sale of lithography devices that infringe
ASMLs
patent. Nikon Korea and Nikon Japan filed response
briefs denying infringement. Nikon filed an
invalidation action against five ASML patents in
July
2003 with the Korean Intellectual Property Office.
ASML submitted a response brief with the Korean
Intellectual Property Office on October 13,
2003. |
| | The District Court decisions on the Korean
proceedings are not expected before 2005; the
final,
non-appealable decisions are not expected before
2006. ASML intends to vigorously pursue its claims
and believes it has meritorious defenses against
Nikons claims. In the event that a final
non-appealable decision were to be rendered in the
Korean proceedings that was adverse to ASML, it
could
substantially restrict or eliminate ASMLs
sales in
Korea, which could have a material adverse effect
on
the Companys results of operations, the
amount which
currently cannot be estimated. |
| Other Contingencies | ASML has research and development agreements with
the
government of the Netherlands, Ministry of
Economic
Affairs. In previous years, credits were received
for
research and development projects relating to new
generations of semiconductor lithography systems.
The
agreements require that the majority of the
amounts
received are to be repaid, with interest, to the
extent that product sales occur that relate to the
research. The amount of the repayment due is based
on
a percentage of the selling price of the product
and
is charged to cost of sales when such a sale is
recorded. |
| | As of December 31, 2002 and 2003, ASML has
contingent
obligations totaling EUR 12 million and EUR
0 million
to repay TOK credits received in previous
years. |

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15. Research and development credits
ASML receives subsidies and credits for research and development from various sources
as follows:

As of December 31 — Netherlands government technology subsidy	15,881	25,981	19,119
Netherlands Ministry of
Economic Affairs (TOKs) credits 1	0	0	0
European community and other subsidies	342	34	0
Total subsidies and credits received	16,223	26,015	19,119

1 In 2001, 2002 and 2003, ASML recorded EUR 3.6 million, EUR 36.1 million and EUR 13.8 million, respectively, for repayment obligations. For the year 2004, there do not remain any future repayment obligations for TOKs.

16. Income taxes
The amounts below include continued and discontinued operations as tax effects arising from
discontinued operations mostly reside and will remain with ASML group companies.
The components of income before income taxes are as follows:

Year ended December 31 — Domestic	(36,486	)	(206,001	)	(288,370	)
Foreign	(660,734	)	(108,447	)	45,163
Total	(697,220	)	(314,448	)	(243,207	)

The foreign component predominantly relates to the U.S

The Netherlands domestic statutory tax rate is 34.5 percent. The reconciliation between the provision for income taxes shown in the consolidated statement of operations, based on the effective tax rate, and expense based on the domestic tax rate, is as follows:

| Year ended December 31 — Income tax expense based on
domestic rate | (244,027 | ) | (108,485 | ) | (83,906 | ) |
| --- | --- | --- | --- | --- | --- | --- |
| Different tax rates | 25,974 | | 12,362 | | (6,568 | ) |
| Other credits and non-taxable items | (175 | ) | (10,502 | ) | 7,483 | |
| Provision for income taxes shown
in the statement of operations | (218,228 | ) | (106,625 | ) | (82,991 | ) |

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ASMLs provision for income taxes consists of the following:

Year ended December 31
Current
Domestic	(28,343	)	26		2,307
Foreign	6,002		5,668		17,094
Deferred
Domestic	0		(46,020	)	(99,426	)
Foreign	(195,887	)	(66,299	)	(2,966	)
Total	(218,228	)	(106,625	)	(82,991	)

Deferred tax assets (liabilities) consist of the following:

As of December 31 — Tax effect carry-forward losses	230,474		294,534
Inventories	896		49,961
Temporary depreciation investments	(133,516	)	(152,745	)
Other temporary differences	78,960		11,185
Total	176,814		202,935

Deferred tax assets (liabilities) are classified in the consolidated financial statements as follows:

As of December 31 — Deferred tax assets current	0		49,590
Deferred tax assets non-current	314,795		325,271
Deferred tax liabilities current	(4,465	)	(2,285	)
Deferred tax liabilities non-current	(133,516	)	(169,641	)
Total	176,814		202,935

Deferred tax assets are resulting from net operating loss carry-forwards incurred predominantly in the U.S. and the Netherlands. Net operating losses qualified as tax losses under Dutch tax laws incurred by Netherlands group companies can in general be offset for an indefinite period against future taxable profits. Net operating losses qualified as tax losses under U.S. federal tax laws incurred by U.S. group companies can in general be offset against future profits realized in 20 years following the year in which the losses are incurred. The possibility to carry forward U.S. federal tax losses will expire in the period 2021 through 2023. Net operating losses qualified as tax losses under U.S. state tax laws incurred by U.S. group companies can in general be offset against future profits realized in 5 to 20 years following the year in which the losses are incurred. The period of net operating loss carryforward for U.S. state tax purposes depend on the state in which the tax loss arose. The possibility to carry forward U.S. state tax losses will expire in the period 2006 through 2023. The total amount of tax loss carried forward as of December 31, 2003 is EUR 842 million. Based on its analysis, management believes that it is more likely than not that all tax losses will be offset by future taxable income before the statute on loss compensation expires. The analysis takes into account the projected future taxable income from operations, possible tax planning alternatives, and the expected outcome of a bi-lateral Advance Pricing Agreement

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| (APA) initiated by ASML. Management believes that it is more likely than not
that these negotiations will result in an APA agreement between ASML and the U.S. and
Netherlands tax authorities regarding inter-company transfers of certain tangible and
intangible assets. These transactions are the result of the realignment of group operations.
The APA negotiations are expected to be finalized before the end of 2004. |
| --- |
| Pursuant to Netherlands tax laws, ASML has temporarily depreciated part of its investment
in its U.S. group companies. This depreciation has been deducted from the taxable base in
The Netherlands. The depreciation resulted in a temporary tax refund of EUR 152 million.
This temporary depreciation must be added back on a straight-line basis to the taxable base
in the period 2006 through 2010. The net tax effect of this repayment obligation, amounting to
EUR 152 million, is recorded as a long-term deferred tax liability in the Companys financial
statements. |
| 17. Segment disclosure |
| Segment information has been prepared in accordance with SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. |
| The Company has only one reporting segment in continuing operations: lithography.
ASML markets and sells its products in the United States, Europe and Asia principally
through its direct sales organization. ASML makes all its sales into the United States through
its U.S. subsidiary and its sales into Asia primarily through its Hong Kong subsidiary. |

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The following table summarizes net sales, operating income and identifiable assets of ASMLs operations in Asia, Europe and the United States, the significant geographic areas in which ASML operates.


2001
Net sales to
unaffiliated customers	742,697		150,127		696,423		0		1,589,247
Inter-company sales	0		1,106,485		0		(1,106,485	)	0
Total net sales	742,697		1,256,612		696,423		(1,106,485	)	1,589,247
Operating income (loss)	(48,024	)	39,634		(544,811	)	(37,417	)	(590,618	)
Identifiable assets	365,918		3,141,398		825,591		(941,090	)	3,391,817
2002
Net sales to
unaffiliated customers	1,066,476		190,196		702,000		0		1,958,672
Inter-company sales	0		1,580,790		27,971		(1,608,761	)	0
Total net sales	1,066,476		1,770,986		729,971		(1,608,761	)	1,958,672
Operating income (loss)	5,569		(84,460	)	30,392		(45,544	)	(94,043	)
Identifiable assets	438,976		3,360,456		630,824		(1,248,732	)	3,181,524
2003
Net sales to
unaffiliated customers	762,384		220,190		560,163		0		1,542,737
Inter-company sales	26,897		1,212,740		54,331		(1,293,968	)	0
Total net sales	789,281		1,432,930		614,494		(1,293,968	)	1,542,737
Operating income (loss)	5,038		(224,608	)	95,404		(30,866	)	(155,032	)
Identifiable
assets 1	611,477		3,332,335		565,531		(1,660,658	)	2,848,685

1 Includes as of December 31, 2003, identifiable long-lived assets for a total of EUR 703,865 divided over Asia for EUR 22,043, for Europe EUR 1,635,371 and for the United States EUR 380,488 and taking into account eliminations of EUR 1,334,037.

| | Assets, liabilities and capital expenditures by geographical area are not evaluated by executive
management and are not used for the purpose of making decisions about allocating resources
to the segment or assessing its performance. |
| --- | --- |
| | 18. Board of Management and Supervisory Board remuneration |
| Board of
Management | The total remuneration and related costs (in euro) of the members of the Board of
Management can be specified as follows: |

Year ended December 31 — Salaries	2,187,000	2,016,000	1,912,966
Bonuses	0	0	1,052,131	1
Pension cost	172,000	263,000	212,058
Total	2,359,000	2,279,000	3,177,155

1 The statement of operations for the year ended December 31, 2003 includes an accrual for bonuses of EUR 1,052,131 expected to be paid in the first quarter of 2004 to the Board of Management.

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The 2003 remuneration and related costs (in euro, except for Mr. Chavoustie, which is in USD) of the individual members of the Board of Management was as follows:

D.J. Dunn	590,000	324,500	914,500
P.T.F.M. Wennink	300,000	165,000	465,000
M.A. van den Brink	375,000	206,250	581,250
S.K. McIntosh	355,000	195,250	550,250
D.P. Chavoustie 3	370,000	203,500	573,500

1	Salaries for 2003 were equal to the salaries paid in 2002.
2	The statement of operations for the year ended December 31, 2003 includes an accrual for bonuses expected to
be paid in the first quarter of 2004 to the Board of Management.
3	Amounts in USD

| ASML has a performance-related bonus plan for the Board of Management. Under this plan,
the ultimate bonus amount is dependent on the actual achievement on corporate targets.
These targets are market share, financial and operational performance parameters relating to
return on invested capital parameters. |
| --- |
| The 2003 vested pension benefit 1 (in euro, except for Mr. Chavoustie, which is in USD)
of individual members of the Board of Management were as follows: |

D.J. Dunn	85,082
P.T.F.M. Wennink	30,323
M.A. van den Brink	38,198
S.K. McIntosh	50,537
D.P. Chavoustie 2	10,000

| 1 | Since the pension arrangement for members of the Board of Management is a defined contribution plan,
the Company does not have further pension obligations beyond the annual premium contribution. |
| --- | --- |
| 2 | Amount in USD |

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Details of options held by members of the Board of Management to purchase ordinary shares of ASML Holding N.V. are set forth below:

	Granted	Exercised			Share — price on
Jan 1,	during	during	Dec. 31,	Exercise	exercise	Expiration
2003	2003	2003	2003	price	date	date
D.J. Dunn	600,000		600,000	17.51		01-04-2005
	67,500		67,500	58.00		20-01-2012
	30,000		30,000	40.40		22-01-2007
	30,000		30,000	20.28		21-01-2008
	30,000		30,000	7.02		22-04-2013
P.T.F.M. Wennink	30,000		30,000	11.05		01-01-2005
	31,500		31,500	58.00		20-01-2012
	15,660		15,660	40.40		22-01-2007
	50,000		50,000	29.92		22-01-2007
	20,960		20,960	22.12		20-07-2007
	20,000		20,000	20.28		21-01-2008
	20,000		20,000	7.02		22-04-2013
M.A. van den Brink	21,600		21,600	14.87		21-01-2005
	31,500		31,500	58.00		20-01-2012
	19,860		19,860	40.40		22-01-2007
	26,560		26,560	22.12		20-07-2007
	20,000		20,000	20.28		21-01-2008
	20,000		20,000	7.02		22-04-2013
D.P. Chavoustie	60,000		60,000	15.24		20-10-2005
	30,000		30,000	10.42		20-10-2005
	46,800		46,800	14.87		20-10-2005
	67,500		67,500	56.48		20-01-2012
	25,500		25,500	29.92		22-01-2007
	30,240		30,240	22.12		20-07-2007
	20,000		20,000	20.28		21-01-2008
	20,000		20,000	7.02		22-04-2013
S.K. McIntosh	21,000		21,000	40.40		22-01-2007
	250,000		250,000	29.92		22-01-2007
	28,080		28,080	22.12		20-07-2007
	20,000		20,000	20.28		21-01-2008
	20,000		20,000	7.02		22-04-2013

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Supervisory Board During 2002 and 2003, the individual members of the Supervisory Board received the following remuneration (in euro):

Year ended December 31 — H. Bodt	40,000	40,000
P.H. Grassmann	25,000	25,000
S. Bergsma	25,000	25,000
A. Westerlaken 1	25,000	0
J.A. Dekker	25,000	25,000
M.J. Attardo 2	25,000	25,000
J.W.B. Westerburgen 3	0	25,000

1 Membership ended March 21, 2002,
2 M.J. Attardo owns 34,722 options on shares of the Company.
3 Membership started March 21, 2002.

Members of the Board of Management and/or Supervisory Board are free to acquire or dispose of ASML shares or options for their own account, provided they comply with the ASML Insider Trading Rules 2002. Those securities are not part of members remuneration from the Company and are therefore not included.

| 19. Selected operating expenses and additional
information |
| --- |
| Personnel expenses for all employees were: |

Year ended December 31 — Wages and salaries	413,011	371,281	326,678 1
Social security expenses	33,412	31,897	24,640
Pension and retirement expenses	24,137	22,324	23,150
Total	470,560	425,502	374,468

1 The average wages and salaries per average number of employees decreased in 2003 compared to 2002 as a result of the decline in the USD versus the euro during 2003.

The average number of employees from continuing operations during 2001, 2002 and 2003 was 6,434, 5,640 and 5,323, respectively (excluding non-payroll employees). The total number of personnel employed per sector was:

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As of December 31 — Marketing & Technology	1,689	1,708	1,507
Goodsflow	1,526	1,416	1,184
Customer Support	1,964	2,090	1,717
General	716	588	518
Sales	144	169	133
Total continuing operations	6,039	5,971	5,059
Total discontinued operations	1,031	712	119	1
Total number of employees
(including non-payroll employees)	7,070	6,683	5,178

1 As of January 1, 2004, these employees are transferred to newly incorporated companies of the buyer of ASMLs Thermal business.

| In 2001, 2002 and 2003, a total of 2,972, 2,857 and 2,649
employees in the Companys continuing operations (excluding
non-payroll employees), respectively, were employed in the
Netherlands. |
| --- |
| 20. Vulnerability due to certain concentrations |
| ASML relies on outside vendors to manufacture the components and
subassemblies used in its systems, each of which is obtained from a
sole supplier or a limited number of suppliers. ASMLs reliance on a
limited group of suppliers involves several risks, including a
potential inability to obtain an adequate supply of required
components and reduced control over pricing and timely delivery of
these subassemblies and components. In particular, the number of
systems ASML has been able to produce has occasionally been limited
by the production capacity of Zeiss. Zeiss is currently ASMLs sole
external supplier of lenses and other critical optical components
and is capable of producing these lenses only in limited numbers and
only through the use of its manufacturing and testing facility in
Oberkochen, Germany. ASML sells a substantial number of lithography
systems to a limited number of customers. In 2003, sales to one
customer accounted for EUR 314 million or 20 percent of net sales.
In 2002, sales to one customer accounted for EUR 377 million, or 19
percent of net sales. As a result of the limited number of
customers, credit risk on receivables is concentrated. ASMLs three
largest customers accounted for 44 percent of accounts receivable at
December 31, 2003, compared to 42 percent at December 31, 2002.
Business failure of one of ASMLs main customers may result in
adverse effects on its business, financial condition and results of
operations. |
| 21. Capital stock |

Cumulative preference shares In 1998 as extended in 2003, the Company has granted to the preference share foundation, Stichting Preferente Aandelen ASML (the Foundation) an option to acquire cumulative preference shares in the capital of the Company (the Preference Share Option). The object of the Foundation is to protect the interests of the Company and the enterprises maintained by it. The cumulative preference shares have the same voting rights as ordinary

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| shares but are entitled to dividends on a preferential basis at a percentage
based on the
average official interest rate determined by EURIBOR plus 2 percent. |
| --- |
| The Preference Share Option gives the Foundation the right to
acquire a number of cumulative preference shares equal to the number
of ordinary shares outstanding at the time of exercise of the
cumulative preference share option for a subscription price equal to
their EUR 0.02 nominal value. Only one-fourth of this subscription
price is payable at the time of initial issuance of the cumulative
preference shares. The cumulative preference shares may be cancelled
and repaid by the Company upon the authorization by the General
Meeting of Shareholders of a proposal to do so by the Board of
Management approved by the Supervisory Board and the Meeting of
Priority Shareholders. Exercise of the Preference Share Option would
effectively dilute the voting power of the ordinary shares then
outstanding by one-half. The practical effect of any such exercise
could be to prevent attempts by third parties to acquire control of
the Company. |

| Declaration of
Independence | The Board of Directors of the Foundation and the Board of Management of the Company
together declare that the Foundation is independent of the Company as defined in article A2bI
of Bijlage X bij het Fondsenreglement van Euronext Amsterdam. The Board of the
Foundation comprises three voting members from the Netherlands business and academic
communities, Mr. R.E. Selman, Mr. F.H.M. Grapperhaus and Mr. M.W. den Boogert, and one
non-voting member, the Chairman of the Companys Supervisory Board, Mr. H. Bodt. |
| --- | --- |
| Priority shares | The priority shares are held by the Stichting Prioriteitsaandelen ASML Holding N.V.,
a foundation having a self-elected board that must consist solely of members of the
Companys Supervisory Board and Board of Management. |
| | As of December 31, 2003, the board members were: |
| | Doug J. Dunn |
| | Henk Bodt |
| | Syb Bergsma |
| | Jan A. Dekker |
| | Peter T.F.M. Wennink |

| An overview of the other functions held by above persons can be
obtained at the Companys office. In the joint opinion of the
Company and the foregoing members of the board of the priority
share foundation, the composition of the board conforms with
Appendix X, Article C.10 of the Listing and Issuing Rules of the
Euronext Amsterdam. 1 The priority shares are not entitled to
dividends but have a preferred right over all other outstanding
preferred and ordinary shares on the return of their nominal value
in the case of winding up the Company. Holders of priority shares
are required to approve certain significant corporate decisions and
transactions of the Company. These decisions and transactions
encompass, but are not limited to, amendment of the Articles of
Association, winding up of the Company, issuance of shares,
limitation of pre-emptive rights and repurchase and cancellation of
shares. |
| --- |
| Veldhoven, January 30, 2004 |

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Adopted by The Board of Management: Doug J. Dunn Peter T.F.M. Wennink Martin A. van den Brink David P. Chavoustie Stuart K. McIntosh

Approved by The Supervisory Board: Henk Bodt Syb Bergsma Michael J. Attardo Peter H. Grassmann Jos W.B. Westerburgen Jan A. Dekker

1 Article C10 states that the issuer shall ensure that not more than half of the priority shares are being held by managing directors of the issuer or, where the priority shares are held by a legal entity, that no more than half of the number of votes to be exercised in meetings of the foundation in which decisions are made about the exercise of the voting rights of the priority shares, can be exercised, directly or indirectly, by persons who are also managing directors of the issuer.

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| Independent Auditors Report |
| --- |
| To the Supervisory Board, Board of Management and Shareholders of ASML Holding
N.V. Veldhoven, the Netherlands |
| We have audited the accompanying consolidated balance sheets of
ASML Holding N.V. and its subsidiaries (collectively, the
Company) as of December 31, 2002 and 2003, and the related
consolidated statements of operations, comprehensive income,
shareholders equity and cash flows for each of the three years in
the period ended December 31, 2003 (all expressed in euros). These
financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits. |
| We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion. |
| In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 2002 and 2003, and the results of its
operations, comprehensive income and its cash flows for each of the
three years in the period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United States
of America. |

Eindhoven, the Netherlands January 30, 2004

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link1 "Exhibit Index"

Exhibit Index

Exhibit No.	Description
1	Articles of Association of ASML Holding N.V. (English translation) (Incorporated
by reference to Amendment No. 6 to the Registrants Registration Statement
on Form 8-A/A, filed with the Commission on June 18, 2002 (File No. 0-25566))
2.1	Paying Agent, Conversion Agent and Registrar Agreement between ASML
Holding N.V. and the Bank of New York relating to the Registrants 5.75%
Convertible Subordinated Notes due 2006 (Incorporated by reference to Exhibit
2.3. of the Registrants Annual Report on Form 20-F for the year ended
December 31, 2001)
2.2	Paying Agent, Conversion Agent and Registrar Agreement between ASML
Holding NV and the Bank of New York relating to the Registrants 5.50 percent
Convertible Subordinated Notes due 2010*
4.1	Agreement between ASML Lithography B.V. and Carl Zeiss, dated March 17,
2000 (Incorporated by reference to exhibit 4.2 to the Registrants Annual Report
on Form 20-F for the fiscal year ended December 31, 2000)#
4.2	Agreement between ASML Holding N.V. and Carl Zeiss, dated October 24,
2003*#
4.3	Form of Indemnity Agreement between ASML Holding N.V. and members of its
Board of Management*
4.4	Form of Indemnity Agreement between ASML Holding N.V. and members of its
Supervisory Board*
4.5	Employee Agreement between ASML Holding N.V. and Doug J. Dunn*
4.6	Employee Agreement between ASML Holding N.V. and Stuart K. McIntosh*
4.7	Employee Agreement between ASML Holding N.V. and David P. Chavoustie*
4.8	Form of Employee Agreement for members of the Board of Management*
4.9	ASML New Hires and Incentive Stock Option Plan For Management
(Version 2003) (Incorporated by reference to exhibit 4.4 to the Registrants
Statement on Form S-8, filed with the Commission on September 2, 2003
(File No. 333-109154))
8.1	List of Subsidiaries*
12.1	Certification of CEO and CFO Pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934*
13.1	Certification of CEO and CFO Pursuant to Rule 13a-14(b) of the Securities
Exchange Act of 1934 and 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002*
14.1	Consent of Deloitte & Touche*

*Filed herewith

Certain information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission

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ASML Holding N.V. Annual Report 2003

3813_10-k_2004-02-05_994ed6fe-bb56-47e4-9a46-27ca50393579.zip

Certain information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission

Certain information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission

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ASML Holding N.V. — Annual Report 2003

3813_10-k_2004-02-05_994ed6fe-bb56-47e4-9a46-27ca50393579.zip

Certain information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission

Certain information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission

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ASML Holding N.V. Annual Report 2003