Form 20-F

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, 2005

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 issuer’s classes of capital or common stock
as of the close of the period covered by the annual report.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ No o

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
Yes o No þ

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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o Item 18 þ

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ

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

 

 

Contents

Part I			4
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			4
B. Capitalization and Indebtedness			7
C. Reasons for the Offer and Use of Proceeds			7
D. Risk Factors			7
Item 4 Information on the Company			12
A. History and Development of the Company			12
B. Business Overview			13
C. Organizational Structure			18
D. Property, Plants and Equipment			18
Item 4A Unresolved Staff Comments			19
Item 5 Operating and Financial Review and Prospects			19
A. Operating Results			21
B. Liquidity and Capital Resources			31
C. Research and Development, Patents and Licenses			33
D. Trend Information			33
E. Off-Balance Sheet Arrangements			33
F. Tabular Disclosure of Contractual Obligations			34
G. Safe Harbor			35
Item 6 Directors, Senior Management and Employees			35
A. Directors and Senior Management			35
B. Compensation			37
C. Board Practices			37
D. Employees			41
E. Share Ownership			42
Item 7 Major Shareholders and Related Party Transactions			42
A. Major Shareholders			42
B. Related Party Transactions			44
C. Interests of Experts & Counsel			44
Item 8 Financial Information			44
A. Consolidated Statements and Other Financial Information			44
B. Significant Changes			44
Item 9 The Offer and Listing			44
A. Listing Details			44
B. Plan of Distribution			45
C. Markets			45
D. Selling Shareholder			45
E. Dilution			45
F. Expenses of the Issue			45
Item 10 Additional Information			45
A. Share Capital			45
B. Memorandum and Articles of Association			45
C. Material Contracts			46
D. Exchange Controls			48
E. Taxation			48
F. Dividends and Paying Agents			52
G. Statement by Experts			52
H. Documents on Display			52
I. Subsidiary Information			52
Item 11 Quantitative and Qualitative Disclosures About Market Risk			52
Item 12 Description of Securities Other Than Equity Securities			54
Part II			55
Item 13 Defaults, Dividend Arrearages and Delinquencies			55
Item 14 Material Modifications to the Rights of Security Holders and Use of Proceeds			55

Item 15 Controls and Procedures			55
Item 16			55
A. Audit Committee Financial Expert			55
B. Code of Ethics			55
C. Principal Accountant Fees and Services			56
D. Exemptions from the Listing Standards for Audit Committees			56
E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers			56
Part III			57
Item 17 Financial Statements			57
Item 18 Financial Statements			57
Item 19 Exhibits			57
EX-4.5
EX-4.13
EX-8.1
EX-12.1
EX-13.1
EX-15.1

Part I

Special Note Regarding Forward-Looking Statements

In addition to historical information, this annual report on Form 20-F contains 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 was accounted for under the “pooling of interests” method. Therefore, the selected financial data of ASML Holding N.V. (“ASML” or the “Company”) for the year ended December 31, 2001, reflects the combination of financial statements for ASML’s historical operations with those of SVG.

On December 18, 2002, we announced our decision to divest our Thermal business, including related customer support activities, and the termination of our manufacturing activities in the Track business. As a result of this decision, our consolidated financial statements for each of the three years ended December 31, 2005, our selected financial data for each of the five years ended December 31, 2005 and the financial and operational information presented in this annual report on Form 20-F present these businesses as discontinued operations, instead of as a separate segment as they had been reported prior to the divestiture announcement.

Item 1

Identity of Directors, Senior Management and Advisors

Not applicable.

Item 2

Offer Statistics and Expected Timetable

Not applicable.

Item 3

Key Information

A. Selected Financial Data

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.”

Year ended December 31		2001				2002				2003				2004				2005
(in thousands, except per share data) 1		EUR				EUR				EUR				EUR				EUR
Consolidated statements of operations data
Net sales			1,589,247				1,958,672				1,542,737				2,465,377				2.528,967
Cost of sales			1,558,234				1,491,068				1,173,955				1,559,738				1,554,772
Gross profit on sales			31,013				467,604				368,782				905,639				974,195
Research and development costs			347,333				324,419				305,839				352,920				347,901
Research and development credits			(16,223	)			(26,015	)			(19,119	)			(21,961	)			(24,027	)
Selling, general and administrative expenses			245,962				263,243				212,609				201,629				201,204
Restructuring and merger and acquisition costs (credits)			44,559				0				24,485				(5,862	)			0
Operating income (loss)			(590,618	)			(94,043	)			(155,032	)			378,913				449,117
Minority interest in net result from subsidiaries			3,606				0				0				0				0
Interest income (expense), net			(7,207	)			(36,781	)			(29,149	)			(16,073	)			(14,094	)
Income (loss) from continuing operations before income taxes			(594,219	)			(130,824	)			(184,181	)			362,840				435,023
(Provision for) benefit from income taxes			179,017				42,779				59,675				(127,380	)			(123,559	)
Income (loss) from continuing operations			(415,202	)			(88,045	)			(124,506	)			235,460				311,464
Loss from discontinued operations before income taxes			(103,001	)			(183,624	)			(59,026	)			0				0
Benefit from income taxes			39,211				63,846				23,316				0				0
Loss from discontinued operations			(63,790	)			(119,778	)			(35,710	)			0				0
Net income (loss)			(478,992	)			(207,823	)			(160,216	)			235,460				311,464
Earnings per share data 2, 3
Basic income (loss) from continuing operations per ordinary share			(0.89	)			(0.18	)			(0.26	)			0.49				0.64
Basic loss from discontinued operations per ordinary share			(0.14	)			(0.26	)			(0.07	)			0.00				0.00
Basic net income (loss) per ordinary share			(1.03	)			(0.44	)			(0.33	)			0.49				0.64
Diluted net income (loss) per ordinary share			(1.03	)			(0.44	)			(0.33	)			0.49				0.64
Number of ordinary shares used in computing per share amounts (in thousands)
Basic			465,866				476,866				482,240				483,380				484,103
Diluted			465,866				476,866				482,240				484,661				542,979

1		The selected consolidated data for all periods reflect the effects of our decision in December 2002 to discontinue our Track business and divest our Thermal business which we substantially divested in October 2003.
2		Net income (loss) per ordinary share amounts have been retroactively adjusted to reflect the issuance of 47,139,000 ordinary 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 (i) in 2001, 2002, 2003 and 2004 does not assume conversion of ASML’s outstanding Convertible Subordinated Notes and (ii) in 2001, 2002 and 2003 does not assume the exercise of options issued under ASML’s stock option plans, as such conversions and exercises would have an anti-dilutive effect.

As of December 31		2001				2002				2003				2004				2005
(in thousands)		EUR				EUR				EUR				EUR				EUR
Consolidated balance sheets data
Cash and cash equivalents			910,678				668,760				1,027,806				1,228,130				1,904,609
Working capital4			1,822,711				1,662,570				1,463,308				1,868,871				1,785,836
Total assets			3,643,840				3,301,688				2,868,282				3,243,766				3,756,023
Long-term liabilities			1,588,846				1,233,398				1,040,556				1,039,023				624,203
Total shareholders’ equity			1,226,287				1,315,516				1,141,207				1,391,602				1,711,837
Consolidated statements of cash flows data
Purchases of property, plant and equipment			(160,427	)			(89,282	)			(48,567	)			(74,979	)			(72,660	)
Depreciation, amortization and impairment			138,959				186,686				156,900				93,144				98,881
Net cash provided by (used in) continuing operating activities			(328,017	)			(61,127	)			532,659				257,147				713,511
Net cash provided by (used in) discontinued operating activities			(35,937	)			(121,039	)			12,736				(5,880	)			(2,018	)
Net cash provided by (used in) total operating activities			(363,954	)			(182,166	)			545,395				251,267				711,493
Net cash used in continuing investing activities			(197,693	)			(72,876	)			(49,028	)			(60,398	)			(60,803	)
Net cash used in discontinued investing activities			(33,878	)			(6,434	)			0				0				0
Net cash used in total investing activities			(231,571	)			(79,310	)			(49,028	)			(60,398	)			(60,803	)
Net cash provided by (used in) continuing financing activities			664,290				21,427				(68,156	)			18,871				2,879
Net cash provided by (used in) discontinued financing activities			0				0				0				0				0
Net cash provided by (used in) total financing activities			664,290				21,427				(68,156	)			18,871				2,879
Net increase (decrease) in cash and cash equivalents			(73,522	)			(241,918	)			359,046				200,324				676,479
Ratios and other data
Increase (decrease) in net sales (in percent)			(40.5	)			23.2				(21.2	)			59.8				2.6
Gross profit as a percentage of net sales			2.0				23.9				23.9				36.7				38.5
Operating income (loss) as a percentage of net sales			(37.2	)			(4.8	)			(10.0	)			15.4				17.8
Net income (loss) as a percentage of net sales			(26.1	)			(4.5	)			(8.1	)			9.6				12.3
Shareholders’ equity as a percentage of total assets			33.7				39.8				39.8				42.9				45.6
Backlog of new systems (in units) at year end			117				103				103				119				86
Backlog of used systems (in units) at year end			1				7				21				12				9
Backlog of systems (in units) at year end			118				110				124				131				95
Sales of systems (in units)			197				205				169				282				196
Number of employees at year end for continuing operations			6,039				5,971				5,059				5,071				5,055
Number of ordinary shares outstanding (in thousands) at year end			466,978				482,182				482,514				483,676				484,670
Stock price ASML at year end5			19.52				7.96				15.72				11.81				16.90
Volatility % ASML shares (260 days)6			71.0				89.0				60.9				37.4				26.0

4		Working Capital is calculated as the difference between total current assets, including cash and cash equivalents, and total current liabilities.
5		Closing price of ASML’s 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)

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 “$”, “dollars”, “U.S. dollars”, “U.S. dollar”, “USD” or “US$” are to United States dollars. Solely for the convenience of the reader, certain U.S. dollar amounts have been translated into euro amounts using an exchange rate in effect on December 31, 2005 of US$ 1.00 = EUR 0.84782.

A portion of our net sales and expenses is, and historically 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 U.S. dollars per euro.

Calendar period		2001				2002				2003				2004				2005				2006
																						(Jan. 24)
Period End			0.89				1.05				1.26				1.35				1.18				1.23
Average1			0.89				0.95				1.13				1.24				1.24				1.21
High			0.95				1.05				1.26				1.36				1.35				1.23
Low			0.84				0.86				1.04				1.18				1.17				1.20

1		The average of the Noon Buying Rates on the last business day of each month during the period presented.

Months of		July				August				September				October				November				December				January
		2005				2005				2005				2005				2005				2005				2006 (Jan. 24)
High			1.22				1.24				1.25				1.21				1.21				1.20				1.23
Low			1.19				1.21				1.20				1.19				1.17				1.17				1.20

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

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 is Highly Cyclical and We May be Adversely Affected by Any Future Downturns

As a supplier to the global semiconductor industry, we are subject to the industry’s business cycles, the timing, duration and volatility of which are difficult to predict. The semiconductor industry has historically been cyclical. 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.

Changes in demand for our products as a result of these business cycles have been affected by the timing and amounts of customers’ capital equipment purchases and investments in new technology. Future reductions or delays in capital equipment purchases by our customers could have a material adverse effect on our business, financial condition and results of operations.

In anticipation of periods of increasing demand for semiconductor manufacturing equipment, we must maintain sufficient manufacturing capacity and inventory, and we must attract, hire, integrate and retain a sufficient number of qualified employees to meet customer demand. Our ability to predict the timing and magnitude of industry fluctuations is limited and our products require significant lead time to complete. Accordingly, we may not be able to effectively increase our production capacity to

respond to an increase in customer demand in an industry upturn resulting in lost revenues and damage to customer relationships.

Conversely, in an industry downturn, our ability to maintain profitability will depend substantially on whether we are able to lower our costs and break-even level, which is the number of lithography systems we must sell in a year to achieve net income. If we are unable to lower costs in an industry downturn, our net income may decline significantly. As we need to keep certain levels of inventory on hand to meet anticipated product demand, we also incur costs related to inventory obsolescence in an industry downturn. In addition, industry downturns generally result in overcapacity, exercising downward pressure on prices, which has had in the past, and could have in the future, a material adverse effect on our business, financial condition and results of operations.

Our Business Will Suffer If We Do Not Respond Rapidly to Commercial and Technological Changes in the Semiconductor Industry

The semiconductor manufacturing industry is subject to:

•

rapid change towards more complex technologies;

•

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 and 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 a material adverse effect on our business, financial condition and results of operations.

In addition, we may invest considerable financial and other resources to develop and introduce new technologies, products and product enhancements, such as Extreme Ultraviolet lithography (“EUV”), that our customers may not ultimately adopt. If our customers do not adopt these or other products or enhancements that we develop due to a preference for more established technologies and products or for other reasons, we would not recoup any return on our investments in these technologies or products, which may result in charges to our statement of operations and materially and adversely affect the future growth of the Company.

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;

•

the value of ownership of that system based on its purchase price, maintenance costs, productivity and customer service and support; and

•

the strength and breadth of our portfolio of patents and other intellectual property rights.

Our competitiveness will increasingly depend upon our ability to develop new and enhanced semiconductor equipment that is competitively priced and introduced on a timely basis, as well as our ability to protect and defend our intellectual property rights. See Item 4.B. “Business Overview, Intellectual Property” and Note 14 to our consolidated financial statements.

The costs to develop new systems, in particular photolithography systems, are extremely high and accordingly, the photolithography equipment industry is characterized by fierce competition between a few suppliers. ASML’s 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.

Both Nikon and Canon have substantial financial resources and broad patent portfolios. Each continues to introduce new products with improved price and performance characteristics that compete directly with our products, and 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 further intensify price-based competition in those markets that account for the majority of our sales, resulting in lower prices and margins and a material adverse effect 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 single 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 a material 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 our business. See Item 4.B. “Business Overview, Manufacturing, Logistics and Suppliers.”

In addition to Zeiss’ current position as our single 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. In particular, we rely heavily on Cymer, Inc., a U.S. based company, to provide excimer laser systems.

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 deliver our products in a timely manner, 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 lithography systems to a limited number of customers. While the identity of our largest customers may vary from year to year, we expect sales to remain concentrated among relatively few customers in any particular year. The loss of any significant customer or any reduction in orders by a significant customer may have a material adverse effect on our business, financial condition and results of operations.

In 2005, sales to one customer accounted for EUR 609 million, or 24 percent of net sales, compared to EUR 434 million, or 18 percent of net sales, in 2004. As a result of the limited number of our customers, credit risk on our receivables is concentrated. Our three largest customers accounted for 49 percent of accounts receivable at December 31, 2005, compared to 38 percent at December 31, 2004. Business failure of one of our main customers may have a material adverse effect 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 manufacturing 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 expected in our product introduction plans, which could have a material adverse effect on our business, financial condition and results of operations.

In particular, our current backlog includes a significant number of technology enhancements, including those associated with immersion systems. In order for the market to accept these technology enhancements, our customers, in many cases, must upgrade their existing technology capabilities. For instance, in order for our customers to effectively use immersion systems, they must have sophisticated technology to make use of resist (a fluid) and track equipment used in the immersion process. Such upgrades from established technology may not be available to our customers to enable volume production using our immersion systems or other technology

enhancements. This could result in our customers pushing back or canceling orders for our technology enhancements, which could negatively impact 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 lithography equipment systems (196 units in 2005), with an average selling price (“ASP”) in 2005 of EUR 11.4 million (EUR 13.5 million for new systems and EUR 2.9 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:

•		the highly cyclical semiconductor business industry;
•		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, have a material adverse effect on our operating results for that period.

Since the first quarter of 2003, we have published financial results on a quarterly basis. Our published quarterly earnings have varied significantly from quarter to quarter and may vary in the future as a result of the above.

Compliance with Internal Controls Evaluations and Attestation Requirements May Increase Our Costs and We May Identify Significant Deficiencies or Material Weaknesses

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, ASML will be required, as a foreign private issuer, beginning in fiscal year 2006, to perform an evaluation of its internal controls over financial reporting and have its auditor publicly attest to such evaluation. We are following an internal plan of action for compliance, which includes a timeline and scheduled activities, although as of the date of this filing we have not yet finalized the evaluation.

Compliance with these requirements is expensive and time-consuming. If we fail to complete this evaluation in a timely manner, or if our independent auditor cannot attest to our evaluation in a timely manner, we could be subject to regulatory scrutiny and a loss of public confidence in our internal controls. In addition, we may uncover significant deficiencies or material weaknesses. Measures taken by us to remedy these issues may require significant effort and expense, as well as the commitment of significant managerial resources. Each of these circumstances may have an adverse impact on our business, financial condition and results of operations or on our share price.

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:

•		intellectual property laws may not sufficiently protect our proprietary rights or may adversely change in the future;
•		pending patent applications may not be granted or construed as expected;
•		the steps we take to prevent misappropriation or infringement of our proprietary rights may not be successful; and
•		third parties may be able to develop or obtain patents for similar competing technology.

In addition, litigation may be necessary in order to enforce our intellectual property rights or to determine the scope and validity of the proprietary rights of others. 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.

Defending Against Intellectual Property Claims by Others Could Harm Our Business

We face a continuing risk that we will be subject to claims alleging the infringement of others’ intellectual property rights. If successful, these claims could limit or prohibit us from developing our technology and producing our products, which could have a material adverse effect on our business, financial condition and results of operations.

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, our customers may be subject to claims of infringement from third parties, alleging that our products used by such customers in the manufacture of semiconductor products and/or the processes relating to the use of our products infringe one or more

patents issued to such parties. 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. This may have a material adverse effect on our business, financial condition and results of operations.

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 environment;
•		unexpected legal or regulatory changes; and
•		inability to effectively protect intellectual property.

If we are unable to manage successfully the risks inherent in our international activities, our business, financial condition and results of operations could be materially and adversely affected.

In particular, approximately 18 percent of our 2005 revenues and approximately 27 percent of our 2004 revenues were derived from customers in Taiwan. Taiwan has a unique international political status. The People’s Republic of China asserts sovereignty over Taiwan and does not recognize the legitimacy of the Taiwan government. Relations between Taiwan and the People’s Republic of China, changes in Taiwanese government policies and other factors affecting Taiwan’s political, economic or social environment could have a material adverse effect on our business, financial condition and results of operations.

We Are Subject to Environmental Laws and Regulations

We are subject to Netherlands and foreign environmental regulations in areas such as energy resource management, use, storage, discharge and disposal of hazardous substances, recycling, clean air, water protection and waste disposal. We believe that we have taken adequate measures 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 a material 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. We cannot ensure that alternative 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 a material 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 adapt 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 planned workforce reductions. 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 Netherlands 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 competitors. See Item 6.D. “Employees.”

Fluctuations in Foreign Exchange Rates Could Harm Our Results of Operations

We are exposed to currency risks. We are particularly exposed to fluctuations in the exchange rate between the U.S. dollar and the euro as we incur manufacturing costs and price our systems predominantly in euro while a portion of our net sales and cost of sales is denominated in U.S. dollars.

In addition, a substantial portion of our assets and liabilities and operating results are denominated in U.S. dollars, and a small portion of our assets, liabilities and

operating results are denominated in currencies other than the euro and the U.S. dollar. Our consolidated financial statements are expressed in euro. Accordingly, our results of operations are exposed to fluctuations in various exchange rates.

Furthermore, a strengthening of the euro particularly against the U.S. Dollar and the Japanese Yen 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 a material adverse effect on our business, financial condition and results of operations.

Also see Item 5.A. “Operating Results, Foreign Exchange Management,” Item 5.F. “Tabular Disclosure of Contractual Obligations,” Item 11 “Quantitative and Qualitative Disclosures About Market Risk” and Note 4 to our consolidated financial statements.

Risks Related to Our Ordinary Shares

The current market price of our ordinary shares may not be indicative of prices that will prevail in the future. In particular, the market price of our ordinary shares experiences significant fluctuation, including fluctuation that is unrelated to our performance. We expect that this fluctuation will continue in the future.

Our Articles of Association provide 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 certain corporate decisions and transactions in the hands of our Supervisory Board. 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. This effectively would dilute by one-half the voting power of our outstanding ordinary shares, which may discourage or significantly impede a third party from acquiring a majority of our voting shares.

See further Item 6.C. “Board Practices” and Item 10.B. “Memorandum and Articles of Association.”

Item 4

Information on the Company

A. History and Development of 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 (including Hong Kong), 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, telephone +31 40 268 3000.

In May 2001, we merged with SVG (now part of ASML US, Inc.), a company that was active in the Lithography, Track and Thermal businesses. In December 2002, we announced the termination of our manufacturing activities in the Track business and the divestiture of our Thermal business. In October 2003, we substantially completed the divestiture of our Thermal business.

Capital Expenditures

Our capital expenditures over the past three years amounted to EUR 79.8 million for 2005, EUR 111.3 million for 2004 and EUR 74.5 million for 2003. The related cash outflows amounted to EUR 74.0 million for 2005, EUR 75.5 million for 2004 and EUR 51.7 million for 2003. Our capital expenditures consist of machinery and equipment (e.g. prototypes, demonstration systems and training systems), information technology investments, leasehold improvements to our facilities and licenses of patents related to lithography equipment. 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.

Disposals within continued operations, principally comprising machinery and equipment (more specifically, demonstration systems and training systems), amounted to EUR 30.3 million for 2005, EUR 36.2 million for 2004 and EUR 48.8 million for 2003. See Notes 8 and 9 to our consolidated financial statements.

B. Business Overview

We are one of the world’s leading providers of advanced technology systems for the semiconductor industry, based on market share. We offer an integrated portfolio of lithography 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, imaging and overlay 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 and low-cost volume production at the earliest possible date;
•		enhancing the capabilities of the installed base through ongoing field upgrades of key value drivers (productivity, imaging and overlay) based on further technology developments;
•		reducing the cycle time between customer order of a system and the use of that system in volume production on-site;
•		expanding operational flexibility in research and manufacturing by reinforcing strategic alliances with world-class partners;
•		improving the reliability and uptime of our installed system base; and
•		providing re-marketing services that effectively increase residual value by extending the life of equipment.

Market and Technology Overview

The worldwide electronics and computer industries have experienced significant 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 and 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 print 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 industry’s 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 TWINSCAN product platform 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 millimeter) wafers. The TWINSCAN platform became in 2003 the vehicle to introduce improved resolution products both for 300 millimeter and 200 millimeter wafer size factories. Our PAS 5500 product family, which supports a maximum wafer size of 200 millimeters in diameter, comprises advanced wafer steppers and Step & Scan systems suitable for i-line and deep UV (including 248-nanometer (“nm”) and 193-nm wavelengths) processing of wafers.

In 2005, we intensified our research and development on immersion lithography as we believe this is the most probable solution to lower the cost per wafer and increase resolution. During the second half of 2004, we delivered two pre-production immersion systems to research institutes and one to a commercial customer. In 2005 we delivered 10 immersion tools to commercial customers. One tool is delivered for evaluation purposes and one tool’s revenue is deferred as the ownership of the system will only transfer to the customer in 2006.

We are also 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 December 2004, Micronic Laser Systems AB (“Micronic”) and ASML agreed to a license agreement relating to the development of optical maskless lithography technology for semiconductor manufacturing.

Furthermore, we are currently performing research & development on EUV. EUV combines a wavelength of 13.5 nanometers and a lens system with an initial numerical aperture of 0.25 to provide imaging at a resolution of 40 nm. EUV will provide a large process window compared to today’s approaches and will be a multi-generation lithography solution. We are currently in the integration phase of the first prototype systems which are expected to be delivered to research institutes in the first half of 2006. The timing of the introduction of systems for volume applications is not clear at the moment.

Products

We develop lithography systems for the semiconductor industry and related technologies. Our product development strategy focuses on the development of product families based on a modular, upgradeable design.

Our older PAS 2500 and PAS 5000 families are suitable for g-line and i-line processing of wafers up to 150 millimeters 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.

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 200 millimeter 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 millimeter in diameter and capable of extending shrink technology beyond 70 nanometers.

For processing of 200 millimeter wafers using step-and-scan technology, PAS 5500 series is the most suitable product range. We offer PAS 5500 systems based on i-line technology (using light with a 365-nm wavelength), KrF (using light with a 248-nm wavelength) and ArF (using light with a 193-nm wavelength).

For processing of 300 millimeter wafers, we offer TWINSCAN systems based on i-line, KrF and ArF technology. In 2003, we introduced the second generation of TWINSCAN systems based on the XT body with a reduced footprint and a 50 percent reduction in the main production area occupied by our system. In 2004, we shipped our first lithography systems based on immersion technology. These shipments marked the delivery of the industry’s first high productivity immersion scanners for production applications. We have a unique competitive advantage in immersion techniques due, in part, to the dual-stage design of the TWINSCAN system. Wafer measurement — including focus and overlay — is completed on the dry stage while the imaging process, using water applied between the wafer and the lens, is completed on the 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.

In July 2005, we announced the TWINSCAN XT:1700i, a 193-nm immersion scanner capable of imaging at the 45-nm node in volume production environments. This new system has an Numerical Aperture (“NA”) of 1.2, substantially higher than the XT:1400 with NA of 0.93, breaking the perceived, pre-immersion barrier of 1.0. We expect to execute on volume production ramp in the second quarter of 2006. The XT:1700i allows chipmakers to improve resolution by 30 percent. We believe this new system will increase the value of each wafer since better resolution will likely result in more chips being produced per wafer or more functionality per chip. Additionally, we believe the XT:1700i has the highest throughput currently available, 122 wafers per hour, for the 45-nm node.

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.

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)
700		PAS 5500/22
350		PAS 5500/125
300		PAS 5500/275
280		PAS 5500/400
		AT:400
		XT:400 and XT:450
150				PAS 5500/350
130				PAS 5500/750
				AT:750 and XT:760
120				PAS 5500/800
110				PAS 5500/850 and AT:850
100				XT:860
100						PAS 5500/1100 and AT:1100
90						PAS 5500/1150 and AT:1150
80						AT:1200
70						XT:1250 and XT:1250i
65						XT:1400 and XT:1400i
45						XT:1700i

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

Sales and Customer Support

We market and sell our products principally through our direct sales staff.

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.

Customers and Geographic Markets

In 2005, sales to one customer accounted for EUR 609 million, or 24 percent of net sales, compared to EUR 434 million, or 18 percent of net sales, in 2004. 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. See Item 3.D. “Risk Factors — A High Percentage of Our Net Sales is Derived From a Few Customers” and Note 16 to our consolidated financial statements for a breakdown of our sales by geographic location.

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, fine tuning and testing of a finished system from components and subassemblies that are manufactured to our specifications by third parties and by us and the testing of those components and subassemblies. 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. We procure stepper and scanner 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;
•		dual sourcing of knowledge, globally, together with our suppliers; and
•		single, dual or multiple sourcing of products, where possible or required.

Value sourcing aligns the actual supplier performance to our requirements on quality, logistics, technology and total costs.

Zeiss is our sole external supplier of main optical systems and one of the suppliers of other optical components. Total purchased value from Zeiss accounted for between 20 percent and 50 percent of our cost of goods sold, varying by product type in 2005, and which collectively accounted for approximately 29 percent of our aggregate cost of goods sold in 2005.

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 stepper and scanner systems and is highly dependent on its manufacturing and testing facilities in Oberkochen and Wetzlar, Germany, and their suppliers. During 2005, we were not constrained by the number of lenses that Zeiss could produce.

If Zeiss is unable to maintain or increase production levels, we might not be able to respond to customer demand. As a result, our relationships with current and prospective customers could be harmed, which would have a material adverse effect on our business, financial condition and results of operations.

Our relationship with Zeiss is structured as a strategic alliance pursuant to several agreements from 1997 onwards. These agreements define an exclusive framework for cooperation in all areas of our joint business. The partnership between ASML and Zeiss is focused on continuous improvement of operational excellence.

Pursuant to these agreements, ASML and Zeiss will continue their strategic alliance 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 produce or develop over a prolonged period, we would effectively cease to be able to conduct our business.

In addition to Zeiss, we rely also on other 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. See Item 3.D. “Risk Factors — The Number of Systems We Can Produce is Limited by Our Dependence on a Limited Number of Suppliers as Key Components.”

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 and, in addition, work jointly with independent research centers in nano-electronics and nano-technology. Those research centers focus on the next generations of chips and systems.

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 Union and the U.S. government. Amounts received under these programs generally are not required to be repaid. See our discussions of research and development in Item 5 “Operating and Financial Review and Prospects”, and Note 1 to our consolidated financial statements.

We invested EUR 348 million on research and development in continuing operations in 2005, compared to EUR 353 million in 2004 (including a charge of EUR 49 million with respect to a cross-license agreement entered into between ASML and Nikon) and EUR 306 million in 2003. We are also involved in joint research and development programs with both public and private partnerships and consortiums, involving independent research centers, leading chip manufacturers and governmental programs. We aim to own or license, our jointly developed technology and designs of critical components.

In 2005, our research and development efforts propelled further development of the TWINSCAN platform along with several leading edge technologies, including 248 nanometer, 193 nanometer, immersion and EUV. The continuous drive for cost reductions has led to a significant increase in the commonality of the different models of the TWINSCAN platform. Our research and development activities in 2005 have also led to productivity and performance enhancements for our other product families. In 2005, we established joint development programs with the leading track suppliers on productivity and process integration. Moreover, we continued our research into the feasibility of maskless technology.

Intellectual Property

We rely on intellectual property rights such as patents, copyrights and trade secrets to protect our proprietary technology. We aim to obtain ownership rights on technology developed by or for us or, alternatively, to have appropriate licensing in place with respect to such technology. However, we face the risk that such measures will be inadequate. Intellectual property laws may not sufficiently support our proprietary rights and our patent applications may not be granted or construed as intended. Also, competitors may be able to develop or protect similar technology earlier and independently.

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 licensing 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.

Patent litigation with Nikon

From 2001 through late 2004, we were a party to a series of civil litigations and administrative proceedings in which Nikon alleged ASML’s infringement of Nikon patents relating to photolithography. ASML in turn filed claims against Nikon.

Pursuant to agreements executed on December 10, 2004 (effective November 12, 2004), ASML, Zeiss and Nikon agreed to settle all pending worldwide patent litigation between the companies. The settlement included an agreement to dismiss all pending patent litigation between the companies, an exchange of releases, a cross-license of patents related to lithography equipment used to manufacture semiconductor devices and payments to Nikon by ASML and Zeiss. In connection with the settlement, ASML made an initial payment to Nikon of US$60 million (approximately EUR 49 million) in 2004, a further required payment of US$9 million (approximately EUR 8 million) before November 12, 2005, and is obligated to make additional payments to Nikon of US $9 million each in 2006 and 2007. Zeiss made an initial payment to Nikon of US$40 million (approximately EUR 32 million) in 2004, a further required payment of US$6 million (approximately EUR 4 million) in 2005, and is required to make additional payments to Nikon of US$6 million in each of 2006 and 2007. See Item 10.C. “Material Contracts” for a summary of the ASML-Nikon patent Cross-License Agreement and the ASML-Zeiss Sublicense Agreement.

Patent litigation with Ultratech Stepper, Inc

In May 2000, Ultratech Stepper, Inc. (“Ultratech”) filed a lawsuit against ASML that is proceeding in the United States District Court for the Northern District of California. Ultratech alleges that ASML is infringing Ultratech’s rights under a United States patent in connection with its manufacture and commercialization in the U.S. of advanced photolithography equipment embodying technology that, in particular, is used in Step & Scan equipment. Ultratech’s complaint seeks injunctive relief prohibiting future sales and damages for past sales of this equipment. Ultratech may also seek prejudgment interest. Ultratech’s complaint also seeks enhanced damages based on alleged willful infringement. If the jury finds that ASML willfully infringed the patent, the court has the discretion to award three times the damages.

In August 2002, the Court granted ASML’s motion for summary judgment of non-infringement, after which Ultratech appealed this judgment to the United States Court of Appeals for the Federal Circuit. On March 30, 2004, the Federal Circuit reversed the District Court’s grant of summary judgment and remanded the case to the District Court for determination of infringement under the Federal Circuit’s new construction of one of the terms of the asserted patent.

Ultratech’s patent infringement claims were tried before a jury in Oakland, California, in May and June of 2005. On June 21, 2005 the jury unanimously determined that each of the claims of Ultratech’s patent that Ultratech asserted against ASML was invalid, and thus ASML was not liable for patent infringement, notwithstanding the jury’s finding that each of these claims was infringed by ASML and certain of its customers. The Court entered judgment in favor of ASML following receipt of the jury verdict.

Ultratech has filed motions with the Court seeking to overturn the jury’s finding that the asserted claims of its patent are invalid or, in the alternative, seeking a new trial. ASML has also filed motions seeking to overturn the jury’s finding that the asserted claims of Ultratech’s patent are infringed by ASML, and to establish additional bases for the invalidity of the asserted claims of Ultratech’s patent. The Court has not yet ruled on any of these motions. In the event the Court overturns the jury’s finding that the asserted claims of Ultratech’s patent are invalid, orders a new trial and ASML is found to infringe valid claims of Ultratech’s patent in the new trial, or that an appellate court overturns the jury’s verdict in favor of ASML on appeal, it could result in a damages award and substantially restrict or prohibit

ASML’s sales in the United States, which in turn could have a material adverse effect on the Company’s financial position and results of operations.

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. 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. 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.”

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 regulations could affect our business adversely. The implementation of new technological or legal requirements could impact our products, or our manufacturing or distribution processes, and could affect the timing of product introductions, the cost of our production, and products as well as their commercial success. Moreover, environmental and other regulations that adversely affect the pricing of our products could adversely affect our net sales and operating profit. The impact of these changes in regulation could adversely affect our business even where the specific regulations do not directly apply to us or to our products.

C. Organizational Structure

ASML Holding N.V. is a holding company that operates through its subsidiaries. Our major operating subsidiaries, each of which is a direct wholly-owned subsidiary, are as follows:

See Exhibit 8.1 for a list of our material subsidiaries.

D. Property, Plants and Equipment

We principally obtain and operate our facilities under operating leases. However, we also own a limited number of buildings. The book value of the buildings used in our continuing operations and owned by ASML amounted to EUR 76 million as of December 31, 2005.

We expect capital expenditures in 2006 to range between EUR 80 million and EUR 100 million, of which the majority will be allocated to machinery and equipment, tools and to IT hardware. See Item 4.A. “History and Development of the Company, Capital Expenditures.” See also Item 5.B. “Liquidity and Capital Resources” and Note 9 to our consolidated financial statements.

While we anticipate continuing capital expenditures for the purpose of upgrading and, where appropriate, incrementally expanding our facilities to accommodate new product types and technologies, we believe that our existing facilities are sufficient to accommodate the likely range of production volumes that we currently expect in the market for semiconductor manufacturing equipment for the next 2 years.

Facilities in Europe

Our headquarters, applications laboratory and research and development facilities are located in the Netherlands in a 120,000 square meter state-of-the-art facility, of which 65,000 square meters is used as office space and 55,000 square meters is used for manufacturing and research and development activities. We lease the majority of these facilities through long-term operating leases that contain purchase options. Some of our office facilities at our headquarters in Veldhoven 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 lease several sales and service locations across Europe.

Facilities in the United States

We maintain lithography research, development and manufacturing operations in Wilton, Connecticut in a 27,142 square meter facility. Our American headquarters and American training facilities are located in Tempe, Arizona in two buildings, comprising a 8,840 square meter office building space and a 10,485 square meter training space.

We also have several sales and service locations across the United States.

Facilities in Asia

Our Asian headquarters are located in Hong Kong in a 250 square meter office space. We also have several sales and service/training locations across Asia.

Item 4A

Unresolved Staff Comments

Not applicable.

Item 5

Operating and Financial Review and Prospects

Executive Summary

ASML is the world’s leading provider of lithography systems for the semiconductor industry, manufacturing complex machines that are critical to the production of integrated circuits (“ICs”) or chips. Headquartered in Veldhoven, the Netherlands, ASML operates globally, with activities in Europe, the United States and Asia.

In 2005, we earned net sales of approximately EUR 2.5 billion, employed approximately 5,000 employees and operated in 14 countries and at over 50 sales and service locations.

Semiconductor equipment industry update

Historically the semiconductor industry has experienced significant growth 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 densities has resulted in smaller and cheaper ICs capable of performing a greater number of functions at higher speed 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 for production equipment that can accurately produce advanced ICs in high volumes at the lowest possible cost.

Lithography equipment is used to imprint complex circuit patterns onto silicon wafers, which are the primary raw material for ICs. The imprinting process is one of the most critical and expensive steps in wafer fabrication. Lithography equipment is therefore a significant focus of the IC Industry’s demand for cost efficient enhancements to production technology.

The costs to develop new lithography equipment are very high. Accordingly, the lithography equipment industry is characterized by the dominance of a few primary suppliers: ASML, Nikon and Canon. ASML is the world’s leading provider of lithography equipment with a market share of 55-60 percent in 2005 based on revenue.

Nikon and Canon are the main 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. In 2004, ASML increased its service, sales and marketing operations in Japan to serve its growing regional customer base. In 2005, we continued our long term market development strategy in Japan, and we now have six customers.

The lithography equipment industry has been highly cyclical. Total lithography equipment shipped by the industry as a whole in the five years ended December 31, 2004 is set forth in the following table:

Year ended December 31		2000		2001		2002		2003		2004
Total units shipped		1,182		789		413		456		694
Total Value (in Millions USD)		5,321		3,792		2,817		3,229		5,268

(Source: Gartner Dataquest)

ASML operations update on key performance indicators

In 2005, we achieved net sales of EUR 2,529 million, comprising the shipment of 196 systems (156 new and 40 refurbished). This includes net sales in field and service options of EUR 301 million. 2004 showed net sales of EUR 2,465 million, comprising shipment of 282 systems (216 new and 66 refurbished) and net sales in field and service options of EUR 290 million.

The ASP in 2005 was EUR 11.4 million, an increase of 48 percent over the ASP in 2004 of EUR 7.7 million. The increase in ASP was mainly offset by a decrease in the number of systems shipped from 282 in 2004 to 196 in 2005, a decrease of 30 percent. This increase in ASP and decrease in number of systems shipped reflects the change in nature of market demand from capacity driven in 2004 to technology driven in 2005. Our customers shifted from 248-nm KrF production capacity demand in 2004 to 193-nm ArF leading edge technology demand in 2005.

In 2005, we generated operating income of EUR 449 million, representing 17.8 percent of net sales. In 2004, operating income amounted to EUR 379 million, representing 15.4 percent of net sales. This increase in operating income of EUR 70 million is due to an increase in gross profit of EUR 68 million and a decrease in operating expenses of EUR 2 million.

The increase in gross profit of EUR 68 million is mainly due to higher ASPs and lower cost of goods reflecting he results of our continuous cost of goods reduction program partially offset by a change in product mix. Our gross margin in 2005 was 38.5% compared with 36.7% in 2004.

The decrease in operating expenses of EUR 2 million in 2005 compared to 2004 is mainly due to a decrease in research and development expenses by EUR 7 million and a decrease in restructuring credits of EUR 6 million. Non recurring research and development expenses of EUR 49 million in 2004 relating to the patent litigation settlement with Nikon, were mainly offset by an increase in regular research and development expenses of EUR 42 million or 15 percent in 2005 reflecting our decision to accelerate investment in technology leadership.

Net income in 2005 was EUR 311 million, representing EUR 0.64 per ordinary share compared with net income in 2004 of 235 million, representing EUR 0.49 per ordinary share.

ASML generated EUR 676 million of cash in 2005, which increased its level of cash and cash equivalents to EUR 1,905 million as of December 31, 2005.

As of December 31, 2005, our order backlog was valued at EUR 1,434 million and included 95 systems with an ASP of EUR 15.1 million. As of December 31, 2004 the order backlog was valued at EUR 1,691 million, which included 131 systems with an ASP of EUR 12.9 million. The increase in ASP of 17 percent reflects the high content of leading edge technology in the backlog.

The following table presents the key performance indicators used by our Board of Management and senior management to measure performance in our monthly operational review meetings.

Year ended December 31		2003								2004								2005
(in millions)		EUR								EUR								EUR
Growth
Systems shipped – number			169								282								196
Systems shipped – value			1,279								2,175								2,228
Systems shipped – ASP			7.6								7.7								11.4
Systems backlog – number			124								131								95
Systems backlog – value			993								1,691								1,434
Systems backlog – ASP			8.0								12.9								15.1
Profitability
Net sales			1,543								2,465								2,529
Gross profit			369				23.9	%			906				36.7	%			974				38.5	%
R&D1			287								331								324
SG&A			213								202								201
Restructuring			24								(6	)
Operating income (loss)			(155	)			(10.0	%)			379				15.4	%			449				17.8	%
Net income (loss) 1			(160	)			(10.4	%)			235				9.6	%			311				12.3	%
Liquidity
Cash and cash equivalents			1,028								1,228								1,905
Net cash2			185								425								1,037
Operating cash flow			545								251								711

1		ASML, Nikon Corporation and Carl Zeiss SMT AG have agreed to a comprehensive settlement of legal proceedings and cross-license of patents related to lithography equipment. This agreement had the following effects on ASML’s results for the twelve months ended December 31, 2004 (i) an increase of EUR 49 million in our Research and Development costs and consequently a decrease in operating income; (ii) a decrease of EUR 33 million in net income.
2		Net cash is calculated as the difference between cash and cash equivalents and convertible subordinated notes.

ASML financial performance

We strive to achieve an average operating income to sales of 15 percent over the industry’s business cycle with 5-10 percent at the downturn point and 20-25 percent at the upturn point. In 2005, we generated net sales of EUR 2,529 million and operating income of EUR 449 million or 17.8 percent of net sales. We believe these results were mainly driven by our strong market position in 2005 as well as our continuous investment in technology leadership and operational excellence.

Investment in technological leadership

ASML is the world’s leading provider of lithography equipment with a market share of 55-60 percent in 2005 based on net sales. ASML sustained global product leadership through its TWINSCAN platform, the industry’s only dual-stage wafer imaging system that allows exposure of one wafer while simultaneously measuring another wafer. In 2005, we shipped a total of 129 TWINSCAN systems, including 65 ArF systems.

We further accelerated our investment in technology leadership in 2005 through our next generation TWINSCAN systems based on immersion technology. Research and development expenses in 2005 were EUR 324 million, an increase of EUR 42 million compared to 2004 (excluding a charge of EUR 49 million in 2004 with respect to a cros—license agreement entered into between ASML and Nikon). We believe immersion technology will improve lithography system resolution by 30 percent and that this technology will result in more functionality and increased value per chip. The new ASML TWINSCAN XT:1700i system is a dual stage immersion scanner with the industry’s highest numerical aperture of 1.2 which is capable of volume chip production at a resolution of 45-nm node using a 193-nm wavelength light source. Additionally, the XT:1700i a throughput of 122 wafers per hour which is the highest wafer throughput currently available for this node.

Operational excellence

We continue to implement improvement programs aimed at a year-on-year cost of ownership reduction and cycle time reduction of our systems. The cycle time of our TWINSCAN systems has been reduced by more than 50 percent at the end of 2005 compared with the cycle time at its introduction in 2001.

We have also implemented several cost reduction and fixed to variable cost conversion programs in the past few years to further lower our break-even level, which is the minimum number of new lithography systems that have to be sold in a period to achieve positive net income in that period. We further lowered our break-even level to below 130 systems on an annual basis, depending upon our product mix, and are confident that with this break-even level we are well positioned to maintain profitability even in a period of industry downturn.

A. Operating Results

Critical accounting policies using significant estimates

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, net sales and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, long-term service contracts, warranty and installation obligations, tangible assets, intangible assets, inventories, bad debt provisions, restructuring provisions, contingencies and litigation and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. While we regularly evaluate our estimates and assumptions, actual results may differ from these estimates if these assumptions prove incorrect. To the extent there are material differences between actual results and these estimates, our future results of operations could be materially and adversely affected. We believe that the accounting policies below require us to make significant judgments and estimates in the preparation of our consolidated financial statements.

Revenue recognition

In general, we recognize the revenue from the sale of a system upon shipment and the revenue from the installation of a system upon completion of that installation at the customer site. Each system undergoes, prior to shipment, a “Factory Acceptance Test”

in our clean room facilities, effectively replicating the operating conditions that will be present on the customer’s site, in order to verify whether the system will meet its standard specifications and any additional technical and performance criteria agreed with the customer. A system is shipped, and revenue recognized, only after all specifications are met and customer sign-off is received or waived. Although each system’s performance is re-tested upon installation at the customer’s site, we have never failed to successfully complete installation of a system at a customer premises.

At the end of 2000, we departed from our standard revenue recognition policy in connection with the introduction of our TWINSCAN family of lithography systems. Although each TWINSCAN system successfully completed a Factory Acceptance Test prior to shipment, we considered the TWINSCAN to constitute “new” technology for which we did not have sufficient evidence to conclude that (i) installation at the customer site would occur consistently within a pre-determined time period comparable to our other systems; and (ii) upon installation, the system would perform within the specifications for which customer sign-off had been obtained in the pre-shipment Factory Acceptance Test. Consequently, we initially deferred all revenue with respect to each TWINSCAN system until installation and acceptance of the system at the customer’s premises had been completed. At December 31, 2001, this resulted in the deferral of revenue totaling EUR 138 million in respect of 13 TWINSCAN systems that had been shipped but for which installation had not yet been completed. All of this revenue was recognized during the succeeding year. By the end of 2002, however, we had successfully shipped and installed a total of 70 TWINSCAN systems, which provided us with sufficient evidence to conclude that installation of TWINSCAN systems would occur consistently within a predetermined time period and that the performance of these systems would not reasonably be different from that exhibited in the pre-shipment Factory Acceptance Test. As a result, at the end of 2002, we commenced recognizing revenues from TWINSCAN systems upon shipment. Therefore, no revenue was deferred pending installation of a TWINSCAN system (or any other ASML system).

In our annual report on Form 20-F for the year ended December 31, 2003, we disclosed that whether we would consider immersion as new technology or proven technology would depend on our progress in immersion lithography technology during 2004. During 2004 the engineering and design obstacles associated with immersion technology were overcome in rapid fashion through the development of “add-on” modules to existing models within ASML’s TWINSCAN family of systems. After the development of the immersion tool was completed, we determined that the addition of immersion features to its existing TWINSCAN systems did not constitute “new” technology, since it is a straightforward enhancement to existing technology.

We anticipate that, in connection with future introductions of new technology, we will initially defer revenue recognition until completion of installation and acceptance of the new technology at customer premises. This deferral would continue until we could conclude that installation of the technology in question would occur consistently within a predetermined time period and that the performance of the new technology would not reasonably be different from that exhibited in the pre-shipment Factory Acceptance Test. Any such deferral of revenues, however, could have a material effect on our results of operations for the fiscal period in which the deferral occurred and on the succeeding fiscal period.

A portion of our revenue is derived from contractual arrangements with our customers that have multiple elements, such as installation services and prepaid service contracts. For these arrangements, the revenue relating to the undelivered elements is deferred at estimated fair value until delivery of the deferred elements. The fair value of installation services provided to our customers is initially deferred and is recognized when the installation is completed. The deferred revenue balance from installation services amounted to approximately EUR 9.3 million at December 31, 2005. 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, 2005, the deferred revenue balance on prepaid service contracts (including training) amounted to approximately EUR 109.8 million.

Warranty

We provide standard warranty coverage on our systems for 12 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.

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. In determining impairments of long-lived assets, we must make judgments and estimates to determine whether the cash flows generated by those assets are less than their carrying value. These estimates are based on financial plans updated with the latest available projections of the semiconductor market evolution, our sales expectations and our costs evaluation, and are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the outcome of the plans and estimates used may differ, and future adverse changes in market conditions, may require impairment of certain long-lived assets. During 2005, we recorded impairment charges of EUR 8.4 million relating to machinery and equipment as the carrying amounts of these assets were not recoverable, of which EUR 1.7 million is recorded in research and development expenses and EUR 6.7 million in cost of sales. In addition, during 2005, we recorded a charge of approximately EUR 1.9 million relating to the fact that we ceased using certain of our facilities in Tempe, United States. The facility exit charges included estimated future obligations for non-cancelable lease payments (net of estimated sublease income of EUR 1.4 million that could be reasonably obtained for these facilities).

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 are reviewed on a quarterly basis. Our methodology involves matching our on-hand and on-order inventory with our manufacturing forecast. In determining inventory provisions we evaluate inventory in excess of our forecasted needs on both technological and economical criteria and take appropriate provisions to reflect the risk of 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.

Trade Receivables

A majority of ASML’s trade receivables are derived from sales to large multinational semiconductor manufacturers throughout the world. In order to monitor potential credit losses, ASML performs ongoing credit evaluations of its customers’ financial condition. An allowance for doubtful accounts is maintained for potential credit losses based upon management’s assessment of the expected collectibility of all accounts receivable. The allowance for doubtful accounts is reviewed periodically to assess the adequacy of the allowance. We take into consideration (i) any circumstances of which we are aware regarding a customer’s inability to meet its financial obligations; and (ii) our judgments as to potential prevailing economic conditions in the industry and their potential impact on the Company’s customers. Where we deem it prudent to do so, we may require some form of credit enhancement, such as a letter of credit or bank guarantee, before shipping systems to a customer that presents a credit risk. ASML has not incurred any material accounts receivable credit losses during the past three years. However, we sell a substantial number of systems to a limited number of customers. ASML’s three largest customers accounted for 49% of accounts receivable at December 31, 2005, compared to 38% at December 31, 2004. An unanticipated business failure of one of ASML’s main customers could result in a substantial credit loss in respect to amounts owed to the Company by that customer, which could adversely affect ASML’s results of operations and financial condition. See Note 19 to our consolidated financial statements.

Restructuring

ASML applies the criteria defined in Statement of Financial Accounting Standards (“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 apply SFAS No. 146 (effective since January 1, 2003) in the case of benefit arrangements that, in substance, do not constitute an ongoing benefit arrangement. ASML applies SFAS No. 112 when termination benefits are provided under an ongoing benefit arrangement. SFAS No. 146 provides that a liability for a cost associated with an exit or disposal activity that does not constitute an ongoing benefit arrangement shall be recognized and measured initially

at its fair value in the period in which the liability is incurred; that is when a detailed exit or disposal plan exists, has been committed to by management and has been communicated to the employees. SFAS No. 112 provides that a liability for termination benefits provided under an ongoing benefit arrangement covered by SFAS No. 112 shall be recognized when the likelihood of future settlement is probable and can be reasonably estimated. As a result, whether an employee termination plan constitutes an ongoing benefit arrangement or not, and accordingly, whether SFAS No. 146 or SFAS No. 112 is applied, will affect the timing of recognition of employee termination costs, as well as the amounts recognized. In 2003, ASML announced workforce reductions of approximately 550 positions worldwide due to the continuing downturn in the semiconductor equipment industry. During 2003, ASML recorded a provision of EUR 15.3 million as an ongoing benefit arrangement. The amount of the provision was based upon severance arrangements agreed with our Works Council in the Netherlands for the previous workforce reductions announced in December 2002. ASML’s Board of Management and ASML’s Dutch Works Council then commenced a joint study on implementing these workforce reductions in the Netherlands, which delayed the workforce reductions until the beginning of 2004. Thereafter, in response to a sharp improvement in market conditions during 2004, we decreased the reductions to approximately 300 positions worldwide, of which 150 were contract employees with limited rights upon termination. As a result, in 2004 we recorded a restructuring credit of EUR 12.1 million, EUR 3.8 million of which was recorded in cost of sales and EUR 8.3 million of which was recorded under restructuring expenses.

Other exit costs include purchase and other commitments to be settled or fulfilled. These costs are estimated based on expected settlement fees and committed payments, taking into account future potential benefits, if any, from those commitments.
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.

Contingencies and litigation

As of December 31, 2003, 2004 and 2005, ASML was party to various legal proceedings generally incidental to its business, as disclosed in Note 14 to the consolidated statements. In connection with these proceedings and claims, ASML’s management evaluated, based on the relevant facts and legal principles, the likelihood of an unfavorable outcome and whether the amount of the loss could be reasonably estimated. In each case, management determined that either a loss was not probable or was not reasonably estimable. As a result, no estimated losses were recorded as a charge to its statement of operations in 2003, 2004 and 2005. Significant subjective judgments were required in these evaluations, including judgments regarding the validity of asserted claims and the likely outcome of legal and administrative proceedings. The outcome of these proceedings, however, is subject to a number of factors beyond ASML’s control, most notably the uncertainty associated with predicting decisions by courts and administrative agencies. In addition, estimates of the potential costs associated with legal and administrative proceedings frequently cannot be subjected to any sensitivity analysis, as damage estimates or settlement offers by claimants may bear little or no relation to the eventual outcome. Finally, in any particular proceeding, ASML may agree to settle or to terminate a claim or proceeding in which it believes it would ultimately prevail where it believes that doing so, when taken together with other relevant commercial considerations, is more cost-effective than engaging in an expensive and protracted litigation, the outcome of which is uncertain. Such a decision occurred when ASML determined to enter into a cross-license agreement as an alternative to continuing its intellectual property dispute with Nikon. See Item 10.C. “Material Contracts” for a summary of the Nikon-ASML Cross License Agreement and the ASML/Zeiss Sublicense Agreement.

Income tax

We operate in various tax jurisdictions in the United States, Europe and Asia and must comply with the tax laws of each of these jurisdictions.

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. 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 2005, we assessed our ability to realize our deferred tax assets resulting from net operating loss carry-forwards. The total amount of loss carry-forwards as of December 31, 2005 was EUR 370 million, which resides completely with ASML US Inc. We believe that it is more likely than not that all losses will be offset by future taxable income before the Company’s ability to utilize those losses expires. This analysis takes into account the Company’s projected future taxable income from operations, possible tax planning alternatives available to the Company, and a realignment of

group assets that the Company effected during the period 2001 through 2003 that included the transfer of certain tangible and intangible assets of ASML US Inc. to ASML Netherlands B.V. The value of the assets transferred is expected to result in additional income to ASML US, Inc., which we believe will, more likely than not, be sufficient to absorb the net operating losses that ASML US Inc. has incurred, prior to the expiry of those losses. In order to determine with certainty the tax consequences and value of this asset transfer, in 2002 ASML requested a bilateral advance pricing agreement (“APA”) from the U.S. and Netherlands tax authorities. Since December 2002, management has held numerous meetings with representatives of those authorities. The most recent meeting with the U.S. and Netherlands tax authorities took place in December 2005. Based on these meetings, and feedback from both these authorities, ASML is confident that ASML’s APA request will be successful. The specific timing for completion of the APA remains in the control of those tax authorities. See Note 15 to our consolidated financial statements.

Business strategy

Our business strategy is to provide superior value of ownership for our customers while ASML achieves top financial performance. We implement this strategy through customer focus, technology leadership and operational excellence.

Customer focus

We satisfy different types of chipmakers by customizing our products to provide premium value for all market segments, including memory, foundries or made-to-order chip contractors, and integrated device manufacturers.

Of the top-20 chipmakers worldwide, in terms of semiconductor capital expenditure, 17 are customers of ASML. We plan to solidify our position in this segment through superior execution. We also have a significant market share of customers below the top-20, and we strive for continued growth in this segment.

Japan has historically been dominated by our competitors. In 2005, we continued our long term market development strategy in Japan, and we now have 6 customers.

Technology leadership

Our product range for steppers and advanced Step & Scan systems spans all the industry’s current wavelengths for both 200- and 300-millimeter wafers.

Since 2000, we offer the industry’s only dual-stage wafer imaging platform – called TWINSCAN – which allows exposure of one wafer while simultaneously measuring another wafer. Customers have embraced our technology platform and, in 2005, we installed our 300th TWINSCAN system.

In 2005, we introduced the industry’s highest numerical aperture (NA of 0.93) dry and wet family of tools, the XT:1400. We also announced the first immersion system for volume production at 45-nm circuit line width, the TWINSCAN XT:1700i, a 193-nm wavelength system expected to be ready for volume production in the second quarter of 2006. The NA of the new system increased from 0.93 to 1.20. A higher NA number corresponds with a higher resolution which facilitates shrinking circuit line widths further on silicon wafers.

ASML believes that EUV technology represents a multi-generation lithography solution. We are preparing the first two EUV alpha demo tools. They are expected to be shipped in 2006.

For a market and technology overview and further information about ASML products, see Item 4.B. “Business Overview.”

Operational excellence

We strive to continue our business success based on our technology leadership by continuing to improve our operational excellence, including reduction in lead time while improving our cost competitiveness.

Our 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, based on quality, logistics, technology and total cost. Through value sourcing, we strive to attain flexibility and cost savings from our suppliers thanks to mutual commitment, shared risk and reward. Value sourcing also allows the necessary flexibility to adapt to the cyclicality of the world market for semiconductor lithography systems.

We strive to continuously improve efficiency in our own fixed and variable costs, and to strengthen our capability to generate cash. We seek to improve efficiency by continuously reducing cost of goods and increasing manufacturing efficiency as well as by redesigning for cost efficiency and constantly reducing cycle time.

Financial criteria for ASML

We measure ourselves on financial key performance criteria based on growth, profitability and liquidity (see “Executive Summary — Key Performance Indicators”).

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.”

Our decision in December 2002 to sell our Thermal business and to terminate our Track equipment business has resulted in separate disclosure for continuing and discontinued operations for the three years ended December 31, 2005.

Set forth below are our consolidated statements of operations from continuing operations data for the three years ended December 31, 2005, expressed as a percentage of total net sales:

Year ended December 31		2003				2004				2005
Total net sales			100.0	%			100.0	%			100.0	%
Cost of sales			76.1	1			63.3	2			61.5
Gross profit on sales			23.9				36.7				38.5
Research and development costs			19.8				14.3				13.8
Research and development credits			(1.2	)			(0.9	)			(1.0	)
Selling, general and administrative costs			13.8				8.2				8.0
Restructuring and merger and acquisition related charges			1.6				(0.2	)			0.0
Operating income (loss)			(10.0	)			15.4				17.8
Interest expense, net			1.9				0.7				0.6
Income (loss) from continuing operations before income taxes			(11.9	)			14.7				17.2
(Provision for) Benefit from income taxes			(3.9	)			5.2				4.9
Income (loss) from continuing operations			(8.1	)			9.6				12.3

1		Includes restructuring charges of EUR 5 million.
2		Includes reversal of restructuring charges of EUR 3 million.

Results of operations from continuing operations 2005 compared with 2004

Consolidated sales and gross profit

The following table shows a summary of sales (revenue and units sold), gross profit on sales and ASP data on an annual and semi-annual basis for the years ended December 31, 2005 and 2004. We have made reclassifications to prior periods to conform with current year presentation of net system sales and net services and field option sales. In prior year’s annual report, field option sales were presented under net product sales.

						2004												2005
		First				Second				Full				First				Second				Full
Year ended December 31		half year				half year				year				half year				half year				year
Net sales (EUR million)			1,070				1,395				2,465				1,448				1,081				2,529
Net system sales (EUR million)			933				1,242				2,175				1,313				915				2,228
Net service and field option sales (EUR million)			137				153				290				135				166				301
Total systems recognized			130				152				282				110				86				196
Total new systems recognized			99				117				216				94				62				156
Total used systems recognized			31				35				66				16				24				40
Gross profit on sales (% of sales)			34.2				38.7				36.7				39.6				37.1				38.5
ASP for systems (EUR million)			7.2				8.2				7.7				11.9				10.6				11.4
ASP for new systems (EUR million)			8.7				9.8				9.3				13.5				13.6				13.5
ASP for used systems (EUR million)			2.3				2.9				2.6				2.8				2.9				2.9

Consolidated net sales increased by 2.6 percent from EUR 2,465 million in 2004 to EUR 2,529 million in 2005. Net system sales increased by 2.4 percent from EUR 2,175 million in 2004 to EUR 2,228 million in 2005. Net service and field option sales increased by 3.8 percent from EUR 290 million to EUR 301 million in 2005. The 2.4 percent increase in net system sales was mainly driven by an increase in ASP partially offset by a decrease in the number of systems.

The ASP of systems recognized in net system sales increased by 48.1 percent from EUR 7.7 million in 2004 to EUR 11.4 million in 2005. This increase in ASP was mainly driven by an increased share of 300-mm ArF TWINSCAN systems with higher ASPs and a

decreased share of 200-mm KrF systems, reflecting a shift in market demand from manufacturing capacity in 2004 to leading edge technology in 2005. The number of systems recognized in net system sales decreased from 282 systems in 2004 (216 new systems and 66 used systems) to 196 systems in 2005 (156 new systems and 40 used systems). The decrease in the number of systems shipped in 2005 reflected the large number of 200 mm systems shipped in 2004 that increased our customers’ manufacturing capacity and were not yet fully utilized. Demand in 2005 was mainly driven by leading edge technology.

At December 31, 2005, ASML had no deferred revenue from shipments of new technology. During 2005, no revenue from new technology was recorded that had been previously deferred.

From time to time, ASML repurchases systems that it has manufactured and sold and, following factory-rebuild or refurbishment, resells those systems to other customers. This repurchase decision is mainly driven by market demand for capacity expressed by other customers and not by explicit or implicit contractual arrangements relating to the initial sale. The number of used systems sold in 2005 decreased to 40 from 66 in 2004. This decrease was driven by lower utilization of the lithography equipment in 2005 compared to 2004 which lowered to demand for capacity. The ASP for used systems increased from EUR 2.6 million in 2004 to EUR 2.9 million in 2005, reflecting a further shift from our older PAS 2500 towards our newer PAS 5500 family, including scanner systems.

Service sales showed a 3.8 percent increase from EUR 290 million in 2004 to EUR 301 million in 2005. This increase was mainly due to an increase in option sales to customers to enhance system performance.

Of the top 20 chipmakers worldwide, in terms of semiconductor capital expenditure, 17 are customers of ASML. In 2005, sales to one customer accounted for EUR 609 million, or 24 percent of net sales. In 2004, sales to one customer accounted for EUR 434 million, or 18 percent of net sales.

Gross profit as a percentage of sales increased from 36.7 percent in 2004 to 38.5 percent in 2005. The increased gross profit was mainly driven by increased ASPs (2.4 percent positive impact on gross profit) and decreased cost of goods (1.6 percent positive impact on gross profit) reflecting the results of our continuous cost of goods reduction program. This increase in gross profit was offset by the change in 2005 product mix (2.0 percent negative impact on gross profit). Furthermore lower charges for obsolete inventory (0.5 percent positive impact on gross profit) and lower cost of freight (0.4 percent positive impact on gross profit) offset by negative currency results (1.1 percent negative impact on gross profit) also contributed to the increase in gross margin.

We started 2005 with an order backlog of 131 systems (119 new and 12 used). In 2005, we booked orders for 178 systems and received order cancellations or push-outs beyond 12 months of 18 systems and recognized sales for 196 systems. This resulted in an order backlog of 95 systems (86 new and 9 used) as of December 31, 2005. The total value of our backlog as of December 31, 2005 amounted to EUR 1.4 billion, compared with a backlog of approximately EUR 1.7 billion as of December 31, 2004. See also Item 5.D. “Trend Information”.

Research and development

Research and development costs decreased from EUR 353 million in 2004 to EUR 348 million in 2005. This decrease in research and development costs is primarily due to a charge in 2004 of EUR 49 million with respect to a cross-license agreement entered into with Nikon (see Note 8 to our consolidated financial statements for more information). Excluding this one-time charge in 2004 there was an increase in research and development spending in 2005 of 15 percent to further accelerate our investment in technology leadership. Main investments in research and development relate to the newest versions of our high resolution TWINSCAN systems and our next generation TWINSCAN systems based on immersion and EUV.

Research and development credits increased from EUR 22 million in 2004 to EUR 24 million in 2005 due to an increased volume of research and development projects that qualified for credits under governmental funding programs.

Selling, general and administrative costs

Selling, general and administrative costs remained stable on a level of approximately EUR 201 million for both 2004 and 2005. Selling, general and administrative costs as a percentage of net sales decreased from 8.2 percent in 2004 to 8.0 percent in 2005, primarily due to higher net sales.

Restructuring costs (credits)

Restructuring credits of EUR 6 million in 2004 are adjustments on the 2003 plans as described under “Results of operations from continuing operations 2004 compared with 2003”. In 2005 we did not record any restructuring expenses.

Net interest expense

Net interest expense decreased from EUR 16 million in 2004 to EUR 14 million in 2005 due to an increase in interest income, partially offset by an increase in interest expense. Our interest income relates primarily to interest earned on our cash and cash equivalents, which had higher balances in 2005 as a result of an increase in cash flows from operations. Our interest expense relates primarily to our convertible subordinated notes.

Income taxes

Income taxes represented 28.4 percent of income before taxes in 2005, compared to 35.1 percent in 2004. The decrease in income taxes in 2005 is mainly related to a tax rate reduction in the Netherlands..

Results of operations from continuing operations 2004 compared with 2003

Consolidated sales and gross profit

The following table shows a summary of sales (revenue and units sold), gross profit on sales and ASP data on an annual and semi-annual basis for the years ended December 31, 2004 and 2003. We have made reclassifications to prior periods to conform with current year presentation of net system sales and net services and field option sales. In prior year’s annual report, field option sales were presented under net product sales.

						2003												2004
		First				Second				Full				First				Second				Full
Year ended December 31		half year				half year				year				half year				half year				year
Net sales (EUR million)			647				896				1,543				1,070				1,395				2,465
Net system sales (EUR million)			515				764				1,279				933				1,242				2,175
Net service and field option sales (EUR million)			132				131				263				137				153				290
Total systems recognized			74				95				169				130				152				282
Total new systems recognized			55				71				126				99				117				216
Total used systems recognized			19				24				43				31				35				66
Gross profit on sales (% of sales)			19.4				27.2				23.9				34.2				38.7				36.7
ASP for systems (EUR million)			7.0				8.0				7.6				7.2				8.2				7.7
ASP for new systems (EUR million)			8.7				10.0				9.5				8.7				9.8				9.3
ASP for used systems (EUR million)			1.8				2.2				2.0				2.3				2.9				2.6

Consolidated net sales increased by approximately 59.8 percent from 2003 to 2004 with net system sales increasing by approximately 70.1 percent over that period, primarily due to an increased number of systems recognized.

The number of new systems recognized in net sales increased from 126 units in 2003 to 216 units in 2004 due to an increase in equipment demand by the semiconductor industry in 2004 after three consecutive years of downturn in the global semiconductor industry. The year-on-year increase in the number of new systems recognized mainly related to an increase in sales of our 193-nm ArF and 248-nm KrF systems for 300 millimeter wafer processing and 365-nm i-line for 200 millimeter wafer processing.

The ASP for new systems decreased by approximately 2.1 percent reflecting an increased share of i-line lithography systems for 200 millimeter wafer processing with lower ASPs, which was partially offset by an increased share of KrF lithography systems for 300 millimeter wafer processing with higher ASPs. Furthermore, we experienced higher second half 2004 and 2003 ASPs as a consequence of the sales mix during those periods reflecting an increasing portion of sales of our more advanced systems.

At December 31, 2004 and 2003, ASML had no deferred revenue from new technology. During 2004 and 2003, no revenue from new technology was recorded that had been previously deferred.

The number of used systems sold increased from 43 units in 2003 to 66 in 2004. This increase was driven by high utilization of the lithography equipment, which drove our customers to seek opportunities to expand production capacity in their existing production facilities. The increase in demand for used systems was also related to a change in product mix, which was driven by specific demand in application areas that required less critical resolution capabilities. The ASP for used systems increased by approximately 30.0 percent, reflecting a further shift from our older PAS 2500 towards our newer PAS 5500 family, including scanner systems.

Net service and field option sales increased 10.3 percent from EUR 263 million in 2003 to EUR 290 million in 2004. This increase was mainly due to new contract sales with major customers and relocation of systems in the United States, partially offset by a decline in the exchange rate of the U.S. dollars versus the euro during 2004.

In 2004, sales to one customer accounted for EUR 434 million, or 18 percent of net sales. In 2003, sales to one customer accounted for EUR 314 million, or 20 percent of net sales.

Gross profit as a percentage of net sales in 2004 increased to 36.7 percent from 23.9 percent in 2003. The gross profit on new systems increased from 21.7 percent to 36.2 percent mainly due to lower cost of sales reflecting the results from our cost of goods reduction programs (approximately 6.0 percent positive impact on our gross profit) and improved ASPs (approximately 0.8 percent positive impact on our gross profit). This increase in gross profit was offset by the 2004 product mix (approximately 1.2 percent negative impact on our gross profit). Furthermore, improved utilization of our production facilities positively impacted our gross margin by 6.5 percent, caused by higher sales. Finally, lower costs for obsolete inventory (1.2 percent) and positive currency results (1.2 percent) contributed to the increase in gross margins.

Lithography order backlog

We started 2004 with an order backlog of 124 systems (103 new and 21 used), and received orders for delivery of 318 systems during the year. In 2004, we recorded 282 system sales and 29 order cancellations or push-outs beyond 12 months, resulting in an order backlog of 131 systems (119 new and 12 used) as of December 31, 2004. The total value of the backlog as of December 31, 2004 amounted to EUR 1.7 billion, compared with a backlog of approximately EUR 993 million as of December 31, 2003.

Research and development

Research and development costs increased from EUR 306 million in 2003 to EUR 353 million in 2004 primarily due to a charge of EUR 49 million with respect to a cross-license agreement entered into between ASML and Nikon (see Note 8 to our consolidated financial statements).

The level of research and development expenditures in 2003 and 2004 reflected our continuing effort to introduce several leading edge lithography products for 193-nm applications and the newest versions of the TWINSCAN platform, combined with continued investments in 248 nanometer high numerical aperture (NA) program, immersion and EUV.

Research and development credits increased from EUR 19 million in 2003 to EUR 22 million in 2004 due to an increased volume of research and development projects that qualified for credits.

Selling, general and administrative costs

Selling, general and administrative costs decreased by 5.2 percent from EUR 213 million in 2003 to EUR 202 million in 2004, mainly due to a continuing increased focus on reducing costs and decreased legal fees associated with patent infringement cases, which were partially offset by increased IT costs and consultancy fees with respect to implementing provisions of Section 404 of the U.S. Sarbanes-Oxley Act of 2002. Selling, general and administrative costs as a percentage of net sales decreased from 13.8 percent in 2003 to 8.2 percent in 2004, primarily due to an increase in net sales.

Restructuring costs (credits)

In response to the semiconductor industry’s continuing downturn and a corresponding decrease in demand for ASML’s products and services, on December 18, 2002, we announced measures to contain costs for our lithography business, including customer support, and thereby lower our break-even point. These measures resulted in the recognition of restructuring charges of EUR 78.5 million, recorded during 2002 as cost of sales, for slow-moving and obsolete lithography inventory and impairments of tangible fixed assets. We also announced workforce reductions of approximately 700 positions worldwide. The related lay-off costs were largely recorded in 2003 since the final details of the plan had not been finally determined by December 31, 2002. With respect to these reductions, we recorded in 2003 restructuring charges totaling EUR 6.9 million, of which EUR 4.1 million was reflected in cost of sales and EUR 2.8 million was reflected in restructuring costs. By adjusting labor capacity, we expected to achieve annual cost savings of EUR 49 million. As of December 31, 2003, this plan had been fully effectuated and cash payments equivalent to the full EUR 6.9 million in accrued expenses had been made.

The worldwide slowdown in the semiconductor industry continued into 2003 and, on July 16, 2003, ASML announced further workforce reductions of approximately 550 positions worldwide, of which the majority was planned for the Netherlands. During 2003, ASML recorded a provision of EUR 15.3 million as an ongoing benefit arrangement, of which EUR 3.9 million was included in cost of sales and EUR 11.4 million was included in restructuring costs. The amount of the provision was based upon the severance

arrangements as agreed with our Works Council in the Netherlands for the previous workforce reductions announced in December 2002. The estimated initial annual cost savings were EUR 47 million. ASML’s Board of Management and ASML’s Dutch Works Council then commenced a joint study on implementing these workforce reductions in the Netherlands, which delayed the reductions until the beginning of 2004. Thereafter, in response to a sharp improvement in market conditions during 2004, we decreased the reductions to approximately 300 positions worldwide, of which 150 were contract employees with limited rights upon termination. As a result, we recorded a restructuring credit of EUR 12.1 million, EUR 3.8 million of which was recorded in cost of sales and EUR 8.3 million of which was recorded under restructuring expenses. We made payments associated with these workforce reductions in 2004 of EUR 2.5 million and our initially anticipated cost savings were reduced to approximately EUR 24 million.

Also 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 (primarily leasehold improvements) for which there were insufficient cash flows to support the carrying cost. During 2004, we recorded adjustments to the related restructuring provision due to postponed commencement dates of sublease agreements and higher exit costs than originally estimated. This resulted in an additional charge of EUR 3.5 million, EUR 1.1 million of which was recorded in cost of sales and EUR 2.5 million of which was recorded under restructuring expenses.

Net interest expense

Net interest expense decreased from EUR 29 million in 2003 to EUR 16 million in 2004 due to an increase in interest income and a decrease in interest expense. Our interest income related primarily to interest earned on our cash and cash equivalents. Interest income increased compared with 2003, primarily due to higher cash and cash equivalent balances throughout the year, as a result of an increase in cash flows from operations. Our interest expense related primarily to our convertible notes. Our interest expense decreased in 2004 compared with 2003, primarily due to repurchases and the redemption of our US$ 520 million 4.25 percent Convertible Subordinated Notes during the second half of 2003, partially offset by the issuance in May 2003 of EUR 380 million 5.50% Convertible Subordinated Notes due 2010.

Income taxes

A corporate income tax rate reduction in the Netherlands was enacted in the fourth quarter of 2004. As a consequence, ASML had to re-measure the valuation of its tax assets and liabilities accordingly. This re-measurement led to a one-time tax charge of approximately EUR 15 million. Income taxes represented 35.1 percent of income before taxes in 2004, compared to 32.4 percent in 2003. See Note 15 to our consolidated financial statements.

Discontinued operations

Results from discontinued operations comprised the results of our Thermal business, which we substantially divested in October 2003, and our Track equipment business which we terminated in December 2002.

Year ended December 31		2003				2004
(in thousands)		EUR				EUR
Revenues
Track			2,514				0
Thermal			38,198				0
Total			40,712				0
Loss from discontinued operations, net of taxes
Track loss from operations			(1,456	)			0
Track exit costs			(1,944	)			0
Thermal loss from operations			(21,906	)			0
Thermal exit costs			(10,404	)			0
Total			(35,710	)			0

In October 2003, we completed the sale of our Thermal business to a privately held company formed by VantagePoint Venture Partners. In June 2003, ASML sold certain of its fixed assets and inventories related to its Track business to Rite Track. The exit costs of EUR 2 million, net of tax, were recorded in 2003 as impairment charges on a building previously used in our Track operations.

Foreign Exchange Management

See Item 3.D. “Risk Factors, Fluctuations in Foreign Exchange Rates Could Harm our Results of Operations”, Item 11 “Quantitative and Qualitative Disclosures About Market Risk” and Note 4 to our consolidated financial statements.

New U.S. GAAP Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued a revision of FASB statement No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123(R)”). This statement supersedes Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123(R) addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123(R) eliminates the ability to account for share-based compensation transactions using the intrinsic method that we currently use and generally requires that such transactions be accounted for using a “fair-value”-based method and recognized as expense in our consolidated statement of operations. In January 2005, the SEC issued Staff Accounting Bulletin No. 107, which provides supplemental implementation guidance for SFAS No. 123(R). In April 2005, the SEC extended the compliance requirement date of SFAS No. 123(R), with the result that this requirement will be effective for ASML beginning with the first fiscal quarter of 2006. We expect that the adoption of SFAS No. 123(R) will have a material impact on our results of operations. Uncertainties, however, including our future stock-based compensation strategy, stock price volatility, selection of stock option-pricing model, estimated forfeitures and employee stock option exercise behavior, make it difficult to determine whether the stock-based compensation expense that we will incur in future periods will be similar to the SFAS No. 123 pro forma expense disclosed in Note 1 to the consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”) which replaces Accounting Principles Board Opinions No. 20 “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements — An Amendment of APB Opinion No. 28.” SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. SFAS No. 154 establishes retrospective application, or application as of the earliest practicable date, as the required method for reporting a change in accounting principle and restatement with respect to the reporting of a correction of an error. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

In June 2005, the FASB issued a FASB Staff Position (FSP) interpreting FASB Statement 143, “Accounting for Asset Retirement Obligations,” specifically FSP 143-1, “Accounting for Electronic Equipment Waste Obligations” (FSP 143-1). FSP 143-1 addresses the accounting for obligations associated with Directive 2002/96/EC, Waste Electrical and Electronic Equipment, which was adopted by the European Union (EU). The FSP provides guidance on how to account for the effects of the Directive but only with respect to historical waste associated with products placed on the market on or before August 13, 2005. FSP 143-1 is effective the later of the first reporting period ending after June 8, 2005, or the date of the adoption of the law by the applicable EU-member country. The adoption of FSP 143-1 did not have a material impact on our consolidated financial statements.

In June 2005, the EITF reached a consensus on Issue No. 05-06, “Determining the Amortization Period for Leasehold Improvements” (EITF No. 05-06). EITF No. 05-06 provides guidance for determining the amortization period used for leasehold improvements acquired in a business combination or purchased after the inception of a lease (collectively referred to as subsequently acquired leasehold improvements). EITF No. 05-06 provides that the amortization period used for the subsequently acquired leasehold improvements to be the lesser of (a) the subsequently acquired leasehold improvements’ useful lives, or (b) a period that reflects renewals that are reasonably assured upon the acquisition or the purchase. EITF No. 05-06 is effective on a prospective basis for subsequently acquired leasehold improvements purchased or acquired in periods beginning after the date of the FASB’s ratification, which was on June 29, 2005. ASML does not believe that the adoption of EITF No. 05-06 will have a material impact on its consolidated results of operations.

B. Liquidity and Capital Resources

The following discussion and analysis of financial condition should be viewed in the context of the risks affecting our business strategy, described in Item 3.D. “Risk Factors.”

Our balance of cash and cash equivalents amounted to EUR 1,228 million and EUR 1,905 million as of December 31, 2004 and 2005, respectively. Net cash flows provided by operating activities were EUR 251 million and EUR 711 million in 2004 and 2005, respectively. Cash provided by operating activities in 2005 was primarily derived from our net income. As we have deferred tax assets resulting from net operating losses

carried forward, the tax charge of EUR 124 million reflected in 2005 net income resulted in a cash outflow of only EUR 15 million for corporate income taxes, leaving a cash inflow from net income of the year of approximately EUR 420 million in 2005. Net cash flows provided by operating activities reflected EUR 99 million of depreciation, amortization and impairment charges and EUR 203 million of changes in assets and liabilities. The cash flow from changes in assets and liabilities in 2005 is mainly derived from EUR 203 million in accounts receivable collections.

Net cash used in investing activities was EUR 60 million in 2004 and EUR 61 million in 2005. The 2004 and 2005 figures mainly related to expenditures in information technology investments and machinery and equipment.

Net cash provided by financing activities was EUR 3 million in 2005 compared to EUR 19 million in 2004. In 2005, proceeds from financing activities mainly reflect EUR 16 million in proceeds from the exercise of stock options offset by EUR 13 million in repayments of long term debts, mainly relating to 2 yen-denominated loans which ASML assumed in connection with its merger with SVG in 1999 (see Note 11 to the consolidated financial statements).

Our principal sources of liquidity consist of EUR 1,905 million of cash and cash equivalents as of December 31, 2005, and EUR 400 million of available credit facilities as of December 31, 2005, and cash flows from operations. For further details of 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 needs are affected by many factors, some of which are based on the normal ongoing operations of the business, and others 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 12 months. We expect to steadily improve our cash conversion cycle during 2006, although cash generation will reduce in the first half of 2006 because the company intends to employ additional cash to finance expected growth, prepare the industry’s first two EUV tools for delivery, and make payments for prior year tax liabilities. We expect in 2006 an increase in cash outflow with respect to income taxes as the amounts of loss carry-forwards in the Netherlands and Asia have fully been utilized at the end of 2005. We expect capital expenditures in 2006 to range between EUR 80 million and EUR 100 million. In addition, at December 31, 2005 we have operating lease commitments of approximately EUR 214 million and certain open inventory purchase commitments of approximately EUR 676 million with our suppliers to ensure a smooth and continuous supply chain for key components. Pursuant to agreements executed on December 10, 2004 (effective November 12, 2004), ASML, Zeiss and Nikon agreed to settle all pending worldwide patent litigation between the companies. The settlement included a cross-license of patents related to lithography equipment used to manufacture semiconductor devices and payments to Nikon by ASML and Zeiss. In connection with the settlement, in addition to amounts already paid, ASML is obligated to make additional payments to Nikon of US $9 million (approximately EUR 8 million) in each of the years 2006 and 2007. See Item 4.B. – “Business Overview – Patent Litigation with Nikon.”

In 2006, we have repayment obligations, amounting to US$ 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 a conversion price of US$ 18.66 (EUR 15.82) per share at any time prior to maturity. Since October 22, 2004, the notes have been redeemable at the option of ASML, in whole or in part, at 100 percent of their 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 30-day period. None of the notes were converted into ordinary shares during 2005. 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 at any time prior to maturity. We currently intend to fund our future repayment obligations under our convertible notes primarily with cash on hand and cash generated through operations. A description of our convertible notes, lines of credit and borrowing arrangements is provided in Note 11 to our consolidated financial statements. See also Item 3.D. “Risk Factors.”

As of December 31, 2005, ASML has achieved its strategic target level of EUR 1 billion in net cash, which is comprised of total cash and cash equivalents minus convertible subordinated bonds. ASML will therefore prepare for a potential share buy back program to be executed, subject to whether the company decides during 2006 to make significant investments.

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.

See Notes 4 and 11 to our consolidated financial statements for discussion of our funding, treasury policies and currencies in which cash and cash equivalents are held and convertible notes and other borrowing arrangements.

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.”

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.”

D. Trend Information

The year 2005 showed similar sales levels compared to 2004, however ASPs are higher and the number of systems shipped lower in 2005 due to a change in nature of market demand from capacity driven in 2004 to technology driven in 2005.

We have accumulated a strong backlog for deliveries in the first half of 2006: our unit backlog is smaller than that of December 2004 but the ASP is significantly higher, as a result of a higher proportion of 300 millimeter TWINSCAN advanced systems in backlog. The order backlog as of December 31, 2005 comprises 95 lithography systems with an ASP of EUR 15.1 million. The company expects to ship 48 systems in the first quarter of 2006 with an ASP of EUR 14.1 million for new systems and an ASP for all systems of EUR 12.0 million; however, given market momentum, short-term demand for a few additional system shipments in the first quarter of 2006 may materialize. The company expects a gross margin in the first quarter of 2006 ranging from 38 to 39 percent. However, we remain cautious in our forecast as customer order push-outs are always possible, if overall semiconductor demand were not to materialize as expected.

The following table sets forth our backlog of systems as of December 31, 2004 and 2005.

As of December 31		2004				2005
Backlog sales of new systems (units)			119				86
Backlog sales of used systems (units)			12				9
Backlog sales of total systems (units)			131				95
Value of backlog new systems (EUR million)			1,664				1,411
Value of backlog used systems (EUR million)			27				23
Value of backlog of total systems (EUR million)			1,691				1,434
ASP for new systems (EUR million)			14.0				16.4
ASP for used systems (EUR million)			2.2				2.6
ASP for total systems (EUR million)			12.9				15.1

Our backlog includes only system orders for which written authorizations have been accepted and shipment dates within 12 months have been assigned. 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.

In view of current order demand for ASML immersion tools, the company is preparing for a number of shipments in 2006 which could exceed the range of 20 to 25 immersion systems.

We expect research and development costs (net of credit) will increase to EUR 85 million in the first quarter of 2006. When annualized, expected first quarter 2006 research and development costs represent a spending level of EUR 340 million for 2006, net of credits, an increased research and development investment intended to strengthen ASML’s technology leadership and expand lithography growth.

ASML expects selling, general and administrative expenses in the first quarter of 2006 to be EUR 51 million.

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. Other contractual arrangements, 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

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 entity’s expected losses if they occur, receive a majority of the entity’s expected residual returns if they occur, or both.

In 2003, ASML moved to its current Veldhoven headquarters. We lease these headquarters for a period of 15 years from an entity (the “lessor”) that was incorporated by a syndicate of three banks (“shareholders”) solely for the purpose of leasing this building. The shareholders equity in the lessor amounts to EUR 1.9 million. Furthermore the shareholders each granted a loan of EUR 11.6 million and a fourth bank granted a loan of EUR 12.3 million to the lessor. ASML provided the lessor with a subordinated loan of EUR 5.4 million and has a purchase option that is exercisable either at the end of the lease in 2018, at a pre-determined price of EUR 24.5 million, or during the lease at the book value of the assets. The total assets of the lessor entity amounted to approximately EUR 54 million at inception of the lease.

ASML believes that it holds a variable interest in this entity and that the entity is a variable interest entity (“VIE”) because it is subject to consolidation in accordance with the provisions of paragraph 5 of FIN 46(R). The total equity investment at risk is approximately 3.6 percent of the lessor’s total assets and is not considered and cannot be demonstrated, qualitatively or quantitatively, to be sufficient to permit the lessor to finance its activities without additional subordinated financial support provided by any parties, including the shareholders.
ASML determined that it is not appropriate to consolidate the VIE as it is not the primary beneficiary. To make this determination, the expected losses and expected residual returns of the lessor were allocated to each variable interest holder based on their contractual right to absorb expected losses and residual returns. The analysis of expected losses and expected residual returns involved determining the expected negative and positive variability in the fair value of the lessor’s net assets exclusive of variable interests through various cash flow scenarios based upon the expected market value of the lessor’s net assets. Based on this analysis, ASML determined that other variable interest holders will absorb the majority of the lessor’s expected losses, and as a result, ASML is not the primary beneficiary.

ASML’s maximum exposure to the lessor’s expected losses is estimated to be approximately EUR 5.4 million.

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 result from purchase commitments that are forfeited are provided for in our financial statements. As of December 31, 2005, we had purchase commitments for a total amount of approximately EUR 676 million, reflecting our backlog level at the end of 2005. 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.”

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 operating lease commitments and purchase obligations, these off-balance sheet arrangements consist of product warranties.

From time to time we provide guarantees to third parties in connection with transactions entered into by our subsidiaries in the ordinary course of business.

F. Tabular Disclosure of Contractual Obligations

Our contractual obligations as of December 31, 2005 can be summarized as follows:

		Total				Less than				1-3				3-5				After 5
						1 year				years				years				years
(in thousands)		EUR				EUR				EUR				EUR				EUR
Long Term Debt, including interest expense1			1,003,796				537,764				43,101				422,851				80
Operating Lease Obligations			213,878				33,032				53,657				39,707				87,482
Purchase Obligations			676,007				672,424				3,583				0				0
Other Liabilities2			18,341				7,630				10,711				0				0
Total Contractual Obligations			1,912,022				1,250,850				111,052				462,558				87,562

1		We refer to Note 11 to the consolidated financial statements for the amounts excluding interest expense.

2		Other liabilities relate mainly to the additional payments to Nikon due in 2006 and 2007 with respect to a cross-license of patents related to lithography equipment. See Item 10.C. “Material Contracts for a summary of the Nikon-ASML Cross License Agreement and the ASML/Zeiss Sublicense Agreement.”

Several operating leases for our buildings contain purchase options, exercisable at the option of the Company at the end of the lease, and in some cases, during the term of the lease. The amounts to be paid if ASML should exercise these purchase options at the end of the lease can be summarized as of December 31, 2005 as follows:

Total

Less than

1-3

3-5

After 5

1 year

years

years

years

(in thousands)

EUR

EUR

EUR

EUR

EUR

Purchase options

61,363

0

3,358

2,269

55,736

G. Safe Harbor

See “Special Note regarding Forward-Looking Statements.”

Item 6

Directors, Senior Management and Employees

A. Directors and Senior Management

The members of our Supervisory Board and our Board of Management are as follows:

Name		Title		Date of Birth			Term Expires
Henk Bodt1, 2, 3		Chairman of the Supervisory Board		April 30, 1938			2007
Jan A. Dekker1, 4		Member of the Supervisory Board		May 10, 1939			2006
Peter H. Grassmann4		Member of the Supervisory Board		November 21, 1939			2006
Jos W.B. Westerburgen 2, 3		Member of the Supervisory Board		June 24, 1942			2009
Fritz W. Fröhlich1		Member of the Supervisory Board		March 19, 1942			2008
Arthur P.M. van der Poel3,4		Member of the Supervisory Board		November 1, 1948			2008
Ieke C.J. van den Burg2		Member of the Supervisory Board		March 6, 1952			2009
OB Bilous4		Member of the Supervisory Board		November 7, 1938			2009
Eric Meurice		President and Chief Executive Officer and		July 30, 1956			2008
		Chairman and Member of the Board of
		Management
Peter T.F.M. Wennink		Executive Vice President, Chief Financial		May 30, 1957			N/A	5
		Officer and Member of the Board of
		Management
Martin A. van den Brink		Executive Vice President Marketing		May 21, 1957			N/A	5
		& Technology and Member of the Board
		of Management
David P. Chavoustie		Executive Vice President Sales and		May 7, 1943			N/A	5,6
		Member of the Board of Management
Klaus P. Fuchs		Executive Vice President Operations and		December 30, 1958			2010	7
		Member of the Board of Management

1		Member of the Audit Committee
2		Member of the Remuneration Committee
3		Member of the Selection and Nomination Committee
4		Member of the Technology & Strategy Committee
5		There are no specified terms for members of the Board of Management appointed prior to March 2004
6		Mr. Chavoustie retired from his position on the Board of Management, effective December 31, 2005
7		Mr. Fuchs’ appointment to ASML’s Board of Management is subject to notification of the General Meeting of Shareholders, scheduled on March 23, 2006

Effective March 24, 2005, Mr. Attardo retired by rotation from the Supervisory Board. On that same date, Mr. Westerburgen, was reappointed as member of the Supervisory Board and Mr. Bilous –as successor of Mr. Attardo- and Ms. Van den Burg –who was appointed as a result of the strengthened right of recommendation of the Works Council of ASML Netherlands B.V. (see Item 6 C)- were appointed as new members of the Supervisory Board. Effective January 3, 2005, Mr. McIntosh retired as Executive Vice President Operations and member of the Board of Management.

Mr. Dekker and Mr. Grassmann will retire by rotation on March 23, 2006.

The Works Council of ASML Netherlands B.V. has the strengthened right to make a recommendation for one member of the Supervisory Board, to be appointed by the General Meeting of Shareholders in 2006. As a result hereof, as from 2006, two members of our Supervisory Board will have been appointed as a result of the strengthened right of recommendation of the Works Council of ASML Netherlands B.V.

In October 2005, Mr. Chavoustie confirmed to the Supervisory Board that he plans to retire from his position on the Board of Management, effective December 31, 2005.

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 Royal Philips Electronics. 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 from which he retired in November 2003. He currently serves on the Supervisory Boards of Koninklijke BAM Group N.V. and Syntens and he is also President of the Royal Institute of Engineers (KIVI NIRIA).

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 and a former Executive Vice-President of Siemens AG, from which positions he retired in 2000. He currently serves on the Supervisory Boards of Gambro B.V. and the Medical University of Innsbruck.

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. Mr. Westerburgen currently serves as a member of the Supervisory Board of Rodamco Europe N.V. and is also Vice-Chairman of the Board of the Association Aegon.

Fritz W. Fröhlich

Mr. Fröhlich was appointed to our Supervisory Board in March 2004. He is the former Deputy Chairman and Chief Financial Officer of Akzo Nobel N.V. Mr. Fröhlich is the Chairman of the Supervisory Board of Randstad Holding N.V. and serves as a member of the Supervisory Board of the following companies: Allianz Nederland N.V.; Draka Holding N.V.; Gamma Holding N.V. and Kempen & Co N.V.

Arthur P.M. van der Poel

Mr. Van der Poel was appointed to our Supervisory Board in March 2004. Until 2001 he was the Chief Executive Officer of Philips Semiconductors. Mr. Van der Poel is a former member of the Board of Management (until April 2003) and a former member of the Group Management Committee of Royal Philips Electronics. Mr. Van der Poel is the chairman of the Board of MEDEA+, a member of the Board of Directors of Axalto Holding N.V. and serves as a member of the Supervisory Boards of PSV N.V. and DHV Holding B.V.

Ieke C.J. van den Burg

Ms. Van den Burg was appointed to our Supervisory Board in March 2005. She is a former member of the Dutch Social and Economic Council and of the EU Economic and Social Committee. Ms. Van den Burg also held various positions in Dutch and international trade union and labor organizations. Ms. Van den Burg has been a member of the European Parliament (“EP”) since 1999 and has served on the EP’s Committee on Economic and Monetary Affairs since 1999 and on the Committee on the Internal Market and Customer Protection since 2004.

OB Bilous

Mr. Bilous was appointed to our Supervisory Board in March 2005. From 1960 until 2000 Mr. Bilous held various management positions at IBM, including General Manager and VP Worldwide Manufacturing of IBM’s Microelectronics Division. He also served on the Boards of SMST, ALTIS Semiconductor and Dominion Semiconductor. Mr. Bilous currently serves as Chairman of the Board of Directors of International Sematech and as Board member of Nantero, Inc.

Eric Meurice

Mr. Meurice joined ASML on October 1, 2004 as President, Chief Executive Officer and Chairman of the Board of Management. Prior to joining ASML, and since March 2001, he was Executive Vice President — Thomson Television Worldwide. Between 1995 and 2001,

Mr. Meurice served as Vice President for Dell Computer, where he ran the Western, Eastern Europe and Dell’s Emerging Markets business within EMEA. Before 1995, he gained extensive technology experience in the semiconductor industry at ITT Semiconductors Group and Intel Corporation, in the micro-controller group.

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 Accountants, 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 a member of 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 in 1999. Before that, 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 and retired on December 31, 2005. 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.

Klaus P. Fuchs

Mr. Fuchs’ appointment to our Board of Management will be effective as per the notification of the General Meeting of Shareholders, scheduled on March 23, 2006. Mr. Fuchs will be responsible for the Company’s worldwide operations. Since 2003, Mr. Fuchs has served as Vice President of Linde AG in Wiesbaden, Germany where he was responsible for strategic direction and operations of its industrial sector. Before that he was technical director and member of the executive board at TRW Aerospace and he also gained experience at Daimler Benz Aerospace as Vice President of electronic systems.

B. Compensation

For details on compensation paid to or accrued for members of the Board of Management and members of the Supervisory Board, see Note 17 to our consolidated financial statements.

For details on options granted to, and pension benefits of, the members of the Board of Management, see Note 17 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.

C. Board Practices

Board Practices

General

We endorse the importance of good corporate governance, in which independent oversight, 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, the Supervisory Board, our employees and the shareholders.

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 as well as press releases and publications posted on our website. 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.

Two-tier structure

ASML is incorporated under Netherlands law and has a two-tier board structure. Responsibility for the management of ASML lies with the Board of Management. Independent, non-executive members serve on the Supervisory Board, which supervises and advises the members of the Board of Management in performing their management tasks. The Board of Management has the 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 ASML’s objectives, (ii) corporate strategy and management of risks inherent to ASML’s business activities, (iii) the structure and operation of internal risk management and control systems, (iv) the financial reporting process and (v) compliance with applicable legislation and regulations.

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.

Board of Management

The Board of Management consists of at least two members or such larger number of members as determined by the meeting of holders of priority shares in consultation with the Supervisory Board. Members of the Board of Management are appointed by the Supervisory Board. The Supervisory Board must notify the General Meeting of Shareholders of the intended appointment of a member of the Board of Management. As a result of our compliance with the Netherlands Corporate Governance Code, members of the Board of Management that are appointed in 2004 or later shall be appointed for a maximum period of four years, but may be re-appointed. Members of the Board of Management serve until the end of the term of their appointment, voluntary retirement, or suspension or dismissal by the Supervisory Board. In the case of dismissal, the Supervisory Board must first inform the General Meeting of Shareholders of the intended removal.

The Supervisory Board determines the remuneration of the individual members of the Board of Management, in line with the remuneration policy adopted by the General Meeting of Shareholders, upon a proposal of the Supervisory Board. ASML’s remuneration policy is posted on its website.

Supervisory Board

The Supervisory Board consists of at least three members or such larger number as determined by the Supervisory Board. The Supervisory Board prepares a profile in relation to its size and composition; ASML’s Supervisory Board profile is posted on its website.

Members of the Supervisory Board are appointed by the General Meeting of Shareholders from nominations of the Supervisory Board. Nominations must be reasoned and must be made available to the General Meeting of Shareholders and the Works Council simultaneously. Before the Supervisory Board presents its nominations, both the General Meeting of Shareholders and the Works Council may make recommendations (which the Supervisory Board may reject). In addition, the Works Council has a strengthened right to make recommendations for at least one-third of the members of the Supervisory Board, which recommendation may only be rejected by the Supervisory Board: (i) if the relevant person is unsuitable or (ii) if the Supervisory Board would not be duly composed if the recommended person were appointed as a Supervisory Board member. If no agreement can be reached between the Supervisory Board and the Works Council on these recommendations, the Supervisory Board may request the Enterprise Chamber of the Amsterdam Court to declare its objection legitimate. Any decision of the Enterprise Chamber on this matter is non-appealable.

Nominations of the Supervisory Board may be overruled by the General Meeting of Shareholders by an absolute majority of the votes representing at least one/third of the total outstanding capital. If a nomination is overruled, the Supervisory Board will make a new nomination. If a nomination is not overruled and the General Meeting of Shareholders did not appoint the nominated person, the Supervisory Board will appoint the nominated person.

Members of the Supervisory Board serve for a maximum 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, provided that their entire term of office does not exceed twelve years. The General Meeting of Shareholders may, by an absolute majority of the votes representing at least one-third of the total outstanding capital, dismiss the Supervisory Board in its entirety for lack of confidence. In such event, the Enterprise Chamber of the Amsterdam Court shall appoint one or more members of the Supervisory Board at the request of the Board of Management.

Upon the proposal of the Supervisory Board, the General Meeting of Shareholders determines the remuneration of the members of the Supervisory Board. A member of the Supervisory Board shall not be granted any shares or option rights by way of remuneration.

Approval of Board of Management Decisions

The Board of Management requires prior approval of the General Meeting of Shareholders for resolutions concerning an important change in the identity or character of ASML or its business, including in any case:

(i)		a transfer of all or substantially all of the business of ASML to a third party;
(ii)		entering into or the termination of a long-term joint venture between ASML and a third party, if this joint venture is material to ASML; and
(iii)		an acquisition or divestment by ASML of an interest in the capital of a company with a value of at least one third of ASML’s assets (determined by reference to ASML’s most recently adopted annual accounts).

Rules of Procedure

The Board of Management and the Supervisory Board have adopted Rules of Procedure for each of the Board of Management, Supervisory Board and the four Committees of the Supervisory Board. These Rules of Procedure are posted on ASML’s website.

Directors and Officers Insurance and Indemnification

Members of the Board of Management and Supervisory Board, as well as certain senior management members, are insured under the ASML’s Directors and Officers Insurance Policy. Although the insurance policy provides for a wide coverage, our directors and officers may incur 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 of such officer or director.

Corporate Governance Developments

ASML continuously monitors and assesses applicable corporate governance rules, including recommendations and initiatives regarding principles of corporate governance. These include rules that have been promulgated in the United States both by the NASDAQ National Market (“Nasdaq”) and by the SEC pursuant to the Sarbanes-Oxley Act of 2002.

The Netherlands Corporate Governance Code (the “Code”) came into effect on January 1, 2004. A full report on ASML’s compliance with the Code is required to be included in a company’s statutory annual report. Netherlands listed companies are required to either comply with the principles and the best practice provisions of the Code, or to explain on which points they deviate from these best practice provisions and why. Pursuant to the Code’s recommendations, ASML has included a separate chapter on corporate governance in both its annual reports. The Code contains recommendations with regard to corporate governance, including the following topics:

	•		strengthening the role of the Supervisory Board and its committees and to increase its independence, quality and expertise;
	•		strengthening 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 with respect to the nomination of members of the Supervisory Board;
	•		facilitating and encouraging shareholders to use their voting power and to actively participate in the General Meeting of Shareholders; and
	•		defining the role of the external auditor vis-à-vis the Supervisory Board as its principal contact.

Committees of ASML’s Supervisory Board

The Supervisory Board has an Audit Committee, a Remuneration Committee, a Selection and Nomination Committee and a Technology and Strategy Committee. Members of these committees are appointed from among the Supervisory Board members.

Audit Committee

ASML’s Audit Committee is composed of three members of the Supervisory Board. The current members of our Audit Committee are Fritz Fröhlich (chairman), Henk Bodt and Jan Dekker, each of whom is an independent, non-executive member of the Supervisory Board. The Supervisory Board has determined that Fritz Fröhlich qualifies as the Audit Committee financial expert pursuant to Section 407 of the Sarbanes-Oxley Act and the rules promulgated thereunder. Our external auditor, our Chief Executive Officer, our Chief Financial Officer, our Corporate Controller as well as other ASML employees invited by the chairman of the Audit Committee 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;

•

overseeing the qualifications, independence and performance of the external auditor; and

•

overseeing the integrity of our systems of disclosure controls and procedures and the system of internal controls regarding finance and accounting.

The Audit Committee held six meetings in 2005. At these meetings the Audit Committee, reviewed our quarterly earnings announcements and our audited annual consolidated financial statements, discussed the system of internal controls over financial reporting and related audit findings, approved the external audit plan and related audit fees and pre-approved any audit and non-audit services to be rendered by our external auditor.

Remuneration Committee

ASML’s Remuneration Committee is composed of three members of the Supervisory Board. The current members of our Remuneration Committee are Jos Westerburgen (chairman), Henk Bodt and Ieke van den Burg. The Remuneration Committee is responsible for the preparation of the remuneration policy for the Board of Management.

The Remuneration Committee prepares and the Supervisory Board establishes ASML’s 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. 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 ASML’s short and long-term performance, as well as current compensation and benefits structures and levels benchmarked against relevant peers. External compensation survey data and, where necessary, external consultants are used to benchmark ASML’s remuneration levels and structures.

In 2005, the Remuneration Committee held two scheduled regular meetings and various ad hoc meetings.

Selection and Nomination Committee

ASML’s Selection and Nomination Committee is composed of three members of the Supervisory Board. The current members of our Selection and Nomination Committee are Jos Westerburgen (chairman), Henk Bodt and Arthur van der Poel.

The Selection and Nomination Committee assists the Supervisory Board in:

•		preparing the selection criteria and appointment procedures for members of the Company’s Supervisory Board and Board of Management;
•		periodically evaluating the scope and composition of the Board of Management and the Supervisory Board and proposing the profile of the Supervisory Board in relation thereto;
•		periodically evaluating the functioning of individual members of the Board of Management and the Supervisory Board and reporting the results thereof to the Supervisory Board; and
•		proposing (re-)appointments of members of the Board of Management and the Supervisory Board and supervising the policy of the Board of Management in relation to the selection and appointment criteria for senior management.

The Selection and Nomination Committee held two regularly scheduled meetings in 2005. In addition, the members of the Selection and Nomination Committee met several times on an ad hoc basis to review recruitment of the new Executive Vice President Operations.

Technology and Strategy Committee

ASML’s Technology and Strategy Committee is composed of four members of the Supervisory Board. The current members of our Technology and Strategy Committee are Arthur van der Poel (chairman), Peter Grassmann, Jan Dekker and OB Bilous. In addition, the Technology and Strategy Committee may appoint one or more advisors from within the Company and/or from outside the Company. The advisors to the Technology and Strategy Committee may be invited as guests to (parts of) the meetings of the Committee, but are not entitled to vote in the meetings.

The Technology and Strategy Committee advises the Supervisory Board in relation to the following responsibilities and may prepare resolutions of the Supervisory Board related thereto:

a)

familiarization with and risk assessment and study of potential strategies, required technical resources, technology roadmaps and product roadmaps; and

b)

providing advice to the Supervisory Board with respect to matters related thereto.

The Technology and Strategy Committee holds at least two meetings per year and held three meetings in 2005.

Disclosure Committee

ASML has a Disclosure Committee to ensure compliance with applicable disclosure requirements arising under United States and Netherlands 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 members of senior management. Furthermore, members of the Disclosure Committee are in close contact with our external legal counsel and our external auditor.

During 2005, the Disclosure Committee reviewed our quarterly earnings announcements and met to review our audited annual consolidated financial statements and other public announcements containing financial information. In addition, specific meetings were held to assess disclosure controls and procedures and internal control over financial reporting. In order to assist the disclosure committee in preparing its advice to our CEO and CFO in their assessment of ASML’s disclosure controls and procedures and internal control over financial reporting, we have an Internal Control Committee, comprising three members of the Disclosure Committee.

Variations from Certain Nasdaq Corporate Governance Rules

Nasdaq rules provide that foreign private issuers may follow home country practice in lieu of the Nasdaq corporate governance standards subject to certain exceptions and except to the extent that such exemptions would be contrary to US federal securities laws. The practices followed by ASML in lieu of Nasdaq rules are described below:

•

ASML does not follow Nasdaq’s quorum requirements applicable to meetings of ordinary shareholders. In accordance with Dutch law and Dutch generally accepted business practice, ASML’s Articles of Association provide that there are no quorum requirements generally applicable to General Meetings of Shareholders.

•

ASML does not follow Nasdaq’s requirements regarding the provision of proxy statements for General Meetings of Shareholders. Dutch 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 does provide shareholders with an agenda and other relevant documents for the General Meeting of Shareholders.

•

ASML does not follow Nasdaq’s requirement regarding distribution to shareholders of copies of an annual report containing audited financial statements prior to the Company’s Annual General Meeting of Shareholders. The distribution of annual reports to shareholders is not required under Dutch corporate law, Dutch securities laws, or by Euronext Amsterdam. Furthermore, it is generally accepted business practice for Dutch companies not to distribute annual reports. In part, this is because the Dutch system of bearer shares has made it impractical to keep a current list of holders of the bearer shares in order to distribute the annual reports. Instead, we make our annual report available at our corporate head office in the Netherlands (and at the offices of our Netherlands listing agent as stated in the convening notice for the meeting) as from the day of convocation of the Annual General Meeting of Shareholders. In addition, we post a copy of our annual report on our website prior to the Annual General Meeting of Shareholders.

D. Employees

As of December 31, 2005, we had 5,055 employees in our operations employed primarily in manufacturing and product development activities at our headquarters in Veldhoven. As of December 31, 2003, and December 31, 2004, the total number of employees in continued operations was 5,059 and 5,071, respectively. In addition, we had approximately 1,000 temporary employees as of December 31, 2005. For a more detailed description of employee information, see Notes 13 and 18 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 products.

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.

ASML Netherlands B.V., our operating subsidiary in the Netherlands, has a Works Council, as required by Netherlands law. A Works Council is a representative body of the employees of a Netherlands company elected by the employees. The Board of Management of any Netherlands 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, may only be taken with the Works Council’s approval. Such a decision may be taken without the prior approval of the Works Council only with the approval of the District Court.

A dispute arose in early 2005 between the Company and the Works Council. In January 2005, the Works Council expressed its view that the establishment of and amendments to bonus plans for management, in particular, the ASML Senior and Executive Bonus Plan (the “92+ Bonus Plan”), should be subject to the approval of the Works Council. We have always maintained that the Works Council does not have such a right of approval. In May 2005, the Works Council initiated legal proceedings to nullify the 92+ Bonus Plan and to confirm its right of approval with respect to the establishment of and amendments to the 92+ Bonus Plan. On November 8, 2005, the Eindhoven Cantonal Court ruled in favor of the Works Council and confirmed the nullification of the 92+ Bonus Plan. We have filed an appeal of this decision with the Court of Appeal in ‘s- Hertogenbosch and expect a decision during the summer of 2006.

See Note 18 to our consolidated financial statements for a breakdown of our employees by function.

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 17 to our consolidated financial statements, which are incorporated herein by reference. Information with respect to the grant of shares and share options to employees is included in Note 13 to our consolidated financial Statements which is incorporated herein by reference.

Item 7

Major Shareholders and Related Party Transactions

A. Major Shareholders

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 (including options) owned by the members of the 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, 2005:

Identity of Person or Group		Amount Owned				Percent of Class
Capital Group International, Inc 1			51,528,140				10.6	%
FMR Corp. 2			54,662,612				11.3	%
Capital Research and Management Company 3			50,572,880				10.5	%
Members of ASML’s Supervisory Board and Board of Management, as a group (5 persons) 4			654,660					*

outstanding shares. One member of the Supervisory Board holds 3,000 of our outstanding shares. None of the other members of the Supervisory Board hold any of our outstanding shares or options on shares. Certain members of our Board of Management have deposited their stock options with an independent fund manager who has authority to exercise these options and dispose of the underlying shares without instructions from, or consultation with, the respective member of the Board of Management.

According to SEC filings, (i) Capital Group International, Inc. increased its shareholding (including as a holder of convertible notes) from 28,455,070 shares as of November 2003 to 51,528,140 shares as of February 2005, (ii) Capital Research and Management Company increased its shareholding (including as a holder of convertible notes) from 26,807,920 shares as of February 2004 to 50,572,880 as of February 2005 and (iii) FMR Corp. reduced its shareholding (including as a holder of convertible notes) from 58,304,695 shares as of February 2003 to 54,662,612 shares as of February 2005.

Our major shareholders do not have voting rights different from other shareholders. We do not issue share certificates, except for registered New York Shares. For more information see Item 10.B. “Memorandum and Articles of Association.”

As of December 31, 2005, our ordinary shares were held by 612 registered holders with a registered address in the United States. Since certain of our ordinary shares were held by brokers and nominees, the number of record holders in the United States may not be representative of the number of beneficial holders or of where the beneficial holders are resident.

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”).

The Major Holdings Act applies to any person or entity that 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 ASML’s share capital.

For the purpose of calculating the percentage of capital interest or voting rights, the following interests must be taken into account: shares and votes (i) directly held by any person, (ii) held by such person’s subsidiaries, (iii) held by a third party for such person’s account and (iv) held by a third party with whom such person has concluded an oral or written voting agreement. Interests held jointly by multiple persons are attributed to those persons in accordance with their entitlement. A holder of a pledge or right of usufruct in respect of shares can also be subject to these 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.

For the same purpose, the following instruments qualify as “shares” and “votes” respectively: (i) shares, depositary receipts for shares, contractual rights to acquire shares or depositary receipts for shares (such as the rights under convertible bonds) and (ii) votes and contractual rights to acquire votes.

On July 3, 2003, a draft bill to amend the Major Holding Act was submitted to the Second Chamber of the Netherlands Parliament and is expected to enter into force soon. The provisions of this draft bill (including its latest amendments) can be summarised as follows:

-		the percentage thresholds that trigger a reporting requirement are: 5, 10, 15, 20, 25, 30, 50 and 70 percent;
-		a holder must notify the AFM of the percentages of voting rights and capital interest held by it if either or both of such percentages crosses these thresholds (i) immediately, if this is the result of an acquisition or disposal by it; (ii) within four trading days, if this is the result of a change in the company’s share capital or voting rights reported in the AFM’s public register;
-		persons holding 5% or more in voting rights or capital interest must notify the AFM of any changes in the composition of their interest since the previous notification within four weeks after December 31;
-		the following instruments qualify as “shares”: (i) shares, (ii) depositary receipts for shares (or negotiable instruments similar to such receipts)(iii) negotiable instruments for acquiring the instruments under (i) or (ii) (such as convertible bonds), and (iv) options for acquiring the instruments under (i) or (ii);

-

the following shares and votes qualify as shares and votes “held” by a person: those directly held by it; those held by its subsidiaries; those held by a third party for such person’s account; those held by a third party with whom the person has concluded an oral or written voting agreement; those temporarily held by a third party against payment. Shares held by the custodian of an unincorporated investment fund are deemed to be held by such fund’s manager. Shares held jointly by more persons are in principle attributed in accordance with their entitlement. A person acting as an attorney who has discretion in the exercise of voting rights is deemed to hold these votes. A holder of a pledge or right of usufruct in respect of shares is deemed to hold voting rights if he has, or can acquire, the right to vote on the shares or, in case of depositary receipts, the underlying shares.

The AFM keeps a public registry of and publishes all notifications made pursuant to the Major Holdings Act.

Non-compliance with the reporting obligations under the Major Holdings 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 (i) suspension of the voting rights relating to the shares held by the offender, for a period of not more than three years, (ii) nullification of any resolution of the General Meeting of Shareholders of the company to the extent that such resolution would not have been approved if the votes at the disposal of the person or entity in violation of a duty under the Major Holdings Act had not been exercised and (iii) a prohibition on the acquisition by the offender of our 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 transactions during our most recent fiscal year, nor are there presently any proposed material transactions, between ASML or any of its subsidiaries, and any significant shareholder and any director or officer or any relative or spouse thereof. 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 associate thereof, other than the virtual financing arrangement with respect to share options described under Note 13 to our consolidated financial statements.

C. Interests of Experts & Counsel

Not applicable.

Item 8

Financial Information

A. Consolidated Statements and Other 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, which is 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.”

B. Significant Changes

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

Item 9

The Offer and Listing

A. Listing Details

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 Eurolist by Euronext Amsterdam. The principal trading market of our ordinary shares is Eurolist by Euronext Amsterdam. For more information see Item 10.B “Memorandum and Articles of Association.”

The following table sets forth, for the periods indicated, the high and low closing prices of our ordinary shares on Nasdaq, as well as on Eurolist by Euronext Amsterdam.